As filed with the Securities and Exchange Commission on November 14, 2008
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Territorial Bancorp Inc. and
Territorial Savings Bank Profit Sharing and 401(k) Plan
(Exact Name of Registrant as Specified in Its Charter)
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Maryland
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6712
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Being applied for
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(State or Other Jurisdiction of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Code Number)
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(I.R.S. Employer
Identification Number)
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1132 Bishop Street
Suite 2200
Honolulu, Hawaii 96813
(808) 946-1400
(Address, Including
Zip Code, and Telephone Number, Including Area Code, of
Registrant’s Principal Executive Offices)
Mr. Allan S. Kitagawa
Chairman of the Board, President and Chief Executive Officer
1132 Bishop Street
Suite 2200
Honolulu, Hawaii 96813
(808) 946-1400
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
Copies to:
Lawrence M.F. Spaccasi, Esq.
Edward A. Quint, Esq.
Luse Gorman
Pomerenk & Schick, P.C.
5335 Wisconsin Avenue, N.W., Suite 400
Washington, D.C. 20015
(202) 274-2000
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:
x
If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:
¨
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same offering:
¨
If this Form is a
post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same
offering:
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer
x
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Smaller reporting company
¨
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(Do not check if a smaller reporting company)
CALCULATION OF REGISTRATION FEE
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Title of each class of
securities to be registered
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Amount to be
registered
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Proposed maximum
offering price per share
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Proposed maximum
aggregate offering price
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Amount of
registration fee
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Common Stock, $0.01 par value per share
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12,563,750 shares (2)
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$10.00
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$125,637,500 (1)
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$4,938
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(1)
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Estimated solely for the purpose of calculating the registration fee.
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(2)
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The securities of Territorial Bancorp Inc. to be purchased by the Territorial Savings Bank Profit Sharing and 401(k) Plan are included in the amount shown for the common stock.
Accordingly, no separate fee is required for the participation interests. In accordance with Rule 457(h) of the Securities Act of 1933, as amended, the registration fee has been calculated on the basis of the number of shares of common stock that
may be purchased with the current assets of such Plan.
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The registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or
until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
Prospectus Supplement
Interests in
TERRITORIAL SAVINGS BANK
PROFIT SHARING AND 401(k) PLAN
Offering of Participation Interests in up to
Shares of
TERRITORIAL BANCORP INC.
Common Stock
In connection with
the conversion of Territorial Mutual Holding Company from the mutual to the stock form of organization, Territorial Bancorp Inc. is allowing participants in the Territorial Savings Bank Profit Sharing and 401(k) Plan (the “Plan”) to invest
all or a portion of their accounts in stock units representing an ownership interest in the common stock of Territorial Bancorp Inc. Based upon the value of the Plan assets at
, 2009, the trustee of the Plan could purchase up to
shares of Territorial Bancorp Inc. common stock, at the purchase price of $10.00 per share. This prospectus supplement relates to the initial election of Plan
participants to direct the trustee of the Plan to invest all or a portion of their Plan accounts in stock units representing an ownership interest in the Territorial Bancorp Inc. Stock Fund at the time of the stock offering.
The prospectus of Territorial Bancorp Inc., dated
, 2009, accompanies this prospectus supplement. It contains detailed information regarding the conversion and stock
offering of Territorial Bancorp Inc. common stock and the financial condition, results of operations and business of Territorial Mutual Holding Company. This prospectus supplement provides information regarding the Plan. You should read this
prospectus supplement together with the prospectus and keep both for future reference.
For a discussion of risks
that you should consider, see “Risk Factors” section of the prospectus.
The interests in the Plan and the offering of
Territorial Bancorp Inc. common stock have not been approved or disapproved by the Office of Thrift Supervision, the Securities and Exchange Commission or any other federal or state agency. Any representation to the contrary is a criminal offense.
The securities offered in this prospectus supplement and in the prospectus are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
This prospectus supplement may be used only in connection with offers and sales by Territorial Bancorp
Inc. of interests or shares of common stock pursuant to the Plan. No one may use this prospectus supplement to re-offer or resell interests or shares of common stock acquired through the Plan.
You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. Territorial Bancorp Inc., Territorial
Savings Bank and the Plan have not authorized anyone to provide you with information that is different.
This prospectus supplement does
not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make an offer or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and
the prospectus nor any sale of common stock or stock units representing an ownership interest in Territorial Bancorp Inc. common stock shall under any circumstances imply that there has been no change in the affairs of Territorial Bancorp Inc. or
any of its subsidiaries or the Plan since the date of this prospectus supplement, or that the information contained in this prospectus supplement or incorporated by reference is correct as of any time after the date of this prospectus supplement.
The date of this prospectus supplement is
, 2009.
TABLE OF CONTENTS
THE OFFERING
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Securities Offered
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Territorial Bancorp Inc. is offering stock units in the Territorial Savings Bank Profit Sharing and 401(k) Plan (the “Plan”). The stock
units represent indirect ownership of Territorial Bancorp Inc. common stock through the Territorial Bancorp Inc. Stock Fund being established under the Plan in connection with the stock offering. Given the purchase price of $10 per share in the
stock offering, the Plan may acquire up to
shares of Territorial Bancorp Inc. common stock in the stock offering. Only employees of Territorial Savings Bank may become
participants in the Plan and only participants may purchase employer stock units (“Employer Stock Units”) in the Territorial Bancorp Inc. Stock Fund. You investment in Employer Stock Units in connection with the stock offering through the
Territorial Bancorp Inc. Stock Fund is subject to the purchase priorities contained in the Plan of Conversion and Reorganization of Territorial Mutual Holding Company.
Information with regard to the Plan is contained in this prospectus supplement and information with regard to the financial condition, results of operations and
business of Territorial Bancorp Inc. is contained in the accompanying prospectus. The address of the principal executive office of Territorial Bancorp Inc. and Territorial Savings Bank is 1132 Bishop Street, Suite 2200, Honolulu, Hawaii 96813.
Territorial Savings Bank’s telephone number is (808) 946-1400.
All elections
to purchase Employer Stock Units in the stock offering under the Plan and any questions about this prospectus supplement should be addressed to Karen J. Cox, Senior Vice President-Administration, telephone number: (808) 951-1244; fax: (808)
951-1250; email: Karen.Cox@TerritorialSavings.net.
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Election to Purchase Common Stock in the Offering: Priorities
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In connection with the conversion and stock offering, you may elect to transfer, by whole percentages, all or part of your account balances in the
Plan to the Territorial Bancorp Inc. Stock Fund, to be used to purchase common stock of Territorial Bancorp Inc. issued in the stock offering. The trustee of the Territorial Bancorp Inc. Stock Fund will purchase common stock of Territorial Bancorp
Inc. to be held as Employer Stock Units in accordance with your directions. However, such directions are subject to purchase limitations in the Plan of Conversion and Reorganization of Territorial Mutual Holding Company.
The shares of common stock are being offered at $10 per share in a subscription offering and
community offering. In the offering, the purchase priorities are as follows and apply in case more shares are ordered than are available for sale:
Subscription Offering:
(1) Depositors of Territorial Savings Bank with $50 or more as of September 30, 2008, get first
priority.
(2) Territorial Savings Bank and Territorial Bancorp Inc.’s tax-qualified plans, including the employee stock ownership plan and the Plan, get second priority.
(3) Depositors of Territorial
Savings Bank with $50 or more on deposit as of December 31, 2008, get third priority.
(4) Depositors of Territorial Savings Bank as of
, 200
and borrowers of Territorial Savings Bank as of September 18, 2002 whose
borrowings remain outstanding as of [
, 200
] get fourth priority.
Community Offering:
(5) Residents of the State of Hawaii.
Persons who do not qualify under any other priority listed above get last priority.
If you are an eligible depositor in the subscription offering, as listed above, you will separately
receive offering materials in the mail, including a Stock Order Form. If you wish to purchase stock outside of the Plan, you must complete and submit the Stock Order Form and payment, using the reply envelope provided.
Additionally, or instead of placing an order outside of the Plan through a Stock Order Form, as a
Plan participant, you may place an order for Employer Stock Units through the Plan, using the enclosed
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Special Election Form, to be completed and submitted in the manner described on the next page. If you are a participant in the Plan who is
eligible in priority one (depositor of Territorial Savings Bank with $50 or more on deposit at September 30, 2008), your Special Election Form order will receive priority one treatment. If you are not eligible in priority one, your Special
Election Form order will receive priority two treatment, as an order in a tax-qualified plan of Territorial Savings Bank.
No later than the subscription offering period deadline, the amount that you elect to transfer from your existing account balances for the purchase of stock units
representing an ownership interest in shares of Territorial Bancorp Inc. common stock in the offering will be removed from your existing accounts and transferred to an interest-bearing money market account in the Plan, pending the closing of the
offering.
At the closing of the offering, the amount that you have transferred to
purchase stock units representing an ownership interest in shares of Territorial Bancorp Inc. common stock in the stock offering will be placed in the Territorial Bancorp Inc. Stock Fund and allocated to your Plan account.
Once the offering is closed, any amounts that you elected to apply towards the purchase of Employer
Stock Units in the offering will appear in your Territorial Bancorp Inc. Stock Fund balance when you access your account via the internet or by telephone. The formal closing of the offering is expected to be in
, 2009.
If you choose not to direct the investment of your account balances towards the purchase of any shares in the offering, your account balances will remain in the
investment funds of the Plan as previously directed by you.
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Composition of and Purpose of Stock Units
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The Territorial Bancorp Inc. Stock Fund will initially invest 100% in the common stock of Territorial Bancorp Inc. After the closing of the stock offering, the Territorial Bancorp Inc. Stock
Fund will maintain a cash component for liquidity purposes. Liquidity is required in order to facilitate daily transactions such as investment transfers or distributions from the Territorial Bancorp Inc. Stock Fund. Following the closing of the
stock offering, the Territorial Bancorp Inc. Stock Fund will consist of approximately 95% common stock and 5% cash. A unit of the Territorial Bancorp Inc. Stock Fund (known as a “stock unit”) will be initially valued at $10. Newly issued
stock units will consist of a percentage interest in both
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Territorial Bancorp Inc. common stock and cash held in the Territorial Bancorp Inc. Stock Fund. Unit values (similar to the stock’s share price) and the number of units (similar to
number of shares) will be used to communicate the dollar value of a participant’s account. Following the stock offering, each day, the stock unit value of the Territorial Bancorp Inc. Stock Fund will be determined by dividing the total market
value of the Territorial Bancorp Inc. Stock Fund at the end of the day by the total number of units held in the Territorial Bancorp Inc. Stock Fund by all participants as of the previous day’s end. The change in stock unit value reflects the
day’s change in stock price, any cash dividends accrued and the interest earned on the cash component of the Territorial Bancorp Inc. Stock Fund, less any investment management fees. The market value and unit holdings of your account in the
Territorial Bancorp Inc. Stock Fund will be reported to you on your regular Plan participant statements.
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Value of the Plan Assets
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As of September 30, 2008, the market value of the assets of the Plan was approximately $10,111,475, of which approximately
$
is eligible to purchase up to
shares of Territorial Bancorp Inc. common stock in the
offering. The Plan administrator informed each participant of the value of his or her account balance under the Plan as of September 30, 2008.
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In Order to Participate in the Offering
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Enclosed is a Special Election Form on which you can elect to transfer all or a portion of your account balance in the Plan to the Territorial Bancorp Inc. Stock Fund for the purchase of
Employer Stock Units at $10 each in the offering. If you wish to use all or part of your account balance in the Plan to purchase common stock issued in the offering, you should indicate that decision on the Special Election Form.
If you do not
wish to purchase Employer Stock Units in the offering through the Plan, you must fill out the waiver portion of the Special Election Form by checking the box at the bottom of the form and returning the form to Karen Cox as indicated below
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Order Deadline
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If you wish to purchase common stock with your Plan account balances, your Special Election Form must be
received
by Karen J. Cox, Senior Vice President-Administration, 1132
Bishop Street, Suite 2200, Honolulu, Hawaii 96813, telephone number (808) 946-1400; fax (808) 951-1250; email
Karen.Cox@TerritorialSavings.net
no later than 5:00 p.m. Hawaii time, on
, 2009. To allow for processing, this deadline is prior to the subscription offering period deadline (which is
, 2009). If you have any questions with respect to the Special Election Form, please contact Karen J.
Cox.
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Irrevocability of Transfer Direction
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You may not revoke your Special Election Form once it has been delivered to Karen Cox
. You will, however, continue to have the ability to transfer amounts not directed towards
the purchase of stock in the offering among all of the other investment funds on a daily basis.
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Other Purchases in Your Account During the Offering Period
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Whether or not you choose to purchase stock in the offering through the Plan, you will at all times have complete access to those amounts in your account that you do
not
apply
towards purchases in the offering. For example, you will be able to purchase other funds within the Plan with that portion of your account balance that you do not apply towards purchases in the offering during the offering period. Such purchases
will be made at the prevailing market price in the same manner as you make such purchases now, i.e., through telephone transfers and internet access to your account. You can only purchase Employer Stock Units in the offering through the Plan by
returning your Special Election Form to Karen Cox by the due date. You cannot purchase Employer Stock Units in the offering by means of telephone transfers or the internet. That portion of your Plan account balance that you elect to apply towards
the purchase of Employer Stock Units in the offering will be irrevocably committed to such purchase.
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Direction to Purchase Territorial Bancorp Inc. Stock Fund Units after the Offering
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After the offering, you will again have complete access to any amount that you directed towards the purchase of shares in the offering. For example, after the offering closes, you may sell
any shares that you purchased in the offering. Special restrictions may apply to transfers directed to and from the Territorial Bancorp Inc. Stock Fund by the participants who are subject to the provisions of Section 16(b) of the Securities Exchange
Act of 1934, as amended, relating to the purchase and sale of securities by officers, directors and principal shareholders of Territorial Bancorp Inc.
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Purchase Price of Common Stock
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The trustee will pay $10 per Employer Stock Unit, which will be the same price paid by all other persons for a share of common stock in the
offering. No sales commission will be charged for common stock purchased through Employer Stock Units in the offering.
After the offering, the trustee will acquire common stock in open market transactions at the prevailing price. The trustee will pay transaction fees, if any, associated with the purchase, sale or transfer of the
common stock after the offering.
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Nature of a Participant’s Interest in the Common Stock
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The trustee will hold the Employer Stock Units in trust for the participants of the Plan. Employer Stock Units acquired by the trustee at your direction will be allocated to your account.
Therefore, investment decisions of other participants should not affect the earnings allocated to your account.
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Voting Rights of Common Stock
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The Plan provides that you may direct the trustee how to vote any shares of Territorial Bancorp Inc. common stock held by the Territorial Bancorp Inc. Stock Fund, and the interest in such
shares that is credited to your account. If the trustee does not receive your voting instructions, the Plan administrator [will exercise these rights as it determines in its discretion] and will direct the trustee accordingly. All voting
instructions will be kept confidential.
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DESCRIPTION OF THE PLAN
Introduction
Territorial Savings Bank originally adopted the Territorial Savings Bank Profit Sharing 401(k) Plan on January 1, 1973, and amended and restated it effective January 1, 2002 and January 1, 2008 (referred to as the
“Plan”). The Plan is a tax-qualified plan with a cash or deferred compensation feature established in accordance with the requirements under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as amended (the
“Code”).
Territorial Savings Bank intends that the Plan, in operation, will comply with the requirements under
Section 401(a) and Section 401(k) of the Code. Territorial Savings Bank will adopt any amendments to the Plan that may be necessary to ensure the continuing qualified status of the Plan under the Code and applicable Treasury Regulations.
Employee Retirement Income Security Act of 1974 (“ERISA”).
The Plan is an “individual account plan” other than
a “money purchase pension plan” within the meaning of ERISA. As such, the Plan is subject to all of the provisions of Title I (Protection of Employee Benefit Rights) and Title II (Amendments to the Code Relating to Retirement Plans) of
ERISA, except to the funding requirements contained in Part 3 of Title I of ERISA, which by their terms do not apply to an individual account plan (other than a money purchase plan). The Plan is not subject to Title IV (Plan Termination Insurance)
of ERISA. The funding requirements contained in Title IV of ERISA are not applicable to participants or beneficiaries under the Plan.
Reference to Full Text of Plan.
The following portions of this prospectus supplement summarize certain provisions of the Plan. They are not complete and are qualified in their entirety by the full text of the Plan. Copies of the Plan
are available to all employees by filing a request with the Plan Administrator c/o Territorial Savings Bank, Attn: Karen J. Cox, Senior Vice President-Administration; telephone number: (808) 951-1244; fax: (808) 951-1250; email:
Karen.Cox@TerritorialSavings.net. You are urged to read carefully the full text of the Plan.
Eligibility and
Participation
As an employee of Territorial Savings Bank, you are eligible to become a participant in the Plan on the first day of the
month after you have reached age 21 and completed 1,000 hours of service in a 12-consecutive-month period with Territorial Savings Bank. Union employees, nonresident aliens who receive no earned income from the U.S., leased employees and independent
contractors are not eligible to participate in the Plan. Individuals who became employees as the result of an acquisition, merger or similar transaction will be excluded from participation only during the transition period. The Plan year is
January 1 to December 31 (the “Plan Year”).
As of September 30, 2008, there were approximately 347 employees, former employees and beneficiaries
eligible to participate in the Plan.
Contributions Under the Plan
Elective Deferrals.
You are permitted to defer on a pre-tax basis up to 100% of your monthly salary (expressed in terms
of whole percentages), subject to certain restrictions imposed by the Code, and to have that amount contributed to the Plan on your behalf. For purposes of the Plan, “salary” means your W-2 wages. In 2009, the annual salary of each
participant taken into account under the Plan is limited to $245,000. (Limits established by the Internal Revenue Service are subject to increase pursuant to an annual cost-of-living adjustment, as permitted by the Code). You may elect to modify the
amount contributed to the Plan by filing a new elective deferral agreement with the Plan administrator at the beginning of each pay period.
Employer Matching Contributions.
Territorial Savings Bank may make discretionary matching contributions to the Plan, based on a percentage of compensation that each employee contributes to the Plan. The
percentage of matching contributions will be determined by the Territorial Savings Bank, in its sole discretion, from year to year.
Employer Profit Sharing Contributions
. Territorial Savings Bank may make discretionary profit sharing contributions to the Plan.
Limitations on Contributions
Limitations on Employee Salary Deferrals.
For the Plan Year beginning January 1, 2009, the
amount of your before-tax contributions may not exceed $16,500 per calendar year. Contributions in excess of this limit are known as excess deferrals. If you defer amounts in excess of this limitation, your gross income for federal income tax
purposes will include the excess in the year of the deferral. In addition, unless the excess deferral is distributed before April 15 of the following year, it will be taxed again in the year distributed. Income on the excess deferral
distributed by April 15 of the immediately succeeding year will be treated, for federal income tax purposes, as earned and received by you in the tax year in which the contribution is made.
Catch-up Contributions.
If you have made the maximum amount of regular before-tax contributions allowed by the Plan or other legal limits and you
have attained at least age 50 (or will reach age 50 prior to the end of the plan year), you are also eligible to make an additional catch-up contribution. You may authorize your employer to withhold a specified dollar amount of your compensation for
this purposes. For 2009, the maximum catch-up contribution is $5,500.
2
Benefits Under the Plan
Vesting.
At all times, you have a fully vested, nonforfeitable interest in your elective deferral contributions and in the employer matching
contributions and profit sharing contributions, if any, and in any earnings related thereto.
Investment of Contributions
and Account Balances
All amounts credited to your accounts under the Plan are held in the Plan trust (the “Trust”), which is
administered by the trustee appointed by Territorial Savings Bank’s Board of Directors.
Prior to the effective date of the offering,
you were provided the opportunity to direct the investment of your account into one of the following funds:
3
Performance History
The following table provides performance data with respect to the investment funds available under the Plan through September 30, 2008 for average
annual total returns and for year-to-date returns as of October 28, 2008:
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Fund Name
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Expense Ratio
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YTD Returns as of
Oct. 28, 2008
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Average Annual Total Returns as of Sept. 30, 2008
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1 Year
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3 Year
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5 Year
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10 Year
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Vanguard 500 Index Fund
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0.15
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%
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-34.85
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%
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-22.03
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%
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0.11
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%
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5.05
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%
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2.99
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%
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Vanguard Growth Index Fund
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0.22
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%
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-36.44
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%
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-19.02
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%
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0.80
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%
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4.33
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%
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1.58
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%
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Vanguard International Growth Fund
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Redemption Fee: 2% if held < 2 months
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0.51
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%
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-49.36
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%
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-28.58
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%
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3.13
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%
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10.42
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%
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5.74
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%
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Vanguard LifeStrategy Conservative Growth Fund
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0.24
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%
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-20.93
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%
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-10.44
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%
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2.42
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%
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4.81
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%
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4.77
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%
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Vanguard LifeStrategy Growth Fund
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0.23
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%
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-34.58
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%
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-20.15
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%
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1.31
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%
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6.35
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%
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4.61
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%
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Vanguard LifeStrategy Moderate Growth Fund
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0.23
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%
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-27.67
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%
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-15.04
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%
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2.02
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%
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5.72
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%
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4.83
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%
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Vanguard Prime Money Market Fund
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0.24
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%
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2.32
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%
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3.36
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%
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4.37
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%
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3.28
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%
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3.54
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%
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Vanguard Small-Cap Index Fund
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0.22
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%
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-38.28
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%
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-17.22
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%
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1.04
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%
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8.56
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%
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8.21
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%
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Vanguard Target Retirement 2005 Fund
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0.19
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%
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-18.89
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%
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-7.89
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%
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2.61
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%
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—
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—
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Vanguard Target Retirement 2010 Fund
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0.20
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%
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-23.16
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%
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-11.30
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%
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—
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—
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—
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Vanguard Target Retirement 2015 Fund
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0.19
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%
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-26.03
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%
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-13.75
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%
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|
1.86
|
%
|
|
—
|
|
|
—
|
|
|
Vanguard Target Retirement 2020 Fund
|
|
0.20
|
%
|
|
-28.59
|
%
|
|
-15.61
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Vanguard Target Retirement 2025 Fund
|
|
0.19
|
%
|
|
-31.20
|
%
|
|
-17.61
|
%
|
|
1.27
|
%
|
|
—
|
|
|
—
|
|
|
Vanguard Target Retirement 2030
|
|
0.21
|
%
|
|
-33.61
|
%
|
|
-19.43
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Vanguard Target Retirement 2035 Fund
|
|
0.19
|
%
|
|
-35.02
|
%
|
|
-20.42
|
%
|
|
0.95
|
%
|
|
—
|
|
|
—
|
|
|
Vanguard Target Retirement 2040 Fund
|
|
0.21
|
%
|
|
-34.96
|
%
|
|
-20.40
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Vanguard Target Retirement 2045 Fund
|
|
0.19
|
%
|
|
-34.99
|
%
|
|
-20.42
|
%
|
|
1.27
|
%
|
|
—
|
|
|
—
|
|
|
Vanguard Target Retirement 2050 Fund
|
|
0.21
|
%
|
|
-35.04
|
%
|
|
-20.41
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Vanguard Target Retirement Income Fund
|
|
0.19
|
%
|
|
-14.46
|
%
|
|
-4.23
|
%
|
|
3.01
|
%
|
|
—
|
|
|
—
|
|
|
Vanguard Total Bond Market Index Fund
|
|
0.19
|
%
|
|
-1.53
|
%
|
|
3.75
|
%
|
|
4.14
|
%
|
|
3.71
|
%
|
|
4.95
|
%
|
|
Vanguard Windsor II Fund
|
|
0.33
|
%
|
|
-35.29
|
%
|
|
-24.14
|
%
|
|
-0.78
|
%
|
|
7.07
|
%
|
|
5.03
|
%
|
Note: Performance data for periods of less than one year do not reflect the deduction of purchase and redemption
fees. Some funds may have administrative expenses related to the cost of employer plan recordkeeping, which are not reflected in the figures. If these fees were included, the performance would be lower. All other performance data are adjusted for
purchase and redemption fees where applicable.
4
Description of the Investment Funds
The following is a description of each of the funds:
Vanguard 500 Index Fund
.
Vanguard 500 Index Fund seeks to track the performance of a benchmark index that measures the investment return of large-capitalization stocks. The fund employs a “passive management”—or
indexing—investment approach designed to track the performance of the Standard & Poor’s 500 Index, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The fund
attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
Vanguard Growth Index Fund
.
Vanguard Growth Index Fund seeks to track the performance of a benchmark index that measures the investment
return of large-capitalization growth stocks. The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the MSCI US Prime Market Growth Index, a broadly diversified index
predominantly made up of growth stocks of large U.S. companies. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the index, holding each stock in approximately the same
proportion as its weighting in the index.
Vanguard International Growth Fund.
Vanguard International Growth Fund seeks to provide
long-term capital appreciation. The fund invests in the stocks of companies located outside the United States. In selecting stocks, the fund’s advisors evaluate foreign markets around the world and choose companies with above-average growth
potential. The fund uses multiple investment advisors to manage its portfolio.
Vanguard LifeStrategy Conservative Growth Fund.
Vanguard LifeStrategy Conservative Growth Fund seeks to provide current income and low to moderate capital appreciation. The fund invests in other Vanguard mutual funds according to a fixed formula that over time should reflect an allocation of
approximately 40% of the fund’s assets to bonds, 20% to short-term fixed income reserves, and 40% to common stocks. The percentages of the fund’s assets allocated to each of the underlying funds are: 30% Vanguard Total Bond Market Index
Fund, 25% Vanguard Asset Allocation Fund, 20% Vanguard Short-Term Investment-Grade Fund, 20% Vanguard Total Stock Market Index Fund, and 5% Vanguard Total International Stock Index Fund.
The fund’s indirect bond holdings are a diversified mix of short-, intermediate-, and long-term U.S. government, U.S. agency, and investment-grade
corporate bonds, as well as mortgage-backed securities. Its indirect stock holdings consist substantially of large-capitalization U.S. stock and, to a lesser extent, mid- and small-cap U.S. stocks and foreign stocks.
5
Vanguard LifeStrategy Growth Fund
.
Vanguard LifeStrategy Growth Fund seeks to provide
capital appreciation and some current income. The fund invests in other Vanguard mutual funds according to a fixed formula that over time should reflect an allocation of approximately 80% of the fund’s assets to common stocks and 20% to bonds.
The percentages of the fund’s assets allocated to each of the underlying funds are: 50% Vanguard Total Stock Market Index Fund, 25% Vanguard Asset Allocation Fund, 15% Vanguard Total International Stock Index Fund, and 10% Vanguard Total Bond
Market Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser
extent, mid- and small-cap U.S. stocks and foreign stocks. Its indirect bond holdings are a diversified mix of short-, intermediate-, and long-term U.S. government, U.S. agency, and investment-grade corporate bonds, as well as mortgage-backed
securities.
Vanguard LifeStratey Moderate Growth Fund.
Vanguard LifeStrategy Moderate Growth Fund seeks to provide capital
appreciation and a low to moderate level of current income. The fund invests in other Vanguard mutual funds according to a fixed formula that over time should reflect an allocation of approximately 60% of the fund’s assets to common stocks and
40% to bonds. The percentages of the fund’s assets allocated to each of the underlying funds are: 35% Vanguard Total Stock Market Index Fund, 30% Vanguard Total Bond Market Index Fund, 25% Vanguard Asset Allocation Fund, and 10% Vanguard Total
International Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to
a lesser extent, mid- and small-cap U.S. stocks and foreign stocks. Its indirect bond holdings are a diversified mix of short-, intermediate-, and long-term U.S. government, U.S. agency, and investment-grade corporate bonds, as well as
mortgage-backed and asset-backed securities.
Vanguard Prime Money Market Fund.
Vanguard Prime Money Market Fund seeks to provide
current income while maintaining liquidity and a stable share price of $1. The fund invests in high-quality, short-term money market instruments, including certificates of deposit, banker’s acceptances, commercial paper, and other money market
securities. To be considered high-quality, a security generally must be rated in one of the two highest credit-quality categories for short-term securities by at least two nationally recognized rating services (or by one, if only one rating service
has rated the security). If unrated, the security must be determined by Vanguard to be of quality equivalent to those in the two highest credit-quality categories. The fund will invest more than 25% of its assets in securities issued by companies in
the financial services industry. The fund will maintain a dollar-weighted average maturity of 90 days or less.
Vanguard Small-Cap Index
Fund
.
Vanguard Small-Cap Index Fund seeks to track the performance of a benchmark index that measures the investment return of small-capitalization stocks. The fund employs a “passive management”—or indexing—investment
approach designed to track the performance of the MSCI US Small Cap 1750 Index, a broadly diversified index of stocks of smaller U.S. companies. The fund attempts to replicate the target index by investing all, or substantially all, of its assets in
the stock that make up the index, holding each stock in approximately the same proportion as its weighting in the index.
6
Vanguard Target Retirement 2005 Fund.
Vanguard Target Retirement 2005 Fund seeks to provide
capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire before 2008. The fund’s asset
allocation will become more conservative over time. Within seven years after 2005, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard
Total Stock Market Index Fund, Vanguard Inflation-Protected Securities Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, Vanguard Emerging Markets Stock Index Fund, and Vanguard Prime Money Market Fund.
The fund’s indirect bond holdings are a diversified mix of short-, intermediate,-, and long-term investment-grade, taxable U.S. government, U.S.
agency, and corporate bonds, inflation-indexed bonds issued by the U.S. government, as well as mortgage-backed securities. Its indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and
small-cap U.S. stocks and international funds. The fund’s indirect money market holdings consist of high-quality, short-term money market instruments.
Vanguard Target Retirement 2010 Fund.
Vanguard Target Retirement 2010 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard
mutual funds using an asset allocation strategy designed for investors planning to retire between 2008 and 2012. The fund’s asset allocation will become more conservative over time. Within seven years after 2010, the fund’s asset
allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund,
Vanguard Emerging Markets Stock Index Fund, and Vanguard Inflation-Protected Securities Fund.
The fund’s indirect stock holdings
consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency,
and corporate bonds, as well as inflation-protected and mortgage-backed securities, all with maturities of more than one year.
Vanguard
Target Retirement 2015 Fund.
Vanguard Target Retirement 2015 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy
designed for investors planning to retire between 2013 and 2017. The fund’s asset allocation will become more conservative over time. Within seven years after 2015, the fund’s asset allocation should resemble that of the Target Retirement
Income Fund. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
7
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to
a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with
maturities of more than one year.
Vanguard Target Retirement 2020 Fund.
Vanguard Target Retirement 2020 Fund seeks to provide
capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2018 and 2022. The fund’s asset
allocation will become more conservative over time. Within seven years after 2020, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Stock Market Index Fund, Vanguard
Total Bond Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a
diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target Retirement 2025 Fund.
Vanguard Target Retirement 2025 Fund seeks to provide capital appreciation and current income consistent
with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2023 and 2027. The fund’s asset allocation will become more conservative over
time. Within seven years after 2025, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard
European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect
stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government,
U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target
Retirement 2030 Fund.
Vanguard Target Retirement 2030 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy
designed for investors planning to retire between 2028 and 2032. The fund’s asset allocation will become more conservative over time. Within seven
8
years after 2030, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Bond
Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks
and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target Retirement 2035 Fund.
Vanguard Target Retirement 2035 Fund seeks to provide capital appreciation and current income consistent
with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2033 and 2037. The fund’s asset allocation will become more conservative over
time. Within seven years after 2035, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard
European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect
stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government,
U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target
Retirement 2040 Fund.
Vanguard Target Retirement 2040 Fund seeks to provide capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy
designed for investors planning to retire between 2038 and 2042. The fund’s asset allocation will become more conservative over time. Within seven years after 2040, the fund’s asset allocation should resemble that of the Target Retirement
Income Fund. The underlying funds are: Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S.
stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
9
Vanguard Target Retirement 2045 Fund.
Vanguard Target Retirement 2045 Fund seeks to provide
capital appreciation and current income consistent with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2043 and 2047. The fund’s asset
allocation will become more conservative over time. Within seven years after 2045, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard
Total Stock Market Index Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a
diversified mix of investment-grade taxable U.S. government, U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target Retirement 2050 Fund.
Vanguard Target Retirement 2050 Fund seeks to provide capital appreciation and current income consistent
with its current asset allocation. The fund invests in Vanguard mutual funds using an asset allocation strategy designed for investors planning to retire between 2048 and 2053. The fund’s asset allocation will become more conservative over
time. Within seven years after 2050, the fund’s asset allocation should resemble that of the Target Retirement Income Fund. The underlying funds are: Vanguard Total Stock Market Index Fund, Vanguard Total Bond Market Index Fund, Vanguard
European Stock Index Fund, Vanguard Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect
stock holdings consist substantially of large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international stocks. Its indirect bond holdings are a diversified mix of investment-grade taxable U.S. government,
U.S. agency, and corporate bonds, as well as mortgage-backed securities, all with maturities of more than one year.
Vanguard Target
Retirement Income Fund.
Vanguard Target Retirement Income Fund seeks to provide current income and some capital appreciation. The fund invests in Vanguard mutual funds according to an assets allocation strategy designed for investors currently
in retirement. The underlying funds are: Vanguard Total Bond Market Index Fund, Vanguard Total Stock Market Index Fund, Vanguard Inflation-Protected Securities Fund, Vanguard Prime Money Market Fund, Vanguard European Stock Index Fund, Vanguard
Pacific Stock Index Fund, and Vanguard Emerging Markets Stock Index Fund.
The fund’s indirect bond holdings are a diversified mix of
short-, intermediate-, and long-term U.S. government, U.S. agency, and investment-grade corporate bonds,
10
inflation-indexed bonds issued by the U.S. government, as well as mortgage-backed securities. Its indirect stock holdings consist substantially of
large-capitalization U.S. stocks and, to a lesser extent, mid- and small-cap U.S. stocks and international funds. The fund’s indirect money market holdings consist of high-quality, short-term money market instruments.
Vanguard Total Bond Market Index Fund.
Vanguard Total Bond Market Index Fund seeks to track the performance of a broad, market-weighted bond
index. The fund employs a “passive management”—or indexing—investment approach designed to track the performance of the Lehman U.S. Aggregate Bond Index. This index measures a wide spectrum of public, investment-grade, taxable,
fixed income securities in the United States—including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year. The fund invests by
sampling the index, meaning that it holds a range of securities that, in the aggregate, approximate the full index in terms of key risk factors and other characteristics. All of the fund’s investments will be selected through the sampling
process, and at least 80% of the fund’s assets will be invested in bonds held in the index. The fund maintains a dollar-weighted average maturity consistent with that of the index, which currently ranges between 5 and 10 years.
Vanguard Windsor II Fund.
Vanguard Windsor II Fund seeks to provide long-term capital appreciation and income. The fund invests
mainly in large- and mid-capitalization companies whose stocks are considered by an advisor to be undervalued. Undervalued stocks are generally those that are out of favor with investors and the advisor feels are trading at prices that are below
average in relation to such measures as earnings and book value. These stocks often have above-average dividend yields. The fund uses multiple investment advisors.
An investment in any of the funds listed above is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. As with any mutual fund
investment, there is always a risk that you may lose money on your investment in any of the funds listed above.
Territorial Bancorp
Inc. Stock Fund
.
In connection with the stock offering, the Plan now offers the Territorial Bancorp Inc. Stock Fund as an additional choice to the investment options described above. Territorial Bancorp Inc. Stock Fund invests primarily
in the shares of common stock of Territorial Bancorp Inc. In connection with the stock offering, you may, in the manner described earlier, direct the trustee to invest up to 100% of your plan account in Territorial Bancorp Inc. Stock Fund as a
one-time special election. Subsequent to the stock offering, you may elect to invest all or a portion of your elective deferral contributions or matching contributions in Territorial Bancorp Inc. Stock Fund; you may also elect to transfer into
Territorial Bancorp Inc. Stock Fund all or a portion of your accounts currently invested in other funds under the Plan.
11
Territorial Bancorp Inc. Stock Fund consists primarily of investments in the shares of common stock of
Territorial Bancorp Inc. After the stock offering, the trustee of the Plan will use all amounts held by it in Territorial Bancorp Inc. Stock Fund to purchase additional shares of common stock of Territorial Bancorp Inc.
As of the date of this prospectus supplement, there is no established market for Territorial Bancorp Inc. common stock. Accordingly, there is no record
of the historical performance of Territorial Bancorp Inc. Stock Fund. Performance of Territorial Bancorp Inc. Stock Fund depends on a number of factors, including the financial condition and profitability of Territorial Bancorp Inc. and Territorial
Savings Bank and market conditions for shares of Territorial Bancorp Inc. common stock generally.
Investments in Territorial Bancorp Inc.
Stock Fund involve special risks common to investments in the shares of common stock of Territorial Bancorp Inc.
For a discussion of
material risks you should consider, see “Risk Factors” section of the attached prospectus and the Section called “Notice of Your Rights Concerning Employer Securities” (see below).
Withdrawals and Distributions from the Plan
Applicable federal law requires the Plan to impose substantial restrictions on the right of a Plan participant
to withdraw amounts held for his or her benefit under the Plan prior to the participant’s termination of employment with Territorial Savings Bank. A substantial federal tax penalty may also be imposed on withdrawals made prior to the
participant’s attainment of age 59
1
/
2
, regardless of whether such a withdrawal occurs during his or her employment with
Territorial Savings Bank or after termination of employment.
Time of Distribution.
You may request a distribution
from the Plan if you terminate employment before your normal retirement age (age 65), or in the event you incur a disability, or in the event you attain your normal retirement age but do not terminate employment.
In the event you have attained age 59
1
/
2
and are still employed by Territorial Savings Bank, you may request a distribution from your elective deferrals and from the portion of your account attributable to employer profit
sharing contributions and employer matching contributions.
Hardship
. In the event you incur a financial hardship, you may
request an in-service withdrawal of the portion of your account attributable to your elective deferrals, including qualified nonelective contributions and qualified matching contributions that are treated as elective deferrals, and any earnings
thereon.
Rollover Contributions and Transfer Contributions
. You may request a distribution of your rollover contributions and
transfer contributions at any time.
12
Loan
. You may request a loan from your account pursuant to the procedures established in the Plan.
Form of Distribution
. Distribution of your benefit under the Plan will be made in a single lump sum payment. You may elect to have
the distribution paid in a direct rollover to an individual retirement account or another employer plan or paid directly to you.
Administration of the Plan
The Trustee and Custodian
. The trustee of the Plan is RSGroup Trust Company. RSGroup Trust
Company serves as trustee for all the investments funds under the Plan.
Plan Administrator
. Pursuant to the terms of the Plan, the
Plan is administered by the Plan administrator. The address of the Plan administrator is Territorial Savings Bank, Attention: Karen J. Cox, Senior Vice President-Administration, telephone number (808) 951-1244. The Plan administrator is
responsible for the administration of the Plan, interpretation of the provisions of the Plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the Plan, maintenance of Plan records,
books of account and all other data necessary for the proper administration of the Plan, preparation and filing of all returns and reports relating to the Plan which are required to be filed with the U.S. Department of Labor and the Internal Revenue
Service, and for all disclosures required to be made to participants, beneficiaries and others under Sections 104 and 105 of ERISA.
Reports to Plan Participants
. The Plan administrator will furnish you a statement at least quarterly showing the balance in your account as of the end of that period, the amount of contributions allocated to your account for that
period, and any adjustments to your account to reflect earnings or losses (if any).
Amendment and Termination
It is the intention of Territorial Savings Bank to continue the Plan indefinitely. Nevertheless, Territorial Savings Bank may terminate
the Plan at any time. If the Plan is terminated in whole or in part, then regardless of other provisions in the Plan, you will have a fully vested interest in your accounts. Territorial Savings Bank reserves the right to make any amendment or
amendments to the Plan which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries; provided, however, that Territorial Savings Bank may make any
amendment it determines necessary or desirable, with or without retroactive effect, to comply with ERISA.
Merger,
Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan, or the transfer of the trust
assets to another plan, the Plan requires that you would, if either the Plan or the other plan terminates, receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit you would have been
entitled to receive immediately before the merger, consolidation or transfer, if the Plan had then terminated.
13
Federal Income Tax Consequences
The following is a brief summary of the material federal income tax aspects of the Plan. You should not rely on this summary as a complete or definitive
description of the material federal income tax consequences relating to the Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state
and local income tax laws may not be the same as under the federal income tax laws. Please consult your tax advisor with respect to any distribution from the Plan and transactions involving the Plan.
As a “tax-qualified retirement plan,” the Code affords the Plan special tax treatment, including:
(1) the sponsoring employer is allowed an immediate tax deduction for the amount contributed to the Plan each year;
(2) participants pay no current income tax on amounts contributed by the employer on their behalf; and
(3) earnings of the Plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments.
Territorial Savings Bank will administer the Plan to comply with the requirements of the Code as of the applicable effective date of any change in the
law.
Lump-Sum Distribution
. A distribution from the Plan to a participant or
the beneficiary of a participant will qualify as a lump-sum distribution if it is made within one taxable year, on account of the participant’s death, disability or separation from service, or after the participant attains age 59
1
/
2
, and consists of the balance credited to participants under the Plan and all other profit sharing plans (and in some cases all
other stock bonus plans), if any, maintained by Territorial Savings Bank. The portion of any lump-sum distribution required to be included in your taxable income for federal income tax purposes consists of the entire amount of the lump-sum
distribution, less the amount of after-tax contributions, if any, you have made to this Plan and any other profit sharing plans maintained by Territorial Savings Bank, which is included in the distribution.
Territorial Bancorp Inc. Common Stock Included in Lump-Sum Distribution
. If a lump-sum distribution includes Territorial Bancorp Inc. common
stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount may be reduced by the amount of any net unrealized appreciation with respect to Territorial Bancorp Inc. common stock, that is, the
excess of the value of Territorial Bancorp Inc. common stock at the time of the distribution over its cost or other basis of the securities to the trust. The tax basis of Territorial Bancorp Inc. common stock, for purposes of computing gain or loss
on its subsequent sale, equals the value of Territorial Bancorp Inc. common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable
14
disposition of Territorial Bancorp Inc. common stock, to the extent of the amount of net unrealized appreciation at the time of distribution, will constitute
long-term capital gain, regardless of the holding period of Territorial Bancorp Inc. common stock. Any gain on a subsequent sale or other taxable disposition of Territorial Bancorp Inc. common stock, in excess of the amount of net unrealized
appreciation at the time of distribution, will be considered long-term capital gain. The recipient of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent
allowed by regulations to be issued by the Internal Revenue Service.
Distributions: Rollovers and Direct Transfers to Another Qualified
Plan or to an IRA
. You may roll over virtually all distributions from the Plan to another qualified plan or to an individual retirement account (IRA) in accordance with the terms of the other plan or account.
Notice of Your Rights Concerning Employer Securities.
There has been an important change in Federal law that provides specific rights concerning investments in employer securities, such as Territorial Bancorp Inc. common stock. Because you may in the future have
investments in Territorial Bancorp Inc. Stock Fund under the Plan, you should take the time to read the following information carefully.
Your Rights Concerning Employer Securities
. The Plan must allow you to elect to move any portion of your account that is invested in the Territorial Bancorp Inc. Stock Fund from that investment into other investment alternatives
under the Plan. You may contact the Plan Administrator shown above for specific information regarding this new right, including how to make this election. In deciding whether to exercise this right, you will want to give careful consideration to the
information below that describes the importance of diversification. All of the investment options under the Plan are available to you if you decide to diversify out of the Territorial Bancorp Inc. Stock Fund.
The Importance of Diversifying Your Retirement Savings
. To help achieve long-term retirement security, you should give careful consideration to
the benefits of a well-balanced and diversified investment portfolio. Spreading your assets among different types of investments can help you achieve a favorable rate of return, while minimizing your overall risk of losing money. This is because
market or other economic conditions that cause one category of assets, or one particular security, to perform very well often cause another asset category, or another particular security, to perform poorly. If you invest more than 20% of your
retirement savings in any one company or industry, your savings may not be properly diversified. Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk.
In deciding how to invest your retirement savings, you should take into account all of your assets, including any retirement savings outside of the Plan.
No single approach is right for everyone because, among other factors, individuals have different financial goals, different time horizons for meeting their goals, and different tolerance for risk. Therefore, you should carefully consider the rights
described here and how these rights affect the amount of money that you invest in Territorial Bancorp Inc. common stock through the Plan.
15
It is also important to periodically review your investment portfolio, your investment objectives, and
the investment options under the Plan to help ensure that your retirement savings will meet your retirement goals.
Additional ERISA Considerations
As noted above, the Plan is subject to certain provisions of
ERISA, including special provisions relating to control over the Plan’s assets by participants and beneficiaries. The Plan’s feature that allows you to direct the investment of your account balances is intended to satisfy the requirements
of Section 404(c) of ERISA relating to control over plan assets by a participant or beneficiary. The effect of this is two-fold. First, you will not be deemed a “fiduciary” because of your exercise of investment discretion. Second, no
person who otherwise is a fiduciary, such as Territorial Savings Bank, the Plan Administrator, or the Plan’s trustee is liable under the fiduciary responsibility provision of ERISA for any loss which results from your exercise of control over
the assets in your Plan account.
Because you will be entitled to invest all or a portion of your account balance in the Plan in
Territorial Bancorp Inc. common stock, the regulations under Section 404(c) of ERISA require that the Plan establish procedures that ensure the confidentiality of your decision to purchase, hold, or sell employer securities, except to the
extent that disclosure of such information is necessary to comply with federal or state laws not preempted by ERISA. These regulations also require that your exercise of voting and similar rights with respect to the common stock be conducted in a
way that ensures the confidentiality of your exercise of these rights.
Securities and Exchange Commission Reporting and
Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934, as amended, imposes reporting and liability
requirements on officers, directors, and persons beneficially owning more than 10% of public companies such as Territorial Bancorp Inc. Section 16(a) of the Securities Exchange Act of 1934 requires the filing of reports of beneficial ownership.
Within 10 days of becoming an officer, director or person beneficially owning more than 10% of the shares of Territorial Bancorp Inc., a Form 3 reporting initial beneficial ownership must be filed with the Securities and Exchange Commission. Changes
in beneficial ownership, such as purchases, sales and gifts generally must be reported periodically, either on a Form 4 within two business days after the change occurs, or annually on a Form 5 within 45 days after the close of Territorial Bancorp
Inc.’s fiscal year. Discretionary transactions in and beneficial ownership of the common stock through the Territorial Bancorp Inc. Stock Fund of the Plan by officers, directors and persons beneficially owning more than 10% of the common stock
of Territorial Bancorp Inc. generally must be reported to the Securities and Exchange Commission by such individuals.
In addition to the
reporting requirements described above, Section 16(b) of the Securities Exchange Act of 1934, as amended, provides for the recovery by Territorial Bancorp Inc. of profits realized by an officer, director or any person beneficially owning more
than 10% of Territorial Bancorp Inc.’s common stock resulting from non-exempt purchases and sales of Territorial Bancorp Inc. common stock within any six-month period.
16
The Securities and Exchange Commission has adopted rules that provide exemptions from the profit recovery
provisions of Section 16(b) for all transactions in employer securities within an employee benefit plan, provided certain requirements are met. These requirements generally involve restrictions upon the timing of elections to acquire or dispose
of employer securities for the accounts of Section 16(b) persons.
Except for distributions of common stock due to death, disability,
retirement, termination of employment or under a qualified domestic relations order, persons affected by Section 16(b) are required to hold shares of common stock distributed from the Plan for six months following such distribution and are
prohibited from directing additional purchases within the Territorial Bancorp Inc. Stock Fund for six months after receiving such a distribution.
Financial Information Regarding Plan Assets
Financial information representing the assets available for plan benefits at
[date], are available upon written request to the Plan Administrator at the address shown above.
LEGAL OPINION
The validity of the issuance of the common stock has been passed upon by Luse Gorman Pomerenk & Schick, A Professional Corporation, Washington, D.C., which firm acted as special counsel to Territorial Bancorp Inc. in connection
with Territorial Bancorp Inc.’s stock offering.
17
PROSPECTUS
TERRITORIAL BANCORP INC.
(Proposed Holding Company for Territorial Savings Bank)
Up to 10,925,000 Shares of Common Stock
Territorial Bancorp Inc., a Maryland corporation, is offering shares of common stock for sale in connection with the conversion of Territorial Mutual Holding Company from the mutual to the stock form of organization. All shares of common
stock are being offered for sale at a price of $10.00 per share. We expect that our common stock will be traded on the Nasdaq Global Select Market under the symbol “TBNK,” upon conclusion of the stock offering. There is currently no public
market for the shares of our common stock.
We are offering up to 10,925,000 shares of common stock for sale on a best efforts basis. We
may sell up to 12,563,750 shares of common stock because of demand for the shares or changes in market conditions without resoliciting subscribers. We must sell a minimum of 8,075,000 shares in order to complete the offering.
We are offering the shares of common stock in a “subscription offering.” Depositors of Territorial Savings Bank with aggregate account balances
of at least $50 as of the close of business on September 30, 2007 will have first priority rights to buy our shares of common stock. Shares of common stock not purchased in the subscription offering may be offered for sale to the general public
in a “community offering.” We also may offer for sale shares of common stock not purchased in the subscription offering or community offering through a “syndicated community offering” managed by Keefe, Bruyette & Woods,
Inc.
The minimum number of shares of common stock you may order is 25 shares. The maximum number of shares of common stock that can be
ordered through a single qualifying account is 50,000 shares, and no person by himself or with an associate or group of persons acting in concert may purchase more than 100,000 shares. The offering is expected to expire at 3:00 p.m., local time, on
[expiration date]. We may extend this expiration date without notice to you until [extension date], unless the Office of Thrift Supervision approves a later date, which may not be beyond [final date]. Once submitted, orders are irrevocable unless
the offering is terminated or is extended beyond [extension date], or the number of shares of common stock to be sold is increased to more than 12,563,750 shares or decreased to fewer than 8,075,000 shares. If the offering is extended beyond
[extension date], or if the number of shares of common stock to be sold is increased to more than 12,563,750 shares or decreased to fewer than 8,075,000 shares, we will resolicit subscribers, giving them an opportunity to change or cancel their
orders. Funds received during the offering will be held in a segregated account at Territorial Savings Bank, or, in our discretion, at another insured depository institution, and will earn interest at
%, which is our
current passbook savings rate.
Keefe, Bruyette & Woods, Inc. will assist us in selling our shares of common stock on a best
efforts basis. Keefe, Bruyette & Woods, Inc. is not required to purchase any shares of the common stock that are being offered for sale. Purchasers will not pay a commission to purchase shares of common stock in the offering. Keefe,
Bruyette & Woods, Inc. has advised us that it intends to make a market in the common stock, but is under no obligation to do so.
This investment involves a degree of risk, including the possible loss of your investment.
Please read “
Risk
Factors
” beginning on page 16.
OFFERING SUMMARY
Price: $10.00 per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
Maximum
|
|
Adjusted
Maximum
|
|
Number of shares
|
|
|
8,075,000
|
|
|
10,925,000
|
|
|
12,563,750
|
|
Gross offering proceeds
|
|
$
|
80,750,000
|
|
$
|
109,250,000
|
|
$
|
125,638,000
|
|
Estimated offering expenses (excluding selling agent fees and expenses)
|
|
$
|
2,050,000
|
|
$
|
2,050,000
|
|
$
|
2,050,000
|
|
Estimated selling agent fees and expenses
(1)
|
|
$
|
818,000
|
|
$
|
1,080,000
|
|
$
|
1,231,000
|
|
Estimated net proceeds
|
|
$
|
77,882,000
|
|
$
|
106,120,000
|
|
$
|
122,357,000
|
|
Estimated net proceeds per share
|
|
$
|
9.64
|
|
$
|
9.71
|
|
$
|
9.74
|
|
(1)
|
See “The Conversion; Plan of Distribution—Marketing and Distribution; Compensation” for a discussion of Keefe, Bruyette & Woods, Inc.’s compensation for
this offering.
|
These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
For assistance, please call the Stock Information Center, toll free, at [stock info #].
K
EEFE
, B
RUYETTE
& W
OODS
The date
of this prospectus is [prospectus date].
[MAP SHOWING MARKET AREA APPEARS HERE]
i
TABLE OF CONTENTS
ii
SUMMARY
The following summary highlights material information in this prospectus. It may not contain all the information that is important to you. For
additional information, you should read this entire prospectus carefully, including the Consolidated Financial Statements and the notes to the Consolidated Financial Statements.
In this prospectus, the terms “we, “our,” and “us” refer to Territorial Bancorp Inc. and Territorial Savings Bank unless the
context indicates another meaning.
Territorial Savings Bank
Territorial Savings Bank is a federally chartered savings bank headquartered in Honolulu, Hawaii. Territorial Savings Bank was organized in 1921, and reorganized into the mutual holding company structure in 2002.
Territorial Savings Bank is currently the wholly owned subsidiary of Territorial Savings Group, Inc., a federal corporation, which is the wholly owned subsidiary of Territorial Mutual Holding Company, a federal mutual holding company. On a
consolidated basis, Territorial Mutual Holding Company had total assets of $1.2 billion, total loans of $629.6 million, total deposits of $910.3 million and equity of $99.1 million as of September 30, 2008. We provide financial services to
individuals, families and businesses through our 24 banking offices located throughout the State of Hawaii.
Territorial Savings
Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in one- to four-family residential mortgage loans and investment
securities. To a much lesser extent, we also originate home equity loans and lines of credit, construction, commercial and other non-residential real estate loans, consumer loans, multi-family mortgage loans and other loans. Territorial Savings Bank
offers a variety of deposit accounts, including passbook and statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and Super NOW accounts. Through our subsidiary, Territorial Financial
Services, Inc., we engage in insurance agency activities. We also offer various non-deposit investments to our customers, including annuities and mutual funds, through a third-party broker-dealer.
Territorial Savings Bank’s executive offices are located at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii 96813. Our telephone number at this
address is (808) 946-1400. Our website address is www.territorialsavings.net. Information on our website is not incorporated into this prospectus and should not be considered part of this prospectus.
Territorial Bancorp Inc.
Territorial Bancorp Inc. is
a newly formed Maryland corporation that will own all of the outstanding shares of common stock of Territorial Savings Bank upon completion of the mutual-to-stock conversion and the offering. Territorial Bancorp Inc. has not engaged in any business
to date.
Our executive offices are located at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii 96813. Our telephone number at this address
is (808) 946-1400.
Our Organizational Structure
In September 2002, Territorial Savings Bank’s mutual predecessor reorganized into the mutual holding company form of organization by forming Territorial Mutual Holding Company. Territorial Mutual Holding Company
owns 100% of the outstanding shares of common stock of Territorial Savings Group, Inc., a federal corporation. Territorial Mutual Holding Company is a mutual holding company that has no stockholders and is controlled by its members. Territorial
Savings Group, Inc. owns 100% of the outstanding shares of common stock of Territorial Savings Bank. Territorial Savings Group, Inc. has not issued shares of stock to the public.
Pursuant to the terms of Territorial Mutual Holding Company’s plan of conversion and reorganization, Territorial Mutual Holding Company will convert
from a mutual holding company to the stock holding company corporate structure. As part of the conversion, we are offering for sale in a subscription offering, and, if necessary, a community offering and a syndicated community offering, shares of
common stock of Territorial Bancorp Inc. Upon the completion of the conversion and offering, Territorial Mutual Holding Company and Territorial Savings Group, Inc. will cease to exist, and Territorial Savings Bank will be a wholly owned subsidiary
of Territorial Bancorp, Inc.
Business Strategy
Our business strategy is to grow and improve our profitability by:
|
|
•
|
|
remaining a community-oriented financial institution;
|
|
|
•
|
|
increasing loan production while maintaining high asset quality;
|
|
|
•
|
|
emphasizing lower cost core deposits to maintain low funding costs; and
|
|
|
•
|
|
expanding our branch network.
|
A
full description of our products and services begins on page 81 of this prospectus under the heading “Business of Territorial Savings Bank.”
These strategies are intended to guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes necessitated
by future market conditions and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy” for a further discussion of our business strategy.
Reasons for the Conversion
Our primary reasons for
converting and raising additional capital through the offering are:
|
|
•
|
|
to support our internal growth through lending in communities we serve or may serve in the future and through the establishment of
de novo
branch offices
.
We currently intend to establish one new branch office per year over the next two years;
|
|
|
•
|
|
to assist us in the management of interest rate risk;
|
|
|
•
|
|
to repay trust preferred securities and short-term borrowings;
|
2
|
|
•
|
|
to provide additional financial resources to pursue future acquisitions of banks, thrifts and other financial services companies, and branch offices, although we
have no current arrangements or agreements with respect to any such acquisitions;
|
|
|
•
|
|
to provide better capital management tools, including the ability to pay dividends and to repurchase shares of our common stock, subject to market conditions; and
|
|
|
•
|
|
to retain and attract qualified personnel by establishing stock-based benefit plans for management and employees.
|
Terms of the Conversion and the Offering
Under
Territorial Mutual Holding Company’s plan of conversion and reorganization, our organization will convert to a fully public stock holding company structure. In connection with the conversion, we are offering between 8,075,000 and 10,925,000
shares of common stock to eligible depositors and borrowers of Territorial Savings Bank, to our employee benefit plans and, to the extent shares remain available, to the general public. The number of shares of common stock to be sold may be
increased to up to 12,563,750 as a result of demand for the shares or changes in the market for financial institution stocks. Unless the number of shares of common stock to be offered is increased to more than 12,563,750 or decreased to less than
8,075,000, or the offering is extended beyond [extension date], subscribers will not have the opportunity to change or cancel their stock orders.
The purchase price of each share of common stock to be issued in the offering is $10.00. All investors will pay the same purchase price per share. Investors will not be charged a commission to purchase shares of common stock in the
offering. Keefe, Bruyette & Woods, Inc., our marketing advisor in the offering, will use its best efforts to assist us in selling shares of our common stock. Keefe, Bruyette & Woods, Inc. is not obligated to purchase any shares of
common stock in the offering.
Persons Who May Order Shares of Common Stock in the Offering
We are offering the shares of common stock in a “subscription offering” in the following descending order of priority:
|
|
•
|
|
First, to depositors of Territorial Savings Bank with aggregate account balances of at least $50 as of the close of business on September 30, 2007.
|
|
|
•
|
|
Second, to Territorial Savings Bank’s tax-qualified employee benefit plans.
|
|
|
•
|
|
Third, to depositors of Territorial Savings Bank with aggregate account balances of at least $50 as of the close of business on December 31, 2008.
|
|
|
•
|
|
Fourth, to depositors of Territorial Savings Bank as of [other member date] and to borrowers of Territorial Savings Bank as of September 18, 2002 whose
borrowings remain outstanding as of [other member date].
|
Shares of common stock not purchased in the subscription
offering may be offered for sale to the general public in a “community offering,” with a preference given to natural persons residing in the State of Hawaii. The community offering may begin concurrently with, during or promptly after the
subscription offering as we may determine at any time. If shares remain available for sale following the subscription offering or community offering, we also may offer for sale shares of common stock through a “syndicated community
offering” managed by Keefe, Bruyette & Woods, Inc.
3
We have the right to accept or reject, in our sole discretion, orders received in the community offering
or syndicated community offering. We have not established any set criteria for determining whether to accept or reject a purchase order in the community offering or the syndicated community offering, and, accordingly, any determination to accept or
reject purchase orders in the community offering and the syndicated community offering will be based on the facts and circumstances known to us at the time.
To ensure a proper allocation of stock, each subscriber eligible to purchase stock in the subscription offering must list on his or her stock order and certification form all deposit accounts in which he or she had an
ownership interest at September 30, 2007, December 31, 2008 or [other member date], as applicable. Failure to list all accounts, or providing incorrect information, could result in the loss of all or part of a subscriber’s stock
allocation. Our interpretation of the terms and conditions of the plan of conversion and reorganization and of the acceptability of the order forms will be final.
If we receive orders for more shares than we are offering, we may not be able to fully or partially fill your order. Shares will be allocated first in the order of priority to subscribers in the subscription offering.
A detailed description of share allocation procedures can be found in the section entitled “The Conversion; Plan of Distribution.”
How We
Determined the Offering Range
The amount of common stock that we are offering is based on an independent appraisal of the estimated
market value of Territorial Bancorp Inc., assuming the conversion and the offering are completed. FinPro, Inc., our independent appraiser, has estimated that, as of November 7, 2008, this market value ranged from $80.8 million to $109.3
million, with a midpoint of $95.0 million. Based on this valuation and a $10.00 per share price, the number of shares of common stock being offered for sale by us will range from 8,075,000 shares to 10,925,000 shares. The $10.00 per share price
was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.
The appraisal
is based in part on our financial condition and results of operations, the effect of the additional capital raised by the sale of shares of common stock in the offering and an analysis of a peer group of 13 publicly traded savings bank and thrift
holding companies that FinPro, Inc. considered comparable to us.
4
The appraisal peer group consists of the following companies.
|
|
|
|
|
|
|
|
|
|
|
Company Name and Ticker Symbol
|
|
Exchange
|
|
Headquarters
|
|
Total Assets
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
First Defiance Financial Corp. (FDEF)
|
|
Nasdaq
|
|
Defiance, OH
|
|
$
|
1,922,026
|
(1)
|
|
HF Financial Corp. (HFFC)
|
|
Nasdaq
|
|
Sioux Falls, SD
|
|
|
1,127,724
|
(1)
|
|
HopFed Bancorp, Inc. (HFBC)
|
|
Nasdaq
|
|
Hopkinsville, KY
|
|
|
843,435
|
(1)
|
|
Meta Financial Group, Inc. (CASH)
|
|
Nasdaq
|
|
Storm Lake, IA
|
|
|
781,734
|
(2)
|
|
MutualFirst Financial, Inc. (MFSF)
|
|
Nasdaq
|
|
Muncie, IN
|
|
|
1,398,891
|
(1)
|
|
NASB Financial, Inc. (NASB)
|
|
Nasdaq
|
|
Grandview, MO
|
|
|
1,571,172
|
(2)
|
|
Provident Financial Holdings, Inc. (PROV)
|
|
Nasdaq
|
|
Riverside, CA
|
|
|
1,593,950
|
(1)
|
|
Pulaski Financial Corp. (PULB)
|
|
Nasdaq
|
|
St. Louis, MO
|
|
|
1,304,150
|
(1)
|
|
PVF Capital Corp. (PVFC)
|
|
Nasdaq
|
|
Solon, OH
|
|
|
905,232
|
(1)
|
|
Riverview Bancorp, Inc. (RSVB)
|
|
Nasdaq
|
|
Vancouver, WA
|
|
|
895,607
|
(1)
|
|
Teche Holding Company (TSH)
|
|
NYSE (Amex)
|
|
New Iberia, LA
|
|
|
769,488
|
(1)
|
|
Timberland Bancorp, Inc. (TSBK)
|
|
Nasdaq
|
|
Hoquiam, WA
|
|
|
681,883
|
(1)
|
|
United Western Bancorp, Inc. (UWBK)
|
|
Nasdaq
|
|
Denver, CO
|
|
|
2,173,926
|
(2)
|
|
(1)
|
As of September 30, 2008
|
The following table presents a
summary of selected pricing ratios for Territorial Bancorp Inc. and the peer group companies identified by FinPro, Inc. Our ratios are based on core earnings for the twelve months ended September 30, 2008 and book value as of September 30,
2008. Core earnings, for purposes of the appraisal, is defined as net earnings after taxes, excluding the after-tax portion of income from nonrecurring items. The peer group ratios are based on book value as of and core earnings for the most recent
twelve-month period (September 30, 2008 or June 30, 2008). Tangible book value is total equity, less intangible assets. Compared to the median pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range
indicated a premium of 52.53% on a price-to-core-earnings basis, a discount of 12.67% on a price-to-book value basis and a discount of 26.24% on a price-to-tangible book value basis. The pricing ratios result from our generally having higher levels
of equity but lower core earnings than the companies in the peer group on a pro forma basis. The price ratios also reflect recent volatile market conditions, particularly for stock of financial institution holding companies, and the effect of such
conditions on the trading market for recent mutual-to-stock conversions. Our Board of Directors, in reviewing and approving the valuation, considered the range of price-to-core earnings multiples and the range of price-to-book value ratios and
price-to-tangible book value ratios at the different amounts of shares to be sold in the offering. The appraisal did not consider one valuation approach to be more important than the other.
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Price-to-core
earnings multiple
|
|
Price-to-book
value ratio
|
|
|
Price-to-tangible
book value ratio
|
|
|
Territorial Bancorp Inc. (pro forma)
|
|
|
|
|
|
|
|
|
|
Maximum, as adjusted
|
|
14.71x
|
|
60.98
|
%
|
|
61.05
|
%
|
|
Maximum
|
|
12.66x
|
|
56.98
|
%
|
|
57.05
|
%
|
|
Minimum
|
|
9.80x
|
|
48.33
|
%
|
|
48.40
|
%
|
|
Valuation of peer group companies using stock prices as of November 7, 2008
|
|
|
|
|
|
|
|
|
|
Averages
|
|
20.58x
|
|
71.66
|
%
|
|
80.73
|
%
|
|
Medians
|
|
8.30x
|
|
65.25
|
%
|
|
77.35
|
%
|
FinPro, Inc. advised the Board of Directors that the appraisal was prepared in conformance with
the regulatory appraisal methodology. That methodology requires a valuation based on an analysis of the trading prices of comparable public companies whose stocks have traded for at least one year prior to the valuation date, and as a result of this
analysis, FinPro, Inc. determined that our pro forma price-to-core earnings ratios were higher than the peer group companies and our pro forma price-to-book and price-to-tangible book ratios were lower than the peer group companies. See
“—How We Determined the Offering Range.”
Our Board of Directors carefully reviewed the information provided to it by
FinPro, Inc. through the appraisal process, but did not make any determination regarding whether prior standard mutual-to-stock conversions have been undervalued, nor did the board draw any conclusions regarding how the historical data reflected
above may affect Territorial Bancorp Inc.’s appraisal. Instead, we engaged FinPro, Inc. to help us understand the regulatory process as it applies to the appraisal and to advise the Board of Directors as to how much capital Territorial Bancorp
Inc. would be required to raise under the regulatory appraisal guidelines.
The independent appraisal does not indicate per share market
value. Do not assume or expect that the valuation of Territorial Bancorp Inc. as indicated above means that, after the conversion and the offering, the shares of common stock will trade at or above the $10.00 offering price. Furthermore, the pricing
ratios presented above were utilized by FinPro, Inc. to estimate our market value and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a
particular company may be affected by a number of factors such as financial performance, asset size and market location.
The
independent appraisal will be updated prior to the completion of the conversion. If the appraised value decreases below $80.8 million or increases above $125.6 million, subscribers may be resolicited with the approval of the Office of Thrift
Supervision and be given the opportunity to change or cancel their orders. If you do not respond, we will cancel your stock order and return your subscription funds, with interest, and cancel any authorization to withdraw funds from your deposit
accounts for the purchase of shares of common stock. For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion; Plan of Distribution—Determination of Share
Price and Number of Shares to be Issued.”
6
After-Market Stock Price Performance Provided by Independent Appraiser
The following table presents stock price appreciation information for all standard mutual-to-stock conversions completed between January 1, 2007 and
November 7, 2008. These companies did not constitute the group of 13 comparable public companies utilized in FinPro, Inc.’s valuation analysis.
Mutual-to-Stock Conversion Offerings with Closing Dates
between January 1, 2007 and
November 7, 2008
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Percentage Price Appreciation (Depreciation)
From
Initial Trading Date
|
|
|
Company Name and Ticker Symbol
|
|
Conversion
Date
|
|
Exchange
|
|
One Day
|
|
|
One Week
|
|
|
One Month
|
|
|
Through
November 7,
2008
|
|
|
First Savings Financial Group, Inc. (FSFG)
|
|
10/7/2008
|
|
Nasdaq
|
|
(1.00
|
)%
|
|
(4.00
|
)%
|
|
(8.00
|
)%
|
|
(7.80
|
)%
|
|
Home Bancorp, Inc. (HBCP)
|
|
10/3/2008
|
|
Nasdaq
|
|
14.90
|
|
|
3.50
|
|
|
3.10
|
|
|
3.00
|
|
|
Cape Bancorp, Inc. (CBNJ)
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|
2/1/2008
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|
Nasdaq
|
|
0.50
|
|
|
0.10
|
|
|
(2.00
|
)
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|
(14.90
|
)
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|
Danvers Bancorp, Inc. (DNBK)
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|
1/10/2008
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|
Nasdaq
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|
(2.60
|
)
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|
(2.20
|
)
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|
2.60
|
|
|
22.40
|
|
|
First Advantage Bancorp (FABK)
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|
11/30/2007
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|
Nasdaq
|
|
11.70
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|
|
8.00
|
|
|
6.50
|
|
|
4.90
|
|
|
First Financial Northwest, Inc. (FFNW)
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|
10/10/2007
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|
Nasdaq
|
|
17.30
|
|
|
15.30
|
|
|
8.10
|
|
|
(20.20
|
)
|
|
Beacon Federal Bancorp, Inc. (BFED)
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|
10/2/2007
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|
Nasdaq
|
|
16.00
|
|
|
19.00
|
|
|
7.50
|
|
|
(15.00
|
)
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|
Louisiana Bancorp, Inc. (LABC)
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|
7/10/2007
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|
Nasdaq
|
|
9.50
|
|
|
3.00
|
|
|
9.40
|
|
|
22.50
|
|
|
Quaint Oak Bancorp, Inc. (QNTO)
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|
7/5/2007
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|
OTCBB
|
|
(2.00
|
)
|
|
(9.50
|
)
|
|
(11.00
|
)
|
|
(10.10
|
)
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|
CMS Bancorp, Inc. (CMSB)
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|
7/5/2007
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|
Nasdaq
|
|
5.70
|
|
|
5.20
|
|
|
3.20
|
|
|
(22.60
|
)
|
|
ESSA Bancorp, Inc. (ESSA)
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|
4/4/2007
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|
Nasdaq
|
|
17.80
|
|
|
21.50
|
|
|
14.60
|
|
|
34.90
|
|
|
Hampden Bancorp, Inc. (HBNK)
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|
1/17/2007
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|
Nasdaq
|
|
29.20
|
|
|
24.50
|
|
|
23.40
|
|
|
(2.40
|
)
|
|
Average
|
|
|
|
|
|
10.21
|
|
|
8.49
|
|
|
6.23
|
|
|
|
|
|
Median
|
|
|
|
|
|
10.60
|
|
|
6.60
|
|
|
7.00
|
|
|
|
|
Stock price appreciation is affected by many factors, including, but not limited to: general
market and economic conditions; the interest rate environment; the amount of proceeds a company raises in its offering; and numerous factors relating to the specific company, including the experience and ability of management, historical and
anticipated operating results, the nature and quality of the company’s assets, and the company’s market area. The companies listed in the table above may not be similar to Territorial Bancorp Inc., the pricing ratios for their stock
offerings were in some cases different from the pricing ratios for Territorial Bancorp Inc.’s common stock and the market conditions in which these offerings were completed were, in some cases, different from current market conditions. Any or
all of these differences may cause our stock to perform differently from these other offerings.
There can be no assurance that our
stock price will not trade below $10.00 per share, as has been the case for some mutual-to-stock conversions. Before you make an investment decision, we urge you to carefully read this prospectus, including, but not limited to, the section entitled
“Risk Factors” beginning on page 16.
Limits on How Much Common Stock You May Purchase
The minimum number of shares of common stock that may be purchased is 25. Generally, no individual, or individuals exercising subscription rights through
a single qualifying account held jointly, may purchase more than 50,000 shares ($500,000) of common stock. If any of the following persons purchases shares of common stock, their purchases, in all categories of the offering, when combined with your
purchases, cannot exceed 100,000 shares ($1,000,000):
|
|
•
|
|
your spouse or relatives of you or your spouse living in your house;
|
7
|
|
•
|
|
most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior management position; or
|
|
|
•
|
|
other persons who may be your associates or persons acting in concert with you.
|
See the detailed descriptions of “acting in concert” and “associate” in “The Conversion; Plan of Distribution—Limitations
on Common Stock Purchases.”
How You May Purchase Shares of Common Stock
In the subscription offering and community offering, you may pay for your shares only by:
|
|
•
|
|
personal check, bank check or money order, made payable to Territorial Bancorp Inc.; or
|
|
|
•
|
|
authorizing us to withdraw funds from the types of Territorial Savings Bank deposit accounts permitted on the stock order and certification form.
|
Territorial Savings Bank is not permitted to knowingly lend funds to anyone for the purpose of purchasing shares of
common stock in the offering. Additionally, you may not use a check drawn on a Territorial Savings Bank line of credit or a third-party check to pay for shares of common stock.
You can subscribe for shares of common stock in the offering by delivering a signed and completed original stock order and certification form, together
with full payment or authorization to withdraw from one or more of your Territorial Savings Bank deposit accounts, so that it is received (not postmarked) before 3:00 p.m., local time, on [expiration date], which is the expiration of the offering
period. For orders paid for by check or money order, the funds will be cashed promptly and held in a segregated account at Territorial Savings Bank, or in our discretion at another insured depository institution. We will pay interest on those funds
calculated at Territorial Savings Bank’s current passbook savings rate from the date funds are received until completion or termination of the conversion and the offering. Withdrawals from certificates of deposit to purchase shares of common
stock in the offering may be made without incurring an early withdrawal penalty; however, if a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the
time of withdrawal without penalty and the remaining balance will be transferred to a savings account and earn interest at our passbook savings rate subsequent to the withdrawal. All funds authorized for withdrawal from deposit accounts with
Territorial Savings Bank must be in the accounts at the time the stock order is received. However, funds will not be withdrawn from the accounts until the completion of the conversion and offering and will earn interest at the applicable deposit
account rate until that time. A hold will be placed on those funds when your stock order is received, making the designated funds unavailable to you. After we receive your order, your order cannot be changed or canceled unless the number of shares
of common stock to be offered is increased to more than 12,563,750 or decreased to fewer than 8,075,000, or the offering is extended beyond [extension date].
By signing the stock order and certification form, you are acknowledging receipt of a prospectus and that the shares of common stock are not deposits or savings accounts that are federally insured or otherwise
guaranteed by Territorial Savings Bank, the Federal Deposit Insurance Corporation or any other government agency.
You may be able to
subscribe for shares of common stock using funds in your individual retirement account, or IRA. However, shares of common stock must be purchased through and held in a self-directed retirement account, such as those offered by a brokerage firm. By
regulation, Territorial
8
Savings Bank’s individual retirement accounts are not self-directed, so they cannot be used to purchase or hold shares of our common stock. If you wish
to use some or all of the funds in your Territorial Savings Bank individual retirement account to purchase our common stock, the applicable funds must be transferred to a self-directed account maintained by an independent trustee, such as a
brokerage firm, and the purchase must be made through that account. If you do not have such an account, you will need to establish one before placing your stock order. It will take time to transfer your Territorial Savings Bank individual retirement
account to an independent trustee, so please allow yourself sufficient time to take this action. An annual administrative fee may be payable to the independent trustee. Because individual circumstances differ and processing of retirement fund orders
takes additional time, we recommend that you contact our Stock Information Center promptly, preferably at least two weeks before the [expiration date] expiration of the offering period, for assistance with purchases using your Territorial Savings
Bank individual retirement account or any other retirement account that you may have. Whether you may use such funds for the purchase of shares in the stock offering may depend on time constraints and, possibly, limitations imposed by the brokerage
firm or institution where the funds are held.
Delivery of Stock Certificates
Certificates representing shares of common stock sold in the offering will be mailed to the persons entitled thereto at the certificate registration
address noted by them on the order form, as soon as practicable following consummation of the offering and receipt of all necessary regulatory approvals.
It is possible that, until certificates for the common stock are delivered, purchasers might
not be able to sell the shares of common stock that they ordered, even though the common stock will have begun trading.
How We Intend to Use the
Proceeds From the Offering
Assuming we sell 12,563,750 shares of common stock in the stock offering, and we have net proceeds of $122.4
million, we intend to distribute the net proceeds as follows:
|
|
•
|
|
$61.2 million (50.0% of the net proceeds) will be invested in Territorial Savings Bank;
|
|
|
•
|
|
$10.1 million (8.2% of the net proceeds) will be loaned to our employee stock ownership plan to fund its purchase of our shares of common stock;
|
|
|
•
|
|
$24.0 million (19.6% of the net proceeds) will be used to redeem trust preferred securities (although we intend to redeem less of our trust preferred securities if
we sell less than the maximum, as adjusted, in the offering); and
|
|
|
•
|
|
$27.1 million (22.2% of the net proceeds) will be retained by us.
|
We may use the remaining funds we receive for investments, to pay cash dividends, to repurchase shares of common stock and for other general corporate purposes. Territorial Savings Bank may use the proceeds it
receives to support increased lending and other products and services, and to repay short-term borrowings. The net proceeds retained by Territorial Bancorp Inc. and Territorial Savings Bank also may be used for future business expansion through
acquisitions of banks, thrifts and other financial services companies, and opening or acquiring branch offices. We have no current arrangements or agreements with respect to any such acquisitions. Initially, a substantial portion of the net proceeds
will be invested in short-term investments and mortgage-backed securities consistent with our investment policy.
9
Please see the section of this prospectus entitled “How We Intend to Use the Proceeds From the
Offering” for more information on the proposed use of the proceeds from the offering.
You May Not Sell or Transfer Your Subscription Rights
Office of Thrift Supervision regulations prohibit you from transferring your subscription rights. If you order shares of common stock in
the subscription offering, you will be required to state that you are purchasing the shares of common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action,
including reporting persons to federal or state regulatory agencies, against anyone who we believe has sold or given away his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred
your subscription rights. When completing your stock order and certification form, you should not add the name(s) of persons who do not have subscription rights or who qualify in a lower subscription priority than you do. In addition, the stock
order and certification form requires that you list all deposit or loan accounts, giving all names on each account and the account number at the applicable eligibility record date. Your failure to provide this information, or providing incomplete or
incorrect information, may result in a loss of part or all of your share allocation, if there is an oversubscription.
Deadline for Orders of Common
Stock
If you wish to purchase shares of common stock in the offering, we must receive a properly completed original stock order and
certification form, together with full payment for the shares of common stock, at the Stock Information Center or any of our branch offices no later than 3:00 p.m., local time, on [expiration date]. A postmark prior to [expiration date] will not
entitle you to purchase shares of common stock unless we receive the envelope by 3:00 p.m., local time on [expiration date]. You may submit your stock order and certification form by mail using the order reply envelope provided, by overnight courier
to the indicated address on the order form, or by hand delivery to our Stock Information Center, located at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii, or to any of our branch offices. Once we receive it, your order is irrevocable unless the
offering is terminated or extended beyond [extension date] or the number of shares of common stock to be sold is decreased to less than 8,075,000 shares or increased to more than 12,563,750 shares. If the offering is extended beyond [extension
date], or if the number of shares of common stock to be sold is decreased to less than 8,075,000 shares or is increased to more than 12,563,750 shares, we will, with the approval of the Office of Thrift Supervision, resolicit subscribers, giving
them the opportunity to confirm, cancel or change their stock orders during a specified resolicitation period.
Although we will make
reasonable attempts to provide a prospectus and offering materials to holders of subscription rights, the subscription offering and all subscription rights will expire at 3:00 p.m., local time, on [expiration date], whether or not we have been able
to locate each person entitled to subscription rights.
Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares
If we do not receive orders for at least 8,075,000 shares of common stock, we may take steps to issue the minimum number of shares of common stock in
the offering range. Specifically, we may:
|
|
•
|
|
increase the purchase limitations; and/or
|
10
|
|
•
|
|
seek the approval of the Office of Thrift Supervision to extend the offering beyond [extension date], so long as we resolicit subscriptions that we have previously
received in the offering.
|
Possible Change in the Offering Range
FinPro, Inc. will update its appraisal before we complete the offering. If, as a result of demand for the shares, or changes in market conditions, FinPro,
Inc. determines that our pro forma market value has increased, we may sell up to 12,563,750 shares in the offering without further notice to you. If our pro forma market value at that time is either below $80.8 million or above $125.6 million,
then, after consulting with the Office of Thrift Supervision, we may:
|
|
•
|
|
terminate the stock offering and promptly return all funds;
|
|
|
•
|
|
set a new offering range and give all subscribers the opportunity to confirm, modify or rescind their purchase orders for shares of Territorial Bancorp Inc.’s
common stock; or
|
|
|
•
|
|
take such other actions as may be permitted by the Office of Thrift Supervision and the Securities and Exchange Commission.
|
Possible Termination of the Offering
We may
terminate the offering at any time prior to the special meeting of members of Territorial Mutual Holding Company that is being called to vote upon the conversion, and at any time after member approval with the approval of the Office of Thrift
Supervision.
We must sell a minimum of 8,075,000 shares to complete the offering. If we terminate the offering because we fail to sell the
minimum number of shares or for any other reason, we will promptly return your funds with interest at our passbook savings rate and we will cancel deposit account withdrawal authorizations.
Purchases by Officers and Directors
We expect our
directors and executive officers, together with their associates, to subscribe for
shares of common stock in the offering, or
% of the shares to be sold at the minimum of the offering range. However, there can be no assurance that any individual director or executive officer, or the directors and executive officers as a group, will purchase
any specific number of shares of our common stock. The purchase price paid by our directors and executive officers for their subscribed shares will be the same $10.00 per share price paid by all other persons who purchase shares of common stock in
the offering. Purchases by directors, executive officers and their associates will be included in determining whether the required minimum number of shares has been subscribed for in the offering.
Benefits to Management and Potential Dilution to Stockholders Following the Conversion
We expect our tax-qualified employee stock ownership plan to purchase 8% of the total number of shares of common stock that we sell in the offering, or
874,000 shares of common stock, assuming we sell the maximum of the shares proposed to be sold. If we receive orders for more shares of common stock than the maximum of the offering range, the employee stock ownership plan will have first priority
to purchase shares over this maximum, up to a total of 8% of the total number of shares of common stock
11
sold in the offering. This plan is a tax-qualified retirement plan for the benefit of all our employees. Purchases by the employee stock ownership plan will
be included in determining whether the required minimum number of shares has been sold in the offering. Assuming the employee stock ownership plan purchases 874,000 shares in the offering, we will recognize additional pre-tax compensation expense of
$8.7 million over a 20-year period, assuming the shares of common stock have a fair market value of $10.00 per share for the full 20-year period. If, in the future, the shares of common stock have a fair market value greater or less than $10.00, the
compensation expense will increase or decrease accordingly.
We also intend to implement one or more stock-based benefit plans no earlier
than six months after completion of the conversion. Stockholder approval of these plans will be required, and the stock-based benefit plans cannot be implemented until at least six months after the completion of the conversion pursuant to applicable
Office of Thrift Supervision regulations. If adopted within 12 months following the completion of the conversion, the stock-based benefit plan will reserve a number of shares of common stock equal to not more than 4% of the shares sold in the
offering, or up to 437,000 shares of common stock at the maximum of the offering range, for restricted stock awards to key employees and directors, at no cost to the recipients. If adopted within 12 months following the completion of the conversion,
the stock-based benefit plan will also reserve a number of stock options equal to not more than 10% of the shares of common stock sold in the offering, or up to 1,092,500 shares of common stock at the maximum of the offering range, for key employees
and directors. If the stock-based benefit plans are adopted after one year from the date of the completion of the conversion, the 4% and 10% limitations described above will no longer apply. We have not yet determined whether we will present these
plans for stockholder approval within 12 months following the completion of the conversion or whether we will present these plans for stockholder approval more than 12 months after the completion of the conversion.
If 4% of the shares of common stock sold in the offering are awarded under a stock-based benefit plan and come from authorized but unissued shares of
common stock, stockholders would experience dilution of up to approximately 3.8% in their ownership interest in Territorial Bancorp Inc. If 10% of the shares of common stock sold in the offering are issued upon the exercise of options granted under
a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of approximately 9.1% in their ownership interest in Territorial Bancorp Inc.
We intend to enter into employment agreements with certain of our executive officers. See “Management of Territorial Bancorp Inc.—Executive
Officer Compensation” for a further discussion of these agreements, including their terms and potential costs, as well as a description of other benefits arrangements.
12
The following table summarizes the number of shares of common stock and aggregate dollar value of grants
(valuing each share granted at the offering price of $10.00) that are available under one or more stock-based benefit plans if such plans are adopted within one year following the completion of the conversion and the offering. The table shows the
dilution to stockholders if all these shares are issued from authorized but unissued shares, instead of shares purchased in the open market. The table also sets forth the number of shares of common stock to be acquired by the employee stock
ownership plan for allocation to all employees. A portion of the stock grants shown in the table below may be made to non-management employees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares to be Granted or Purchased
|
|
|
Dilution
Resulting
From
Issuance of
Shares for
Stock Benefit
Plans
|
|
|
Value of Grants (1)
|
|
|
|
|
|
|
At
Minimum
of Offering
Range
|
|
At
Maximum
of Offering
Range
|
|
As a
Percentage
of Common
Stock to be
Issued (2)
|
|
|
|
At
Minimum
of
Offering
Range
|
|
At
Maximum
of
Offering
Range
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Employee stock ownership plan
|
|
646,000
|
|
874,000
|
|
8.0
|
%
|
|
7.4
|
%
|
|
$
|
6,460
|
|
$
|
8,740
|
|
Stock awards
|
|
323,000
|
|
437,000
|
|
4.0
|
|
|
3.8
|
%
|
|
|
3,230
|
|
|
4,370
|
|
Stock options
|
|
807,500
|
|
1,092,500
|
|
10.0
|
|
|
9.1
|
%
|
|
|
2,616
|
|
|
3,540
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
1,776,500
|
|
2,403,500
|
|
22.0
|
%
|
|
18.0
|
%
|
|
$
|
12,306
|
|
$
|
16,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The actual value of restricted stock grants will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the
same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $3.24 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of
$10.00; dividend yield of 0%; an expected option life of 6.5 years; a risk-free interest rate of 3.4%; and a volatility rate of 23.42% based on an index of publicly traded thrift institutions. The actual expense of stock options granted under a
stock-based benefit plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted, which may or may not be the
Black-Scholes model.
|
|
(2)
|
The stock-based benefit plans may award a greater number of options and shares, respectively, if the plans are adopted more than 12 months after the completion of the conversion.
|
The actual value of restricted stock grants will be determined based on their fair value (the closing market price of shares
of common stock of Territorial Bancorp Inc.) as of the date grants are made. The following table presents the total value of all shares to be available for awards of restricted stock under the stock-based benefit plan, assuming the shares for the
plan are purchased or issued in a range of market prices from $8.00 per share to $16.00 per share at the time of the grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Price
|
|
323,000 Shares
Awarded at Minimum
of Offering Range
|
|
380,000 Shares
Awarded at Midpoint of
Offering
Range
|
|
437,000 Shares
Awarded at Maximum
of Offering Range
|
|
502,550 Shares
Awarded at
Maximum
of Offering Range, As
Adjusted
|
|
(In thousands, except share price information)
|
|
$
|
8.00
|
|
$
|
2,584
|
|
$
|
3,040
|
|
$
|
3,496
|
|
$
|
4,020
|
|
|
10.00
|
|
|
3,230
|
|
|
3,800
|
|
|
4,370
|
|
|
5,026
|
|
|
12.00
|
|
|
3,876
|
|
|
4,560
|
|
|
5,244
|
|
|
6,031
|
|
|
14.00
|
|
|
4,522
|
|
|
5,320
|
|
|
6,118
|
|
|
7,036
|
|
|
16.00
|
|
|
5,168
|
|
|
6,080
|
|
|
6,992
|
|
|
8,041
|
The grant-date fair value of the stock options granted under the stock-based benefit plans will be
based, in part, on the closing price of shares of common stock of Territorial Bancorp Inc. on the date the options are granted. The fair value will also depend on the various assumptions utilized in the option-pricing model ultimately adopted. The
following table presents the total estimated value of the stock options to be available for grant under the stock-based benefit plans, assuming the range of market prices for the shares are $8.00 per share to $16.00 per share at the time of the
grant.
13
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Exercise Price
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|
Grant-Date Fair
Value Per Option
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807,500 Options at
Minimum of Range
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|
950,000 Options at
Midpoint of Range
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|
1,092,500 Options at
Maximum of Range
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|
1,256,375 Options at
Maximum of Range,
As Adjusted
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(In thousands, except share price information)
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$
|
8.00
|
|
$
|
2.60
|
|
$
|
2,096
|
|
$
|
2,470
|
|
$
|
2,841
|
|
$
|
3,267
|
|
|
10.00
|
|
|
3.24
|
|
|
2,616
|
|
|
3,078
|
|
|
3,540
|
|
|
4,071
|
|
|
12.00
|
|
|
3.89
|
|
|
3,144
|
|
|
3,696
|
|
|
4,250
|
|
|
4,887
|
|
|
14.00
|
|
|
4.54
|
|
|
3,667
|
|
|
4,313
|
|
|
4,960
|
|
|
5,704
|
|
|
16.00
|
|
|
5.19
|
|
|
4,191
|
|
|
4,931
|
|
|
5,670
|
|
|
6,521
|
The tables presented above are provided for informational purposes only. There can be no
assurance that our stock price will not trade below $10.00 per share. Before you make an investment decision, we urge you to carefully read this prospectus, including, but not limited to, the section entitled “Risk Factors” beginning on
page 16.
Market for Common Stock
We expect that our common stock will be listed on the Nasdaq Global Select Market under the symbol “TBNK.” Keefe, Bruyette & Woods, Inc. currently intends to make a market in the shares of our common stock, but is under
no obligation to do so. See “Market for the Common Stock.”
Our Policy Regarding Dividends
Following completion of the stock offering, our Board of Directors will have the authority to declare dividends on our common stock, subject to statutory
and regulatory requirements. However, no decision has been made with respect to the amount, if any, and timing of any dividend payments. The payment and amount of any dividend payments will depend upon a number of factors, including the following:
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|
•
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|
regulatory capital requirements;
|
|
|
•
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our financial condition and results of operations;
|
|
|
•
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statutory and regulatory limitations; and
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•
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general economic conditions and forecasts.
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Tax
Consequences
As a general matter, the conversion will not be a taxable transaction for federal or state income tax purposes to
Territorial Mutual Holding Company, Territorial Savings Group, Inc., Territorial Savings Bank, Territorial Bancorp Inc., or persons eligible to subscribe in the subscription offering. See the section of this prospectus under the heading
“Taxation” for additional information.
Conditions to Completion of the Conversion and the Offering
We cannot complete the conversion and the offering unless:
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|
•
|
|
the plan of conversion and reorganization is approved by at least
a majority of votes eligible
to be cast by members of Territorial Mutual Holding Company. A
special meeting of members to consider and vote upon the plan of conversion and reorganization has been set for [meeting date];
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14
|
|
•
|
|
we have received orders to purchase at least the minimum number of shares of common stock offered; and
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|
•
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|
we receive final approval of the Office of Thrift Supervision to complete the conversion and the offering.
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How You Can Obtain Additional Information
Our branch
office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or the offering, please call our Stock Information Center, toll free, at [stock info #], Monday through
Friday between 8:30 a.m. and 4:00 p.m., local time, or visit the Stock Information Center located at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii. The Stock Information Center will be closed on weekends and bank holidays.
TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE EXPIRATION DATE OF [EXPIRATION DATE] IN ACCORDANCE WITH FEDERAL LAW, NO PROSPECTUS
WILL BE MAILED OR HAND-DELIVERED ANY LATER THAN FIVE DAYS OR TWO DAYS, RESPECTIVELY, PRIOR TO [EXPIRATION DATE].
15
RISK FACTORS
You should consider carefully the following risk factors in evaluating an investment in our shares of common stock.
Risks Related to Our Business
Future changes in interest rates could reduce our profits.
Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest
income is the difference between:
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•
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the interest income we earn on our interest-earning assets, such as loans and securities; and
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•
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the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.
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As a result of our focus on one- to four-family residential real estate loans and the low demand for variable rate loans in our market area, the interest
rates we earn on our loans are generally fixed for a longer period of time. Additionally, many of our securities investments are of longer maturities with fixed interest rates. Like many savings institutions, our focus on deposit accounts as a
source of funds, which have no stated maturity date or shorter contractual maturities results in our liabilities having a shorter duration than our assets. For example, as of December 31, 2007, 87.2% of our loans had maturities of 15 years or
longer, while 97.3% of our certificates of deposits had maturities of one year or less. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest
income earned on our assets, such as loans and investments, may not increase as rapidly as the interest paid on our liabilities, such as deposits. In a period of declining interest rates, the interest income earned on our assets may decrease more
rapidly than the interest paid on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called or prepaid, thereby requiring us to reinvest those cash flows at lower interest
rates. Our vulnerability to rising interest rates in recent years has caused our net interest rate spread (the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities) to decrease to 2.25%
for the year ended December 31, 2007 from 2.60% for the year ended December 31, 2006 and 3.20% for the year ended December 31, 2005. This has resulted in a corresponding decrease in net interest income (the difference between interest
income and interest expense) to $28.6 million for the year ended December 31, 2007 from $33.1 million for the year ended December 31, 2006 and $39.4 million for the year ended December 31, 2005. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”
In addition, changes in interest rates
can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce
their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities. Additionally, increases in interest
rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans.
16
Changes in interest rates also affect the current fair value of our interest-earning securities
portfolio. Generally, the value of securities moves inversely with changes in interest rates. At September 30, 2008, the fair value of our investment and mortgage-backed securities, all classified as held to maturity, totaled $506.9 million.
Gross unrealized losses on these securities totaled $15.3 million at September 30, 2008.
At September 30, 2008, the Office of
Thrift Supervision “rate shock” analysis indicated that our net portfolio value (the difference between the present value of our assets and the present value of our liabilities) would decrease by $67.4 million if there was an instantaneous
200 basis point increase in market interest rates. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”
Our lending activities provide lower interest rates than financial institutions that originate more commercial loans.
Our principal lending activity consists of originating one- to four-family residential real estate mortgage loans. As of September 30, 2008, these
loans totaled $569.9 million, or 90.5% of total loans as of that date. We originate our loans with a focus on limiting credit risk, and not to generate the highest return or create the greatest difference between our cost of funds and the yield on
our interest-earning assets (interest rate spread). We intend to continue our focus on residential real estate lending and this lending strategy following the stock offering.
Residential real estate mortgage loans generally have lower interest rates than commercial business loans, commercial real estate loans and consumer
loans. As a result, we may generate lower interest rate spreads and rates of return when compared to our competitors who originate more consumer or commercial loans than we do. For the year ended December 31, 2007, our return on average equity
(net income divided by average equity) was 6.35%, compared to a median return on average equity of 5.35% for a peer group of publicly traded savings institutions for the most recent twelve-month period for which data is available as of
November 7, 2008. In addition, our net interest margin was 2.48%, compared to a median of 3.45% for a peer group of publicly traded savings institutions for the most recent twelve-month period for which data is available as of November 7,
2008. Each of these factors may reduce the value of our shares of common stock.
We could record future losses on our holdings of trust preferred
securities.
We own shares of trust preferred securities with an adjusted cost basis of $7.0 million, and a fair value of $3.0 million
at September 30, 2008. The trust preferred securities were issued by two issuer pools consisting primarily of financial institution holding companies. A number of factors or combinations of factors could cause us to conclude in one or more
future reporting periods that an unrealized loss that exists with respect to these securities constitutes an impairment that is other than temporary. These factors include, but are not limited to, continued failure to make scheduled interest
payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific
factors that would render us unable to forecast a full recovery in value.
17
Recent negative developments in the financial industry and the domestic and international credit markets may adversely
affect our operations and results.
Negative developments in the latter half of 2007 and during 2008 in the global credit and
securitization markets have resulted in uncertainty in the financial markets in general with the expectation of the general economic downturn continuing into 2009. Loan portfolio quality has deteriorated at many institutions. In addition, the values
of real estate collateral supporting many commercial loans and home mortgages have declined and may continue to decline. Bank and bank holding company stock prices have been negatively affected, as has the ability of banks and bank holding companies
to raise capital or borrow in the debt markets. As a result, the potential exists for new federal or state laws and regulations regarding lending and funding practices and liquidity standards, and bank regulatory agencies are expected to be active
in responding to concerns and trends identified in examinations, including the expected issuance of many formal enforcement orders. Negative developments in the financial industry and the domestic and international credit markets, and the impact of
new legislation in response to those developments, may negatively impact our operations by restricting our business operations, including our ability to originate or sell loans, and adversely impact our financial performance. In addition, these
risks could affect the value of our loan portfolio as well as the value of our investment portfolio, which would also negatively affect our financial performance.
Non-residential real estate loans increase our exposure to credit risks.
At September 30, 2008, our portfolio of
commercial real estate, construction and other non-residential real estate loans totaled $20.9 million, or 3.3% of total loans, compared to $8.6 million, or 1.7% of total loans at December 31, 2005. These loans generally expose us to a greater
risk of non-payment and loss than residential real estate loans because repayment of such loans often depends on the successful operations and income stream of the borrowers. Additionally, such loans typically involve larger loan balances to single
borrowers or groups of related borrowers compared to residential real estate loans.
We target our business lending and marketing strategy
towards small to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these
businesses, our results of operations and financial condition may be adversely affected.
Strong competition within our market areas may limit our
growth and profitability.
Competition in the banking and financial services industry is intense. In our market areas, we compete with
commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater
name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which
could affect our ability to grow and remain profitable on a long-term basis. Our profitability depends upon our continued ability to successfully compete in our market areas. If we must raise interest rates paid on deposits or lower interest rates
charged on our loans, our net interest margin and profitability could be adversely affected. For additional information see “Business of Territorial Savings Bank—Competition.”
18
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we
evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance. While our allowance for loan losses
was 0.12% of total loans at September 30, 2008, material additions to our allowance could materially decrease our net income.
In
addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as
required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.
Concentration of
loans in our primary market area may increase risk.
Our success depends primarily on the general economic conditions in the State of
Hawaii, as nearly all of our loans are to customers in the state. Accordingly, the local economic conditions in the State of Hawaii have a significant impact on the ability of borrowers to repay loans as well as our ability to originate new loans.
As such, a decline in real estate valuations in this market would lower the value of the collateral securing those loans. In addition, a significant weakening in general economic conditions such as inflation, recession, unemployment or other factors
beyond our control could negatively affect our financial results.
Our local economy relies heavily on the tourism industry. Continued downturns in this
industry could affect our operations and results.
Tourism is one of the two largest components of Hawaii’s economy. The Hawaii
Department of Business, Economic Development and Tourism reported a 24.2% decline in tourists from August 2007 to August 2008, representing the largest year-to-year reduction recorded in the state’s history. Similarly, the unemployment rate in
the State of Hawaii increased to 4.2% as of August 2008 from a rate of 2.7% as of August 2007. Continued downturns in the tourism industry, and the related loss of jobs or operating income for businesses, could have a significant impact on our
ability to originate loans, and the ability of borrowers to repay loans, either of which could adversely affect our financial condition and results of operations.
We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
We are
subject to extensive regulation, supervision, and examination by the Office of Thrift Supervision and the Federal Deposit Insurance Corporation. Such regulators govern the activities in which we may engage, primarily for the protection of
depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank, and the
adequacy of a bank’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on us and our
19
operations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. There can be
no assurance that proposed laws, rules and regulations, or any other laws rule or regulation, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition
or prospects.
Severe weather, natural disasters and other external events could significantly affect our operations and results.
Because all of our office locations are located in the State of Hawaii, severe weather or natural disasters, such as tsunamis, hurricanes and earthquakes
and other adverse external events could have a significant affect on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of
collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Accordingly, the occurrence of any such event could have a material adverse effect on our business, which, in turn,
could adversely affect our financial condition and results of operations.
Risks Related to this Stock Offering
The future price of the shares of common stock may be less than the purchase price in the stock offering.
If you purchase shares of common stock in the stock offering, you may not be able to sell them at or above the purchase price in the stock offering. The
purchase price in the offering is determined by an independent, third-party appraisal, pursuant to federal banking regulations and subject to review and approval by the Office of Thrift Supervision. The appraisal is not intended, and should not be
construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. Our aggregate pro forma market value as reflected in the final, approved independent appraisal may exceed the market price of our shares of
common stock after the completion of the offering, which may result in our stock trading below the initial offering price of $10.00 per share.
The
capital we raise in the stock offering will reduce our return on equity. This could negatively affect the trading price of our shares of common stock.
Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. For the nine months ended
September 30, 2008, our annualized return on average equity was 9.04%. Following the stock offering, we expect our consolidated equity to increase from $99.1 million to between $167.2 million at the minimum of the offering range and $206.3
million at the adjusted maximum of the offering range. Based upon our earnings for the nine months ended September 30, 2008, annualized, and these pro forma equity levels, our return on equity would be 5.21% and 4.20% at the minimum and maximum
of the offering range, respectively. We expect our return on equity to remain lower until we are able to leverage the additional capital we receive from the stock offering. Although we will be able to increase net interest income using proceeds of
the stock offering, our return on equity will be reduced by the capital raised in the stock offering, higher expenses from the costs of being a public company, and added expenses associated with our employee stock ownership plan and the stock-based
benefit plan we intend to adopt. Until we can increase our net interest income and non-interest income, we expect our return on equity to remain lower, which may reduce the value of our shares of common stock.
20
We will need to implement additional finance and accounting systems, procedures and controls in order to satisfy our
new public company reporting requirements.
Upon completion of the stock offering, we will become a public reporting company. The
federal securities laws and regulations of the Securities and Exchange Commission require that we file annual, quarterly and current reports, and that we maintain effective disclosure controls and procedures and internal controls over financial
reporting. We expect that the obligations of being a public company, including substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. These obligations will increase our
operating expenses and could divert management’s attention from our banking operations. Compliance with the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the Securities and Exchange Commission will require us to certify
the adequacy of our internal controls and procedures, which could require us to upgrade our systems, and/or hire additional staff, which will increase our operating costs.
Our stock-based benefit plans will increase our costs, which will reduce our income.
We anticipate
that our employee stock ownership plan will purchase 8% of the total shares of common stock sold in the stock offering, with funds borrowed from Territorial Bancorp Inc. The cost of acquiring the shares of common stock for the employee stock
ownership plan will be between $6.5 million at the minimum of the offering range and $10.1 million at the adjusted maximum of the offering range. We will record annual employee stock ownership plan expense in an amount equal to the fair value of
shares of common stock committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.
We also intend to adopt a stock-based benefit plan after the stock offering under which plan participants would be awarded shares of our common stock (at
no cost to them) and/or options to purchase shares of our common stock. The number of shares of restricted stock or stock options reserved for issuance under any initial stock-based benefit plan may not exceed 4% and 10%, respectively, of our total
outstanding shares, if these plans are adopted within 12 months after the completion of the conversion. We may grant shares of common stock and stock options in excess of these amounts provided the stock-based benefit plan is adopted more than one
year following the stock offering. Assuming the market price of the common stock is $10.00 per share; the options are granted with an exercise price of $10.00 per share; the dividend yield on the stock is 0%; the expected option life is 6.5 years;
the risk free interest rate is 3.4% (based on the ten-year Treasury rate) and the volatility rate on the shares of common stock is 23.42% (based on an index of publicly traded thrift institutions), the estimated grant-date fair value of the options
utilizing a Black-Scholes option pricing analysis is $3.24 per option granted. Assuming this value is amortized over a five-year vesting period, the corresponding annual pre-tax expense associated with the stock options would be $814,000 ($497,000
after taxes assuming a tax rate of 39%) at the adjusted maximum. In addition, assuming that all shares of restricted stock are awarded at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax
expense associated with shares awarded under the stock-based benefit plan would be $1.0 million ($611,000 after taxes assuming a tax rate of 39%) at the adjusted maximum. However, if we grant shares of stock or options in excess of these amounts,
such grants would increase our costs further.
The shares of restricted stock granted under the stock-based benefit plan will be expensed
by us over their vesting period at the fair market value of the shares on the date they are awarded. If the shares of restricted stock to be granted under the plan are repurchased in the open market (rather than issued directly from authorized but
unissued shares by Territorial Bancorp Inc.) and cost the same as the
21
purchase price in the stock offering, the reduction to stockholders’ equity due to the plan would be between $3.2 million at the minimum of the offering
range and $5.0 million at the adjusted maximum of the offering range. To the extent we repurchase shares of common stock in the open market to fund the grants of shares under the plan, and the price of such shares exceeds the offering price of
$10.00 per share, the reduction to stockholders’ equity would exceed the range described above. Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to stockholders’ equity would
be less than the range described above.
The implementation of stock-based benefit plans will dilute your ownership interest.
We intend to adopt one or more stock-based benefit plans, which will allow participants to be awarded shares of common stock (at no cost to them) or
options to purchase shares of our common stock, following the stock offering. These stock-based benefit plans will be funded through either open market purchases of shares of common stock, if permitted, or from the issuance of authorized but
unissued shares of common stock. Stockholders would experience a reduction in ownership interest totaling 12.9% in the event newly issued shares are used to fund stock options or awards of shares of common stock under these plans in an amount equal
to 10% and 4%, respectively, of the shares issued in the stock offering. We may grant shares of common stock and stock options in excess of these amounts provided the stock-based benefit plan is adopted more than one year following the stock
offering.
We have not determined whether we will adopt stock-based benefit plans more than one year following the stock offering. Stock-based benefit
plans adopted more than one year following the stock offering may exceed regulatory restrictions on the size of stock-based benefit plans adopted within one year, which would increase our costs.
If we adopt stock-based benefit plans within one year following the completion of the stock offering, then we may grant shares of common stock or stock
options under our stock-based benefit plans for up to 4% and 10%, respectively, of our total outstanding shares. The amount of stock awards and stock options available for grant under the stock-based benefit plans may exceed these amounts, provided
the stock-based benefit plans are adopted more than one year following the stock offering. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “—Our
stock-based benefit plans will increase our costs, which will reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in
“—The implementation of stock-based benefit plans will dilute your ownership interest.”
We will enter into employment agreements that
may increase our compensation costs.
We have entered into employment agreements with each of Allan S. Kitagawa, our Chairman of the
Board, President and Chief Executive Officer, Vernon Hirata, our Vice Chairman, Co-Chief Operating Officer, General Counsel and Corporate Secretary and Ralph Y. Nakatsuka, our Vice Chairman, Co-Chief Operating Officer. In the event of involuntary or
good reason termination of employment, or certain types of termination following a change in control, as set forth in the employment agreements, the employment agreements contain cash severance benefits that would cost Territorial Bancorp Inc. (or
the acquirer) approximately $
in the aggregate as of September 30, 2008. For additional information see
“Management of Territorial Bancorp Inc.—Executive Officer Compensation.”
22
We have broad discretion in using the proceeds of the stock offering. Our failure to effectively use such proceeds
could reduce our profits.
We will use a portion of the net proceeds to finance the purchase of shares of common stock in the stock
offering by the employee stock ownership plan and to redeem up to $24.0 million of trust preferred securities that we have issued, and may use the remaining net proceeds to pay dividends to stockholders, repurchase shares of common stock, purchase
investment securities, deposit funds in Territorial Savings Bank, acquire other financial services companies or for other general corporate purposes. Territorial Savings Bank may use the proceeds it receives to fund new loans, establish or acquire
new branches, purchase investment securities, reduce a portion of our borrowings, or for general corporate purposes. We have not identified specific amounts of proceeds for any of these purposes and we will have significant flexibility in
determining the amount of net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively could reduce our profitability. We have not established a timetable for the effective deployment of
the proceeds and we cannot predict how long we will require to effectively deploy the proceeds.
Our stock value may be negatively affected by federal
regulations that restrict takeovers.
For three years following the stock offering, Office of Thrift Supervision regulations prohibit
any person from acquiring or offering to acquire more than 10% of our common stock without the prior written approval of the Office of Thrift Supervision. See “Restrictions on Acquisition of Territorial Bancorp Inc.” for a discussion of
applicable Office of Thrift Supervision regulations regarding acquisitions.
The corporate governance provisions in our articles of incorporation and
bylaws, and the corporate governance provisions under Maryland law, may prevent or impede the holders of our common stock from obtaining representation on our board of directors and may impede takeovers of the company that our board might conclude
are not in the best interest of Territorial Bancorp Inc. or its stockholders.
Provisions in our articles of incorporation and bylaws
may prevent or impede holders of our common stock from obtaining representation on our Board of Directors and may make takeovers of Territorial Bancorp Inc. more difficult. For example, our Board of Directors is divided into three staggered classes.
A classified board makes it more difficult for stockholders to change a majority of the directors because it generally takes at least two annual elections of directors for this to occur. Our articles of incorporation include a provision that no
person will be entitled to vote any shares of our common stock in excess of 10% of our outstanding shares of common stock. This limitation does not apply to the purchase of shares by a tax-qualified employee stock benefit plan established by us. In
addition, our articles of incorporation and bylaws restrict who may call special meetings of stockholders and how directors may be removed from office. Additionally, in certain instances, the Maryland General Corporation Law requires a supermajority
vote of our stockholders to approve a merger or other business combination with a large stockholder, if the proposed transaction is not approved by a majority of our directors. See “Restrictions on Acquisition of Territorial Bancorp Inc.”
We have never issued common stock and there is no guarantee that a liquid market will develop.
We have never issued capital stock and there is no established market for our common stock. We expect that our common stock will be traded on the Nasdaq
Global Select Market under the symbol “TBNK,” subject to completion of the offering and compliance with certain conditions, including the presence of at least three registered and active market makers. Keefe Bruyette & Woods has
advised us
23
that it intends to make a market in shares of our common stock following the offering, but it is under no obligation to do so or to continue to do so once it
begins. While we will attempt before completion of the offering to obtain commitments from at least two other broker-dealers to make a market in shares of our common stock, there can be no assurance that we will be successful in obtaining such
commitments.
We may take other actions to meet the minimum required sales of shares if we cannot find enough purchasers in the community.
If we do not sell enough shares to reach the minimum of the offering range through the subscription and community offerings, shares
may be offered for sale to the general public in a syndicated community offering to be managed by Keefe Bruyette & Woods, Inc., acting as our agent. If we are not able to reach the minimum of the offering range after Keefe
Bruyette & Woods, Inc., uses its best efforts in a syndicated community offering we may do any of the following: increase the maximum purchase limitations and allow all maximum purchase subscribers to increase their orders to the new
maximum purchase limitations; terminate the offering and promptly return all funds; set a new offering range, notifying all subscribers of the opportunity to confirm, cancel or change their orders; or take such other actions as may be permitted by
the Office of Thrift Supervision.
The distribution of subscription rights could have adverse income tax consequences.
If the subscription rights granted to certain depositors and borrowers of Territorial Savings Bank are deemed to have an ascertainable value, receipt of
such rights may be taxable in an amount equal to such value. Whether subscription rights are considered to have ascertainable value is an inherently factual determination. We have received an opinion that such rights have no value; however, such
opinion is not binding on the Internal Revenue Service.
24
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables set forth selected consolidated historical financial and other data of Territorial Mutual Holding Company and its subsidiaries for
the periods and at the dates indicated. The information at December 31, 2007 and 2006 and for the years ended December 31, 2007, 2006 and 2005 is derived in part from, and should be read together with, the audited consolidated financial
statements and notes thereto of Territorial Mutual Holding Company beginning at page F-1 of this prospectus. The information at December 31, 2005, 2004 and 2003 and for the years ended December 31, 2004 and 2003 is derived in part from
audited consolidated financial statements that are not included in this prospectus. The information at September 30, 2008 and for the nine months ended September 30, 2008 and 2007 is unaudited and reflects all normal recurring adjustments
that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results of operations for the nine months ended September 30, 2008 are not necessarily indicative of the results to
be achieved for the remainder of 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30,
2008
|
|
At December 31,
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
|
|
(Unaudited)
|
|
(In thousands)
|
|
Selected Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,204,858
|
|
$
|
1,162,018
|
|
$
|
1,299,783
|
|
$
|
1,244,834
|
|
$
|
1,210,930
|
|
$
|
1,012,451
|
|
Cash
|
|
|
10,148
|
|
|
19,755
|
|
|
88,512
|
|
|
15,085
|
|
|
48,274
|
|
|
52,613
|
|
Investment securities held to maturity
|
|
|
521,834
|
|
|
538,025
|
|
|
621,339
|
|
|
669,853
|
|
|
644,427
|
|
|
513,799
|
|
Loans receivable, net
|
|
|
622,170
|
|
|
554,795
|
|
|
546,201
|
|
|
516,090
|
|
|
480,079
|
|
|
410,563
|
|
Bank owned life insurance
|
|
|
26,851
|
|
|
26,068
|
|
|
20,026
|
|
|
19,301
|
|
|
18,588
|
|
|
17,851
|
|
Federal Home Loan Bank of Seattle stock, at cost
|
|
|
12,348
|
|
|
12,348
|
|
|
12,348
|
|
|
12,348
|
|
|
9,592
|
|
|
9,061
|
|
Deposits
|
|
|
910,252
|
|
|
892,316
|
|
|
981,354
|
|
|
1,016,051
|
|
|
1,024,836
|
|
|
859,191
|
|
Federal Home Loan Bank of Seattle advances
|
|
|
28,504
|
|
|
72,000
|
|
|
100,000
|
|
|
100,317
|
|
|
75,000
|
|
|
56,000
|
|
Securities sold under agreements to repurchase
|
|
|
115,200
|
|
|
55,200
|
|
|
60,545
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Subordinated debentures
|
|
|
24,216
|
|
|
24,199
|
|
|
24,178
|
|
|
24,156
|
|
|
—
|
|
|
—
|
|
Equity
|
|
|
99,057
|
|
|
92,479
|
|
|
86,829
|
|
|
79,367
|
|
|
67,262
|
|
|
67,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Years Ended December 31,
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
2006
|
|
2005
|
|
|
2004
|
|
2003
|
|
|
|
(Unaudited)
|
|
(In thousands)
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income
|
|
$
|
45,759
|
|
$
|
45,948
|
|
$
|
60,947
|
|
$
|
61,887
|
|
$
|
61,230
|
|
|
$
|
56,049
|
|
$
|
49,131
|
|
Interest expense
|
|
|
19,326
|
|
|
24,470
|
|
|
32,368
|
|
|
28,836
|
|
|
21,842
|
|
|
|
17,993
|
|
|
17,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
26,433
|
|
|
21,478
|
|
|
28,579
|
|
|
33,051
|
|
|
39,388
|
|
|
|
38,056
|
|
|
31,761
|
|
Provision (reversal of allowance) for loan losses
|
|
|
69
|
|
|
21
|
|
|
25
|
|
|
6
|
|
|
(15
|
)
|
|
|
277
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest and dividend income after provision (reversal of allowance) for loan losses
|
|
|
26,364
|
|
|
21,457
|
|
|
28,554
|
|
|
33,045
|
|
|
39,403
|
|
|
|
37,779
|
|
|
31,725
|
|
Non-interest income
|
|
|
3,597
|
|
|
3,840
|
|
|
3,876
|
|
|
4,013
|
|
|
4,143
|
|
|
|
6,278
|
|
|
7,248
|
|
Non-interest expense
|
|
|
19,877
|
|
|
17,849
|
|
|
24,047
|
|
|
25,100
|
|
|
22,666
|
|
|
|
19,876
|
|
|
17,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
10,084
|
|
|
7,448
|
|
|
8,383
|
|
|
11,958
|
|
|
20,880
|
|
|
|
24,181
|
|
|
22,073
|
|
Income taxes
|
|
|
3,557
|
|
|
2,553
|
|
|
2,615
|
|
|
4,247
|
|
|
7,912
|
|
|
|
10,198
|
|
|
8,422
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,527
|
|
$
|
4,895
|
|
$
|
5,768
|
|
$
|
7,711
|
|
$
|
12,968
|
|
|
$
|
13,983
|
|
$
|
13,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Nine
Months Ended
September 30,
|
|
|
At or For the Years Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Selected Financial Ratios and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets (ratio of net income to average total assets) (1)
|
|
0.73
|
%
|
|
0.54
|
%
|
|
0.48
|
%
|
|
0.62
|
%
|
|
1.04
|
%
|
|
1.24
|
%
|
|
1.51
|
%
|
|
Return on average equity (ratio of net income to average equity) (1)
|
|
9.04
|
%
|
|
7.25
|
%
|
|
6.35
|
%
|
|
8.93
|
%
|
|
17.42
|
%
|
|
22.96
|
%
|
|
29.36
|
%
|
|
Interest rate spread (1) (2)
|
|
2.90
|
%
|
|
2.25
|
%
|
|
2.25
|
%
|
|
2.60
|
%
|
|
3.20
|
%
|
|
3.43
|
%
|
|
3.51
|
%
|
|
Net interest margin (1)(3)
|
|
3.09
|
%
|
|
2.48
|
%
|
|
2.48
|
%
|
|
2.78
|
%
|
|
3.30
|
%
|
|
3.54
|
%
|
|
3.65
|
%
|
|
Efficiency ratio (1)(4)
|
|
66.19
|
%
|
|
70.50
|
%
|
|
74.09
|
%
|
|
67.72
|
%
|
|
52.07
|
%
|
|
44.83
|
%
|
|
43.58
|
%
|
|
Non-interest expense to average total assets (1)
|
|
2.21
|
%
|
|
1.98
|
%
|
|
2.01
|
%
|
|
2.03
|
%
|
|
1.82
|
%
|
|
1.76
|
%
|
|
1.89
|
%
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
108.58
|
%
|
|
108.02
|
%
|
|
108.16
|
%
|
|
107.18
|
%
|
|
105.55
|
%
|
|
106.46
|
%
|
|
107.34
|
%
|
|
Average equity to average total assets
|
|
8.04
|
%
|
|
7.48
|
%
|
|
7.58
|
%
|
|
6.99
|
%
|
|
5.99
|
%
|
|
5.41
|
%
|
|
5.15
|
%
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing assets to total assets
|
|
0.00
|
%
|
|
0.01
|
%
|
|
0.01
|
%
|
|
0.05
|
%
|
|
0.01
|
%
|
|
0.00
|
%
|
|
0.03
|
%
|
|
Non-performing loans to total loans
|
|
0.00
|
%
|
|
0.02
|
%
|
|
0.02
|
%
|
|
0.11
|
%
|
|
0.02
|
%
|
|
0.00
|
%
|
|
0.06
|
%
|
|
Allowance for loan losses to non-performing loans
|
|
18,750.00
|
%
|
|
685.71
|
%
|
|
724.53
|
%
|
|
129.51
|
%
|
|
712.96
|
%
|
|
75,000.00
|
%
|
|
284.67
|
%
|
|
Allowance for loan losses to total loans
|
|
0.12
|
%
|
|
0.13
|
%
|
|
0.14
|
%
|
|
0.14
|
%
|
|
0.15
|
%
|
|
0.16
|
%
|
|
0.18
|
%
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios (bank-level only):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk-weighted assets)
|
|
25.11
|
%
|
|
24.75
|
%
|
|
25.33
|
%
|
|
23.57
|
%
|
|
23.60
|
%
|
|
22.21
|
%
|
|
22.25
|
%
|
|
Tier I capital (to risk-weighted assets)
|
|
24.96
|
%
|
|
24.59
|
%
|
|
25.17
|
%
|
|
23.41
|
%
|
|
23.43
|
%
|
|
22.02
|
%
|
|
22.04
|
%
|
|
Tier I capital (to average assets)
|
|
10.04
|
%
|
|
9.42
|
%
|
|
9.53
|
%
|
|
8.84
|
%
|
|
8.12
|
%
|
|
7.99
|
%
|
|
8.38
|
%
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of full service offices
|
|
24
|
|
|
24
|
|
|
24
|
|
|
24
|
|
|
22
|
|
|
20
|
|
|
18
|
|
|
Full time equivalent employees
|
|
247
|
|
|
238
|
|
|
244
|
|
|
226
|
|
|
220
|
|
|
200
|
|
|
180
|
|
|
(1)
|
Ratios for the nine months ended September 30, 2008 and 2007 are annualized.
|
|
(2)
|
The average interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing
liabilities for the period.
|
|
(3)
|
The net interest margin represents net interest income as a percent of average interest-earning assets for the period.
|
|
(4)
|
The efficiency ratio represents non-interest expense divided by the sum of net interest income and non-interest income.
|
26
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,”
“believe,” “intend,” “anticipate,” “plan,” “seek,” “expect,” “will,” “may” and words of similar meaning. These forward-looking statements include, but are not limited
to:
|
|
•
|
|
statements of our goals, intentions and expectations;
|
|
|
•
|
|
statements regarding our business plans, prospects, growth and operating strategies;
|
|
|
•
|
|
statements regarding the asset quality of our loan and investment portfolios; and
|
|
|
•
|
|
estimates of our risks and future costs and benefits.
|
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond
our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any
forward-looking statements after the date of this prospectus.
The following factors, among others, could cause actual results to differ
materially from the anticipated results or other expectations expressed in the forward-looking statements:
|
|
•
|
|
general economic conditions, either nationally or in our market areas, that are worse than expected;
|
|
|
•
|
|
competition among depository and other financial institutions;
|
|
|
•
|
|
inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;
|
|
|
•
|
|
adverse changes in the securities markets;
|
|
|
•
|
|
changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
|
|
|
•
|
|
our ability to enter new markets successfully and capitalize on growth opportunities;
|
|
|
•
|
|
our ability to successfully integrate acquired entities, if any;
|
|
|
•
|
|
changes in consumer spending, borrowing and savings habits;
|
|
|
•
|
|
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and
Exchange Commission and the Public Company Accounting Oversight Board;
|
|
|
•
|
|
changes in our organization, compensation and benefit plans;
|
27
|
|
•
|
|
changes in our financial condition or results of operations that reduce capital available to pay dividends; and
|
|
|
•
|
|
changes in the financial condition or future prospects of issuers of securities that we own.
|
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these
forward-looking statements. Please see “Risk Factors” beginning on page 16.
HOW WE INTEND TO USE THE
PROCEEDS FROM THE OFFERING
Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in
the offering will be until the offering is completed, we anticipate that the net proceeds will be between $77.9 million and $106.1 million, or $122.4 million if the offering range is increased by 15%.
We intend to distribute the net proceeds from the stock offering as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Based Upon the Sale at $10.00 Per Share of
|
|
|
|
|
8,075,000 Shares
|
|
|
9,500,000 Shares
|
|
|
10,925,000 Shares
|
|
|
12,563,750 Shares (1)
|
|
|
|
|
Amount
|
|
|
Percent
of Net
Proceeds
|
|
|
Amount
|
|
|
Percent
of Net
Proceeds
|
|
|
Amount
|
|
|
Percent
of Net
Proceeds
|
|
|
Amount
|
|
|
Percent
of Net
Proceeds
|
|
|
|
|
(Dollars in thousands)
|
|
|
Stock offering proceeds
|
|
$
|
80,750
|
|
|
|
|
|
$
|
95,000
|
|
|
|
|
|
$
|
109,250
|
|
|
|
|
|
$
|
125,638
|
|
|
|
|
|
Less offering expenses
|
|
|
(2,868
|
)
|
|
|
|
|
|
(2,999
|
)
|
|
|
|
|
|
(3,130
|
)
|
|
|
|
|
|
(3,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net offering proceeds
|
|
$
|
77,882
|
|
|
100.0
|
%
|
|
$
|
92,001
|
|
|
100.0
|
%
|
|
$
|
106,120
|
|
|
100.0
|
%
|
|
$
|
122,357
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use of net proceeds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Territorial Savings Bank
|
|
$
|
50,000
|
|
|
64.20
|
%
|
|
$
|
50,000
|
|
|
54.35
|
%
|
|
$
|
53,060
|
|
|
50.00
|
%
|
|
$
|
61,179
|
|
|
50.00
|
|
|
To redeem trust preferred securities
|
|
|
14,000
|
|
|
17.98
|
|
|
|
24,000
|
|
|
26.09
|
|
|
|
24,000
|
|
|
22.61
|
|
|
|
24,000
|
|
|
19.62
|
|
|
To fund loan to employee stock ownership plan
|
|
|
6,460
|
|
|
8.29
|
|
|
|
7,600
|
|
|
8.26
|
|
|
|
8,740
|
|
|
8.24
|
|
|
|
10,051
|
|
|
8.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained by Territorial Bancorp Inc.
|
|
$
|
7,422
|
|
|
9.53
|
%
|
|
$
|
10,401
|
|
|
11.30
|
%
|
|
$
|
20,320
|
|
|
19.15
|
%
|
|
$
|
27,127
|
|
|
22.17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in
market conditions following the commencement of the offering.
|
Payments for shares of common stock made through withdrawals
from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Territorial Savings Bank’s deposits. The net proceeds may vary because the total expenses relating to the offering may
be more or less than our estimates. For example, our expenses would increase if a syndicated community offering were used to sell shares of common stock not purchased in the subscription and community offerings.
Territorial Bancorp Inc. may use the proceeds it retains from the stock offering:
|
|
•
|
|
to fund a loan to the employee stock ownership plan to purchase shares of common stock in the stock offering;
|
28
|
|
•
|
|
to redeem up to $24.0 million of trust preferred securities, depending on how many shares of stock we sell in the offering;
|
|
|
•
|
|
to invest in mortgage-backed securities, collateralized mortgage obligations and debt securities issued by the United States Government and United States
Government-sponsored agencies or entities;
|
|
|
•
|
|
to finance the acquisition of financial institutions or other financial service companies;
|
|
|
•
|
|
to pay cash dividends to stockholders;
|
|
|
•
|
|
to repurchase shares of our common stock; and
|
|
|
•
|
|
for other general corporate purposes.
|
We intend to redeem between $14.0 million and $24.0 million of trust preferred securities we have issued, depending on how many shares of stock we sell in the offering. The redemption of the trust preferred securities is effected through
the repayment of subordinated debentures that we have issued to the issuer of the actual trust preferred securities. Depending on how much of the trust preferred securities we redeem, we will also incur an expense of up to $527,000 for costs that
are being amortized in future periods relating to the issuance of the trust preferred securities. The trust preferred securities have maturity dates and interest rates as follows:
|
|
|
|
|
|
|
Amount
|
|
Maturity Date
|
|
Interest Rate as of
September 30, 2008
|
|
(Dollars in thousands)
|
|
|
|
|
|
$ 14,000
|
|
September 26, 2032
|
|
6.88%
|
|
$ 5,000
|
|
June 26, 2033
|
|
6.58%
|
|
$ 5,000
|
|
December 17, 2033
|
|
5.77%
|
With the exception of the funding of the loan to the employee stock ownership plan and the
redemption of the trust preferred securities, Territorial Bancorp Inc. has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Initially, we intend to invest a substantial portion of the net proceeds in
short-term investments, investment-grade debt obligations and mortgage-backed securities.
Under current Office of Thrift Supervision
regulations, we may not repurchase shares of our common stock during the first year following the conversion, except to fund equity benefit plans other than stock options or except when extraordinary circumstances exist and with prior regulatory
approval.
Territorial Savings Bank may use the net proceeds it receives from the Offering:
|
|
•
|
|
to expand its banking franchise by establishing or acquiring new branches, or by acquiring other financial institutions or other financial services companies. We
currently intend to open one new branch office per year over the next two years;
|
|
|
•
|
|
to repay short-term borrowings;
|
29
|
|
•
|
|
to invest in mortgage-backed securities and collateralized mortgage obligations, and debt securities issued by the United States Government and United States
Government-sponsored agencies or entities; and
|
|
|
•
|
|
for other general corporate purposes.
|
Territorial
Savings Bank has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Our short-term and long-term growth plans anticipate that, upon completion of the offering, we will experience growth through increased
lending and investment activities and, possibly, acquisitions. We currently have no understandings or agreements to acquire other banks, thrifts, or other financial services companies. There can be no assurance that we will be able to consummate any
acquisition. We intend to open a new branch office at a leased facility in Kihei, Hawaii during the first or second quarter of 2009, but we do not intend to use a material portion of the net proceeds with respect to this office.
Initially, the net proceeds we retain will be invested in short-term investments, investment-grade debt obligations and mortgage-backed securities.
OUR POLICY REGARDING DIVIDENDS
Following completion of the stock offering, our Board of Directors will have the authority to declare dividends on our shares of common stock, subject to
statutory and regulatory requirements. However, no decision has been made with respect to the payment of dividends. In determining whether to pay a cash dividend and the amount of such cash dividend, the Board is expected to take into account a
number of factors, including capital requirements, our consolidated financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any
dividends will be paid or that, if paid, will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by Office of Thrift Supervision policy and regulations, may be paid in
addition to, or in lieu of, regular cash dividends. We will file a consolidated tax return with Territorial Savings Bank. Accordingly, it is anticipated that any cash distributions made by us to our stockholders would be treated as cash dividends
and not as a non-taxable return of capital for federal and state tax purposes. Additionally, pursuant to Office of Thrift Supervision regulations, during the three-year period following the stock offering, we will not take any action to declare an
extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.
Pursuant to our Articles of Incorporation, we are authorized to issue preferred stock. If we issue preferred stock, the holders thereof may have a priority over the holders of our shares of common stock with respect to the payment of
dividends. For a further discussion concerning the payment of dividends on our shares of common stock, see “Description of Capital Stock—Common Stock.” Dividends we can declare and pay will depend, in part, upon receipt of dividends
from Territorial Savings Bank, because initially we will have no source of income other than dividends from Territorial Savings Bank, earnings from the investment of proceeds from the sale of shares of common stock, and interest payments received in
connection with the loan to the employee stock ownership plan. A regulation of the Office of Thrift Supervision imposes limitations on “capital distributions” by savings institutions. See “Supervision and Regulation—Federal
Banking Regulation—Capital Distributions.”
Any payment of dividends by Territorial Savings Bank to us that would be deemed to be
drawn out of Territorial Savings Bank’s bad debt reserves would require a payment of taxes at the then-current tax rate by Territorial Savings Bank on the amount of earnings deemed to be removed from the reserves for such distribution.
Territorial Savings Bank does not intend to make any distribution to us that would create such a federal tax liability. See “Taxation—Federal Taxation” and “—State Taxation.”
30
MARKET FOR THE COMMON STOCK
We have never issued capital stock and there is no established market for our shares of common stock. We expect that our common stock will be traded on
the Nasdaq Global Select Market under the symbol “TBNK,” subject to completion of the offering and compliance with certain conditions, including the presence of at least three registered and active market makers. Keefe Bruyette &
Woods, Inc. has advised us that it intends to make a market in shares of our common stock following the offering, but it is under no obligation to do so or to continue to do so once it begins. While we will attempt before completion of the offering
to obtain commitments from at least two other broker-dealers to make a market in shares of our common stock, there can be no assurance that we will be successful in obtaining such commitments.
The development and maintenance of a public market, having the desirable characteristics of depth, liquidity and orderliness, depends on the existence of
willing buyers and sellers, the presence of which is not within our control or that of any market maker. The number of active buyers and sellers of shares of our common stock at any particular time may be limited, which may have an adverse effect on
the price at which shares of our common stock can be sold. There can be no assurance that persons purchasing the shares of common stock will be able to sell their shares at or above the $10.00 offering purchase price per share. You should have a
long-term investment intent if you purchase shares of our common stock and you should recognize that there may be a limited trading market in the shares of common stock.
31
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
At September 30, 2008, Territorial Savings Bank exceeded all of the applicable regulatory capital requirements. The table below sets forth the
historical equity capital and regulatory capital of Territorial Savings Bank at September 30, 2008, and the pro forma regulatory capital of Territorial Savings Bank, after giving effect to the sale of shares of common stock at a $10.00 per
share purchase price. The table assumes the receipt by Territorial Savings Bank of at least 50% of the net offering proceeds (including $50.0 million at the minimum and midpoint of the offering range). See “How we Intend to Use the Proceeds
from the Offering.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Territorial Savings
Bank Historical at
September 30, 2008
|
|
|
Pro Forma at September 30, 2008, Based Upon the Sale in the Offering of
|
|
|
|
|
8,075,000 Shares
|
|
|
9,500,000 Shares
|
|
|
10,925,000 Shares
|
|
|
12,563,750 Shares (1)
|
|
|
|
|
Amount
|
|
Percent of
Assets (2)
|
|
|
Amount
|
|
|
Percent of
Assets (2)
|
|
|
Amount
|
|
|
Percent of
Assets (2)
|
|
|
Amount
|
|
|
Percent of
Assets (2)
|
|
|
Amount
|
|
|
Percent of
Assets (2)
|
|
|
|
|
(Dollars in thousands)
|
|
|
Equity
|
|
$
|
119,415
|
|
9.92
|
%
|
|
$
|
159,725
|
|
|
12.84
|
%
|
|
$
|
158,015
|
|
|
12.72
|
%
|
|
$
|
159,365
|
|
|
12.81
|
%
|
|
$
|
165,517
|
|
|
13.24
|
%
|
|
Tangible capital (3)(4)
|
|
$
|
120,397
|
|
10.00
|
%
|
|
$
|
160,707
|
|
|
12.92
|
%
|
|
$
|
158,997
|
|
|
12.80
|
%
|
|
$
|
160,347
|
|
|
12.89
|
%
|
|
$
|
166,499
|
|
|
13.32
|
%
|
|
Tangible requirement
|
|
|
18,056
|
|
1.50
|
|
|
|
18,661
|
|
|
1.50
|
|
|
|
18,635
|
|
|
1.50
|
|
|
|
18,655
|
|
|
1.50
|
|
|
|
18,748
|
|
|
1.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
$
|
102,341
|
|
8.50
|
%
|
|
$
|
142,046
|
|
|
11.42
|
%
|
|
$
|
140,362
|
|
|
11.30
|
%
|
|
$
|
141,692
|
|
|
11.39
|
%
|
|
$
|
147,751
|
|
|
11.82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core capital (3)(4)
|
|
$
|
120,397
|
|
10.00
|
%
|
|
$
|
160,707
|
|
|
12.92
|
%
|
|
$
|
158,997
|
|
|
12.80
|
%
|
|
$
|
160,347
|
|
|
12.89
|
%
|
|
$
|
166,499
|
|
|
13.32
|
%
|
|
Core requirement (5)
|
|
|
48,149
|
|
4.00
|
|
|
|
49,762
|
|
|
4.00
|
|
|
|
49,693
|
|
|
4.00
|
|
|
|
49,747
|
|
|
4.00
|
|
|
|
49,994
|
|
|
4.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
$
|
72,248
|
|
6.00
|
%
|
|
$
|
110,945
|
|
|
8.92
|
%
|
|
$
|
109,304
|
|
|
8.80
|
%
|
|
$
|
110,640
|
|
|
8.89
|
%
|
|
$
|
116,505
|
|
|
9.32
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital (3)
|
|
$
|
121,147
|
|
25.11
|
%
|
|
$
|
161,457
|
|
|
32.92
|
%
|
|
$
|
159,747
|
|
|
32.59
|
%
|
|
$
|
161,097
|
|
|
32.85
|
%
|
|
$
|
167,249
|
|
|
32.02
|
%
|
|
Risk-based requirement
|
|
|
38,595
|
|
8.00
|
|
|
|
39,240
|
|
|
8.00
|
|
|
|
39,213
|
|
|
8.00
|
|
|
|
39,235
|
|
|
8.00
|
|
|
|
39,333
|
|
|
8.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess
|
|
$
|
82,552
|
|
17.11
|
%
|
|
$
|
122,217
|
|
|
24.92
|
%
|
|
$
|
120,534
|
|
|
24.59
|
%
|
|
$
|
121,862
|
|
|
24.85
|
%
|
|
$
|
127,916
|
|
|
26.02
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of capital infused into Territorial Savings Bank:
|
|
|
Net proceeds
|
|
|
|
|
|
|
|
$
|
50,000
|
|
|
|
|
|
$
|
50,000
|
|
|
|
|
|
$
|
53,060
|
|
|
|
|
|
$
|
61,179
|
|
|
|
|
|
Less: Common stock acquired by employee stock ownership plan
|
|
|
|
(6,460
|
)
|
|
|
|
|
|
(7,600
|
)
|
|
|
|
|
|
(8,740
|
)
|
|
|
|
|
|
(10,051
|
)
|
|
|
|
|
Less: Common stock acquired by stock-based benefit plans
|
|
|
|
(3,230
|
)
|
|
|
|
|
|
(3,800
|
)
|
|
|
|
|
|
(4,370
|
)
|
|
|
|
|
|
(5,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma increase
|
|
|
$
|
40,310
|
|
|
|
|
|
$
|
38,600
|
|
|
|
|
|
$
|
39,950
|
|
|
|
|
|
$
|
46,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market
conditions following the commencement of the offering.
|
|
(2)
|
The current Office of Thrift Supervision core capital requirement for financial institutions is 3% of total adjusted assets for financial institutions that receive the highest
supervisory rating for safety and soundness and a 4% to 5% core capital ratio requirement for all other financial institutions.
|
|
(3)
|
Tangible and core capital levels are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
|
|
(4)
|
Pro forma capital levels assume that we fund the stock-based benefit plans with purchases in the open market of 4% of the outstanding shares of common stock following the stock
offering at a price equal to the price for which the shares of common stock are sold in the stock offering, and that the employee stock ownership plan purchases 8% of the shares of common stock to be outstanding immediately following the stock
offering with funds we lend. Pro forma GAAP and regulatory capital have been reduced by the amount required to fund both of these plans. See “Management of Territorial Bancorp Inc.” for a discussion of the stock-based benefit plans and
employee stock ownership plan. We may award shares of common stock under one or more stock-based benefit plans in excess of 4% of our total outstanding shares if the stock-based benefit plans are adopted more than one year following the stock
offering. Accordingly, we may increase the awards beyond current regulatory restrictions and beyond the amounts reflected in this table.
|
|
(5)
|
Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk weighting.
|
32
CAPITALIZATION
The following table presents the historical consolidated capitalization of Territorial Mutual Holding Company at September 30, 2008 and the pro
forma consolidated capitalization of Territorial Bancorp Inc., after giving effect to the conversion and the offering, based upon the assumptions set forth in the “Pro Forma Data” section.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Territorial
Mutual Holding
Company
Historical at
September 30,
2008
|
|
|
Territorial Bancorp Inc. Pro Forma,
Based Upon the Sale in the
Offering of
|
|
|
|
|
8,075,000
Shares
|
|
|
9,500,000
Shares
|
|
|
10,925,000
Shares
|
|
|
12,563,750
Shares (1)
|
|
|
|
|
(Dollars in thousands)
|
|
|
Deposits (2)
|
|
$
|
910,252
|
|
|
$
|
910,252
|
|
|
$
|
910,252
|
|
|
$
|
910,252
|
|
|
$
|
910,252
|
|
|
Borrowings and subordinated debentures
|
|
|
167,920
|
|
|
|
153,920
|
|
|
|
143,920
|
|
|
|
143,920
|
|
|
|
143,920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits, borrowed funds and subordinated debentures
|
|
$
|
1,078,172
|
|
|
$
|
1,064,172
|
|
|
$
|
1,054,172
|
|
|
$
|
1,054,172
|
|
|
$
|
1,054,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock $0.01 par value, 50,000,000 shares authorized; none issued or outstanding
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Common stock $0.01 par value, 100,000,000 shares authorized; assuming shares outstanding as shown (3)
|
|
|
—
|
|
|
|
81
|
|
|
|
95
|
|
|
|
109
|
|
|
|
126
|
|
|
Additional paid-in capital (4)
|
|
|
—
|
|
|
|
77,801
|
|
|
|
91,906
|
|
|
|
106,011
|
|
|
|
122,231
|
|
|
Retained earnings (5)
|
|
|
100,227
|
|
|
|
100,227
|
|
|
|
100,227
|
|
|
|
100,227
|
|
|
|
100,227
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss
|
|
|
(1,170
|
)
|
|
|
(1,170
|
)
|
|
|
(1,170
|
)
|
|
|
(1,170
|
)
|
|
|
(1,170
|
)
|
|
Amortized expense recognized on repayment of trust preferred securities
|
|
|
—
|
|
|
|
(206
|
)
|
|
|
(321
|
)
|
|
|
(321
|
)
|
|
|
(321
|
)
|
|
Common stock to be acquired by employee stock ownership plan (6)
|
|
|
—
|
|
|
|
(6,460
|
)
|
|
|
(7,600
|
)
|
|
|
(8,740
|
)
|
|
|
(10,051
|
)
|
|
Common stock to be acquired by stock-based benefit plans (7)
|
|
|
—
|
|
|
|
(3,230
|
)
|
|
|
(3,800
|
)
|
|
|
(4,370
|
)
|
|
|
(5,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
$
|
99,057
|
|
|
$
|
167,249
|
|
|
$
|
179,658
|
|
|
$
|
192,067
|
|
|
$
|
206,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity as a percentage of total assets (2)
|
|
|
8.22
|
%
|
|
|
13.14
|
%
|
|
|
13.98
|
%
|
|
|
14.80
|
%
|
|
|
15.73
|
%
|
|
(1)
|
As adjusted to give effect to an increase in the number of shares of common stock that could occur due to a 15% increase in the offering range to reflect demand for shares or
changes in market conditions following the commencement of the subscription and community offerings.
|
|
(2)
|
Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and
assets by the amount of the withdrawals.
|
|
(3)
|
No effect has been given to the issuance of additional shares of Territorial Bancorp Inc. common stock pursuant to one or more stock-based benefit plans. If these plans are
implemented within 12 months following the completion of the stock offering, an amount up to 10% and 4% of the shares of Territorial Bancorp Inc. common stock sold in the offering will be reserved for issuance upon the exercise of stock options and
for issuance as restricted stock awards, respectively. See “Management of Territorial Bancorp Inc.”
|
|
(4)
|
The sum of the par value of the total shares outstanding and additional paid-in capital equals the net stock offering proceeds at the offering price of $10.00 per share.
|
|
(5)
|
The retained earnings of Territorial Savings Bank will be substantially restricted after the conversion. See “Our Policy Regarding Dividends,” “The Conversion; Plan
of Distribution—Liquidation Rights” and “Supervision and Regulation.”
|
(footnotes continue on following
page)
33
(continued from previous page)
|
(6)
|
Assumes that 8% of the shares sold in the offering will be acquired by the employee stock ownership plan financed by a loan from Territorial Bancorp Inc. The loan will be repaid
principally from Territorial Savings Bank’s contributions to the employee stock ownership plan. Since Territorial Bancorp Inc. will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no asset
or liability will be reflected on Territorial Bancorp Inc.’s consolidated financial statements. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total
stockholders’ equity.
|
|
(7)
|
Assumes a number of shares of common stock equal to 4% of the shares of common stock to be sold in the offering will be purchased for grant by one or more stock-based benefit plans
in open market purchases. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation. This amount does not reflect possible increases or decreases in the
value of common stock relative to the subscription price in the offering. As Territorial Bancorp Inc. accrues compensation expense to reflect the vesting of shares pursuant to the stock-based benefit plans, the credit to equity will be offset by a
charge to noninterest expense. Implementation of the stock stock-based benefit plans will require stockholder approval. The funds to be used by the stock-based benefit plans will be provided by Territorial Bancorp Inc.
|
34
PRO FORMA DATA
The following tables summarize historical data of Territorial Savings Bank and pro forma data of Territorial Bancorp Inc. at and for the nine months
ended September 30, 2008 and the year ended December 31, 2007. This information is based on assumptions set forth below and in the table, and should not be used as a basis for projections of market value of the shares of common stock
following the conversion and offering.
The net proceeds in the tables are based upon the following assumptions:
|
|
•
|
|
all shares of common stock will be sold in the subscription and community offerings;
|
|
|
•
|
|
shares of common stock will be
purchased by our executive officers and directors, and their associates;
|
|
|
•
|
|
our employee stock ownership plan will purchase 8% of the shares of common stock sold in the stock offering with a loan from Territorial Bancorp Inc. The loan will
be repaid in substantially equal payments of principal and interest over a period of 20 years;
|
|
|
•
|
|
Keefe Bruyette & Woods, Inc. will receive a fee equal to 1.0% of the dollar amount of the shares of common stock sold in the stock offering. Shares
purchased by our employee benefit plans or by our officers, directors and employees, and their immediate families will not be included in calculating the shares of common stock sold for this purpose; and
|
|
|
•
|
|
expenses of the stock offering, other than fees and expenses to be paid to Keefe Bruyette & Woods, Inc., will be $2.1 million.
|
We calculated pro forma consolidated net income for the nine months ended September 30, 2008 and the year ended
December 31, 2007 as if the estimated net proceeds we received had been invested at an assumed interest rate of 2.37% (1.45% on an after-tax basis). This represents the three-year United States Treasury Note for the week ended
September 26, 2008, which, in light of current market interests rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest earning assets and
the weighted average rate paid on our deposits, which is the reinvestment rate generally required by Office of Thrift Supervisions regulations.
We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. We adjusted these figures to
give effect to the shares of common stock purchased by the employee stock ownership plan. We computed per share amounts for each period as if the shares of common stock were outstanding at the beginning of each period, but we did not adjust per
share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.
The pro forma tables give
effect to the implementation of stock-based benefit plans. Subject to the receipt of stockholder approval, we have assumed that the stock-based benefit plans will acquire for restricted stock awards a number of shares of common stock equal to 4% of
our outstanding shares of common stock at the same price for which they were sold in the stock offering. We assume that shares of common stock are granted under the plans in awards that vest over a five-year period.
35
We have also assumed that the stock-based benefit plans will grant options to acquire shares of common
stock equal to 10% of our outstanding shares of common stock. In preparing the tables below, we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were
$10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $3.24 for each option. In addition to the terms of the options
described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 23.42% for the shares of common stock, a dividend yield of 0.0%, an expected option life of 6.5 years and a risk-free interest rate of 3.4%.
We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of our total
outstanding shares if the stock-based benefit plans are adopted more than one year following the stock offering. In addition, we may grant options and award shares that vest sooner than over a five-year period if the stock-based benefit plans are
adopted more than one year following the stock offering.
As discussed under “How We Intend to Use the Proceeds from the Stock
Offering,” we intend to contribute at least 50% of the net proceeds from the stock offering to Territorial Savings Bank (including $50.0 million at the minimum and midpoint of the offering range), and we will retain the remainder of the net
proceeds from the stock offering. We will use a portion of the proceeds we retain for the purpose of making a loan to the employee stock ownership plan and retain the rest of the proceeds for future use.
The pro forma table does not give effect to:
|
|
•
|
|
withdrawals from deposit accounts for the purpose of purchasing shares of common stock in the stock offering;
|
|
|
•
|
|
our results of operations after the stock offering; or
|
|
|
•
|
|
changes in the market price of the shares of common stock after the stock offering.
|
The following pro forma information may not represent the financial effects of the stock offering at the date on which the stock offering actually occurs
and you should not use the table to indicate future results of operations. Pro forma stockholders’ equity represents the difference between the stated amount of our assets and liabilities, computed in accordance with GAAP. We did not increase
or decrease stockholders’ equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma stockholders’ equity is not intended to represent the fair market value of the shares of
common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Pro forma stockholders’ equity does not give effect to the impact of intangible assets or tax bad debt reserves in the
unlikely event we are liquidated.
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Nine Months Ended September 30, 2008
Based
Upon the Sale at $10.00 Per Share of
|
|
|
|
|
8,075,000
Shares
|
|
|
9,500,000
Shares
|
|
|
10,925,000
Shares
|
|
|
12,563,750
Shares (1)
|
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Gross proceeds of offering
|
|
$
|
80,750
|
|
|
$
|
95,000
|
|
|
$
|
109,250
|
|
|
$
|
125,638
|
|
|
Less: expenses
|
|
|
(2,868
|
)
|
|
|
(2,999
|
)
|
|
|
(3,130
|
)
|
|
|
(3,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated net proceeds
|
|
|
77,882
|
|
|
|
92,001
|
|
|
|
106,120
|
|
|
|
122,357
|
|
|
Less: Repayment of trust preferred securities
|
|
|
(14,000
|
)
|
|
|
(24,000
|
)
|
|
|
(24,000
|
)
|
|
|
(24,000
|
)
|
|
Less: Common stock purchased by employee stock ownership plan (“ESOP”) (2)
|
|
|
(6,460
|
)
|
|
|
(7,600
|
)
|
|
|
(8,740
|
)
|
|
|
(10,051
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3)
|
|
|
(3,230
|
)
|
|
|
(3,800
|
)
|
|
|
(4,370
|
)
|
|
|
(5,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated net cash proceeds
|
|
$
|
54,192
|
|
|
$
|
56,601
|
|
|
$
|
69,010
|
|
|
$
|
83,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
6,527
|
|
|
$
|
6,527
|
|
|
$
|
6,527
|
|
|
$
|
6,527
|
|
|
Pro forma income on net proceeds
|
|
|
589
|
|
|
|
616
|
|
|
|
750
|
|
|
|
906
|
|
|
Pro forma interest savings on trust preferred securities
|
|
|
441
|
|
|
|
770
|
|
|
|
770
|
|
|
|
770
|
|
|
Pro forma ESOP adjustment (2)
|
|
|
(148
|
)
|
|
|
(174
|
)
|
|
|
(200
|
)
|
|
|
(230
|
)
|
|
Pro forma stock award adjustment (3)
|
|
|
(296
|
)
|
|
|
(348
|
)
|
|
|
(400
|
)
|
|
|
(460
|
)
|
|
Pro forma stock option adjustment (4)
|
|
|
(392
|
)
|
|
|
(462
|
)
|
|
|
(531
|
)
|
|
|
(611
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
6,721
|
|
|
$
|
6,929
|
|
|
$
|
6,916
|
|
|
$
|
6,902
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
0.87
|
|
|
$
|
0.74
|
|
|
$
|
0.65
|
|
|
$
|
0.56
|
|
|
Pro forma income on net proceeds
|
|
|
0.08
|
|
|
|
0.07
|
|
|
|
0.07
|
|
|
|
0.08
|
|
|
Pro forma interest savings on trust preferred securities
|
|
|
0.06
|
|
|
|
0.09
|
|
|
|
0.08
|
|
|
|
0.07
|
|
|
Pro forma ESOP adjustment (2)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
Pro forma stock award adjustment (3)
|
|
|
(0.04
|
)
|
|
|
(0.04
|
)
|
|
|
(0.04
|
)
|
|
|
(0.04
|
)
|
|
Pro forma stock option adjustment (4)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share (5)
|
|
$
|
0.90
|
|
|
$
|
0.79
|
|
|
$
|
0.69
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as a multiple of pro forma net earnings per share
|
|
|
8.33x
|
|
|
|
9.49x
|
|
|
|
10.97x
|
|
|
|
12.50x
|
|
|
Number of shares outstanding for pro forma net income per share calculations (5)
|
|
|
7,453,225
|
|
|
|
8,768,500
|
|
|
|
10,083,775
|
|
|
|
11,596,341
|
|
|
At September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
99,057
|
|
|
$
|
99,057
|
|
|
$
|
99,057
|
|
|
$
|
99,057
|
|
|
Estimated net proceeds
|
|
|
77,882
|
|
|
|
92,001
|
|
|
|
106,120
|
|
|
|
122,357
|
|
|
Less: Amortized expense recognized on repayment of trust preferred securities (after tax)
|
|
|
(206
|
)
|
|
|
(321
|
)
|
|
|
(321
|
)
|
|
|
(321
|
)
|
|
Less: Common stock acquired by ESOP (2)
|
|
|
(6,460
|
)
|
|
|
(7,600
|
)
|
|
|
(8,740
|
)
|
|
|
(10,051
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3) (4)
|
|
|
(3,230
|
)
|
|
|
(3,800
|
)
|
|
|
(4,370
|
)
|
|
|
(5,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma stockholders’ equity
|
|
$
|
167,043
|
|
|
$
|
179,337
|
|
|
$
|
191,746
|
|
|
$
|
206,016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
12.27
|
|
|
$
|
10.43
|
|
|
$
|
9.07
|
|
|
$
|
7.89
|
|
|
Estimated net proceeds
|
|
|
9.65
|
|
|
|
9.68
|
|
|
|
9.71
|
|
|
|
9.74
|
|
|
Less: Amortized expense recognized on repayment of trust preferred securities (after tax)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
Less: Common stock acquired by ESOP (2)
|
|
|
(0.80
|
)
|
|
|
(0.80
|
)
|
|
|
(0.80
|
)
|
|
|
(0.80
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3) (4)
|
|
|
(0.40
|
)
|
|
|
(0.40
|
)
|
|
|
(0.40
|
)
|
|
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma stockholders’ equity per share (6)
|
|
$
|
20.69
|
|
|
$
|
18.88
|
|
|
$
|
17.55
|
|
|
$
|
16.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as percentage of pro forma stockholders’ equity per share
|
|
|
48.33
|
%
|
|
|
52.97
|
%
|
|
|
56.98
|
%
|
|
|
60.98
|
%
|
|
Number of shares outstanding for pro forma book value per share calculations
|
|
|
8,075,000
|
|
|
|
9,500,000
|
|
|
|
10,925,000
|
|
|
|
12,563,750
|
|
(footnotes begin on following page)
37
(Footnotes from previous page)
|
(1)
|
As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market
conditions following the commencement of the offering.
|
|
(2)
|
Assumes that 8% of shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these
shares are assumed to have been borrowed by the employee stock ownership plan from Territorial Bancorp Inc. Territorial Savings Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the
required principal and interest payments on the debt. Territorial Savings Bank’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. Statement of Position 93-6,
“Employers’ Accounting for Employee Stock Ownership Plans” (“SOP 93-6”) requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro
forma adjustments assume that the employee stock ownership plan shares are allocated in twenty equal annual installments based on the number of loan repayment installments expected to be paid by Territorial Savings Bank, the fair value of the common
stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 39.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of
stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that 24,225, 28,500, 32,775 and 37,691 shares were committed to be released during the
period at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and in accordance with SOP 93-6, only the employee stock ownership plan shares committed to be released during the period were considered
outstanding for purposes of income per share calculations.
|
|
(3)
|
If approved by Territorial Bancorp Inc.’s stockholders, one or more stock-based benefit plans may purchase an aggregate number of shares of common stock equal to 4% of the
shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans and purchases by the plans may not
occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Territorial Bancorp Inc. or through open market purchases. The funds to be used by the stock-based benefit plans to purchase the shares
will be provided by Territorial Bancorp Inc. The table assumes that (i) the stock-based benefit plans acquire the shares through open market purchases at $10.00 per share, (ii) 15% of the amount contributed to the stock-based benefit plans
is amortized as an expense during the nine months ended September 30, 2008 and (iii) the stock-based benefit plans expense reflects an effective combined federal and state tax rate of 39%. Assuming stockholder approval of the stock-based
benefit plans and that shares of common stock (equal to 4% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by
approximately 3.9%.
|
The following table shows pro forma earnings per share and stockholders’ equity per share, assuming
all the shares to fund the stock awards are obtained from authorized but unissued shares, based on the sale of shares as indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At and For the Nine Months Ended
September 30, 2008
|
|
8,075,000
Shares
|
|
9,500,000
Shares
|
|
10,925,000
Shares
|
|
12,563,750
Shares
|
|
Pro forma earnings per share
|
|
$
|
0.87
|
|
$
|
0.76
|
|
$
|
0.66
|
|
$
|
0.57
|
|
Pro form stockholders’ equity per share
|
|
$
|
20.28
|
|
$
|
18.54
|
|
$
|
17.26
|
|
$
|
16.15
|
|
(4)
|
If approved by Territorial Bancorp Inc.’s stockholders one or more stock-based benefit plans may grant options to acquire an aggregate number of shares of common stock equal to
10% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans may not occur earlier than
six months after the completion of the conversion. In calculating the pro forma effect of stock options granted under the stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock
at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $3.24 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a
straight-line basis over a five-year vesting period of the options. The actual expense of stock options to be granted under the stock-based benefit plans will be determined by the grant-date fair value of the options, which will depend on a number
of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for
purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the
stock-based benefit plans is obtained from the issuance of authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. Assuming stockholder approval of the stock-based benefit plans and that
shares of common stock used to fund stock options (equal to 10% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted
by approximately 10%.
|
38
|
(5)
|
Income per share computations are determined by taking the number of shares assumed to be sold in the offering and, in accordance with SOP 93-6, subtracting the employee stock
ownership plan shares that have not been committed for release during the period and subtracting non-vested stock awards granted under one or more stock-based benefit plans. See note 2, above.
|
|
(6)
|
The retained earnings of Territorial Savings Bank will be substantially restricted after the conversion. See “Our Policy Regarding Dividends,” “The Conversion; Plan
of Distribution—Liquidation Rights” and “Supervision and Regulation.” The number of shares used to calculate pro forma stockholders’ equity per share is equal to the total number of shares to be outstanding upon completion
of the offering.
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Year Ended December 31, 2007
Based Upon the
Sale at $10.00 Per Share of
|
|
|
|
|
8,075,000
Shares
|
|
|
9,500,000
Shares
|
|
|
10,925,000
Shares
|
|
|
12,563,750
Shares (1)
|
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
Gross Proceeds of Offering
|
|
$
|
80,750
|
|
|
$
|
95,000
|
|
|
$
|
109,250
|
|
|
$
|
125,638
|
|
|
Less: expenses
|
|
|
(2,868
|
)
|
|
|
(2,999
|
)
|
|
|
(3,130
|
)
|
|
|
(3,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated net proceeds
|
|
|
77,882
|
|
|
|
92,001
|
|
|
|
106,120
|
|
|
|
122,357
|
|
|
Less: Repayment of trust preferred securities
|
|
|
(14,000
|
)
|
|
|
(24,000
|
)
|
|
|
(24,000
|
)
|
|
|
(24,000
|
)
|
|
Less: Common stock purchased by ESOP (2)
|
|
|
(6,460
|
)
|
|
|
(7,600
|
)
|
|
|
(8,740
|
)
|
|
|
(10,051
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3)
|
|
|
(3,230
|
)
|
|
|
(3,800
|
)
|
|
|
(4,370
|
)
|
|
|
(5,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated net cash proceeds
|
|
$
|
54,192
|
|
|
$
|
56,601
|
|
|
$
|
69,010
|
|
|
$
|
83,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
5,768
|
|
|
$
|
5,768
|
|
|
$
|
5,768
|
|
|
$
|
5,768
|
|
|
Pro forma income on net proceeds
|
|
|
989
|
|
|
|
1,169
|
|
|
|
1,349
|
|
|
|
1,556
|
|
|
Pro forma interest savings on trust preferred securities
|
|
|
754
|
|
|
|
1,273
|
|
|
|
1,273
|
|
|
|
1,273
|
|
|
Pro forma ESOP adjustment(2)
|
|
|
(197
|
)
|
|
|
(232
|
)
|
|
|
(267
|
)
|
|
|
(307
|
)
|
|
Pro forma stock award adjustment (3)
|
|
|
(394
|
)
|
|
|
(464
|
)
|
|
|
(533
|
)
|
|
|
(613
|
)
|
|
Pro forma stock option adjustment (4)
|
|
|
(523
|
)
|
|
|
(616
|
)
|
|
|
(708
|
)
|
|
|
(814
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
6,194
|
|
|
$
|
6,550
|
|
|
$
|
6,534
|
|
|
$
|
6,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
0.77
|
|
|
$
|
0.66
|
|
|
$
|
0.57
|
|
|
$
|
0.50
|
|
|
Pro forma income on net proceeds
|
|
|
0.11
|
|
|
|
0.09
|
|
|
|
0.10
|
|
|
|
0.10
|
|
|
Pro forma interest savings on trust preferred securities
|
|
|
0.10
|
|
|
|
0.15
|
|
|
|
0.13
|
|
|
|
0.11
|
|
|
Pro forma ESOP adjustment (2)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
Pro forma stock award adjustment (3)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
|
(0.05
|
)
|
|
Pro forma stock option adjustment (4)
|
|
|
(0.07
|
)
|
|
|
(0.07
|
)
|
|
|
(0.07
|
)
|
|
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income per share (5)
|
|
$
|
0.83
|
|
|
$
|
0.75
|
|
|
$
|
0.65
|
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as a multiple of pro forma net earnings per share
|
|
|
12.05x
|
|
|
|
13.33x
|
|
|
|
15.38x
|
|
|
|
17.86x
|
|
|
Number of shares outstanding for pro forma net income per share calculations (5)
|
|
|
7,461,300
|
|
|
|
8,778,000
|
|
|
|
10,094,700
|
|
|
|
11,608,905
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
92,479
|
|
|
$
|
92,479
|
|
|
$
|
92,479
|
|
|
$
|
92,479
|
|
|
Estimated net proceeds
|
|
|
77,882
|
|
|
|
92,001
|
|
|
|
106,120
|
|
|
|
122,357
|
|
|
Less: Amortized expense recognized on repayment of trust preferred securities (after tax)
|
|
|
(206
|
)
|
|
|
(321
|
)
|
|
|
(321
|
)
|
|
|
(321
|
)
|
|
Less: Common stock acquired by ESOP (2)
|
|
|
(6,460
|
)
|
|
|
(7,600
|
)
|
|
|
(8,740
|
)
|
|
|
(10,051
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3) (4)
|
|
|
(3,230
|
)
|
|
|
(3,800
|
)
|
|
|
(4,370
|
)
|
|
|
(5,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma stockholders’ equity
|
|
$
|
160,459
|
|
|
$
|
172,749
|
|
|
$
|
185,158
|
|
|
$
|
199,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
11.45
|
|
|
$
|
9.73
|
|
|
$
|
8.47
|
|
|
$
|
7.36
|
|
|
Estimated net proceeds
|
|
|
9.65
|
|
|
|
9.68
|
|
|
|
9.71
|
|
|
|
9.74
|
|
|
Less: Amortized expense recognized on repayment of trust preferred securities (after tax)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
|
(0.03
|
)
|
|
Less: Common stock acquired by ESOP (2)
|
|
|
(0.80
|
)
|
|
|
(0.80
|
)
|
|
|
(0.80
|
)
|
|
|
(0.80
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3) (4)
|
|
|
(0.40
|
)
|
|
|
(0.40
|
)
|
|
|
(0.40
|
)
|
|
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma stockholders’ equity per share (6)
|
|
$
|
19.87
|
|
|
$
|
18.18
|
|
|
$
|
16.95
|
|
|
$
|
15.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as percentage of pro forma stockholders’ equity per share
|
|
|
50.33
|
%
|
|
|
55.01
|
%
|
|
|
59.00
|
%
|
|
|
63.01
|
%
|
|
Number of shares outstanding for pro forma book value per share calculations
|
|
|
8,075,000
|
|
|
|
9,500,000
|
|
|
|
10,925,000
|
|
|
|
12,563,750
|
|
(footnotes begin on following page)
40
(Continued from previous page)
|
(1)
|
As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market
conditions following the commencement of the offering.
|
|
(2)
|
Assumes that 8% of shares of common stock sold in the offering will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these
shares are assumed to have been borrowed by the employee stock ownership plan from Territorial Bancorp Inc. Territorial Savings Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the
required principal and interest payments on the debt. Territorial Savings Bank’s total annual payments on the employee stock ownership plan debt are based upon 20 equal annual installments of principal and interest. SOP 93-6 requires that
an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual
installments based on the number of loan repayment installments assumed to be paid by Territorial Savings Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an
effective combined federal and state tax rate of 39.0%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock
ownership plan. The pro forma net income further assumes that 32,300, 38,000, 43,700 and 50,255 shares were committed to be released during the period at the minimum, midpoint, maximum, and adjusted maximum of the offering range, respectively, and
in accordance with SOP 93-6, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of income per share calculations.
|
|
(3)
|
If approved by Territorial Bancorp Inc.’s stockholders, one or more stock-based benefit plans plan may purchase an aggregate number of shares of common stock equal to 4% of the
shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans, and purchases by the plan may not
occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Territorial Bancorp Inc. or through open market purchases. The funds to be used by the stock-based benefit plans to purchase the shares
will be provided by Territorial Bancorp Inc. The table assumes that (i) the stock-based benefit plans acquire the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the stock-based benefit plans
is amortized as an expense during the year ended December 31, 2007 and (iii) the stock-based benefit plans expense reflects an effective combined federal and state tax rate of 39%. Assuming stockholder approval of the stock-based benefit
plans and that shares of common stock (equal to 4% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by
approximately 3.9%.
|
The following table shows pro forma earnings per share and stockholders’ equity per share, assuming
all the shares to fund the stock awards are obtained from authorized but unissued shares, based on the sale of shares as indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2007
|
|
8,075,000
Shares
|
|
9,500,000
Shares
|
|
10,925,000
Shares
|
|
12,563,750
Shares
|
|
Pro forma earnings per share
|
|
$
|
0.80
|
|
$
|
0.72
|
|
$
|
0.63
|
|
$
|
0.54
|
|
Stockholders’ equity per share
|
|
$
|
19.49
|
|
$
|
17.87
|
|
$
|
16.68
|
|
$
|
15.65
|
|
(4)
|
If approved by Territorial Bancorp Inc.’s stockholders, one of more stock-based benefit plans may grant options to acquire an aggregate number of shares of common stock equal
to 10% of the shares to be sold in the offering (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans may not occur earlier
than six months after the completion of the conversion. In calculating the pro forma effect of the stock options to be granted under stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the
common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $3.24 for each option, the aggregate grant-date fair value of the stock options was amortized to
expense on a straight-line basis over a five-year vesting period of the options. The actual expense of the stock options to be granted under the stock-based benefit plans will be determined by the grant-date fair value of the options, which will
depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury
stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options
under the stock-based benefit plans is obtained from the issuance of authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. Assuming stockholder approval of the stock-based benefit plans and
that shares of common stock used to fund stock options (equal to 10% of the shares sold in the offering) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests
diluted by approximately 10%.
|
41
|
(5)
|
Income per share computations are determined by taking the number of shares assumed to be sold in the offering and, in accordance with SOP 93-6, subtracting the employee stock
ownership plan shares that have not been committed for release during the period and subtracting non-vested stock awards granted under one or more stock-based benefit plans. See note 2, above.
|
|
(6)
|
The retained earnings of Territorial Savings Bank will be substantially restricted after the conversion. See “Our Policy Regarding Dividends,” “The Conversion; Plan
of Distribution—Liquidation Rights” and “Supervision and Regulation.” The number of shares used to calculate pro forma stockholders’ equity per share is equal to the total number of shares to be outstanding upon completion
of the offering
|
42
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section is intended to help potential investors understand our financial performance through a discussion of the factors affecting our financial condition at September 30, 2008, December 31, 2007 and December 31,
2006, and our consolidated results of operations for the nine months ended September 30, 2008 and 2007 and the years ended December 31, 2007, 2006 and 2005. This section should be read in conjunction with the Consolidated Financial
Statements and notes to the consolidated financial statements that appear elsewhere in this prospectus. Territorial Bancorp Inc. did not exist at September 30, 2008; therefore, the information reflected in this section reflects the financial
performance of Territorial Mutual Holding Company and its subsidiaries.
Overview
We have historically operated as a traditional thrift institution. The significant majority of our assets consist of long-term, fixed rate residential
mortgage loans and mortgage backed securities, which we have funded primarily with deposit accounts, reverse repurchase agreements and Federal Home Loan Bank advances. This has resulted in our being particularly vulnerable to increases in interest
rates, as our interest-bearing liabilities mature or reprice more quickly than our interest-earning assets. As a result, our net interest rate spread (the difference between the yield on average interest-earning assets and the cost of average
interest-bearing liabilities) to decrease to 2.25% for the year ended December 31, 2007 from 2.60% for the year ended December 31, 2006 and 3.20% for the year ended December 31, 2005. This has resulted in a corresponding decrease in
net interest income (the difference between interest income and interest expense) to $28.6 million for the year ended December 31, 2007 from $33.1 million for the year ended December 31, 2006 and $39.4 million for the year ended
December 31, 2005. However, during the nine months ended September 2008, our net interest income increased $5.0 million over the same period in 2007 as interest rates have decreased.
Our operations in 2007 and 2008 have been affected by our efforts to manage our interest rate risk position. Specifically, in 2007, we sold $43.0 million
of 10-, 15- and 20-year fixed-rate mortgage loans and $21.7 million of fixed-rate mortgage-backed securities, and used the net proceeds of the sales to repay short-term borrowings. The loan sales resulted in a loss on loan sales during 2007 of $1.1
million, while the securities sales resulted in gains on securities sales during 2007 of $731,000. We have continued our efforts to reduce interest rate risk in 2008 by obtaining an additional $60.0 million of long-term, fixed-rate reverse
repurchase agreements and through the purchase of $18.2 million of shorter-duration mortgage-backed securities. See “Management of Market Risk” for a discussion of all of the actions we took in 2007 and have taken in 2008 in managing
interest rate risk.
We have continued our focus on originating one- to four-family residential real estate loans, and intend to continue
this strategy following the conversion. Our emphasis on conservative loan underwriting has resulted in low levels of non-performing assets at a time when many financial institutions are experiencing significant asset quality issues. Our
non-performing assets totaled $4,000 at September 30, 2008, compared to $106,000 or 0.01% of total assets at December 31, 2007, and $593,000 or 0.05% of total assets at December 31, 2006. Our non-performing loans and loss experience
has enabled us to maintain a relatively low allowance for loan losses in relation to other peer institutions and correspondingly resulted in low levels of provisions for loan losses. Our provision for loan losses was $69,000, $25,000 and $6,000 for
the nine months ended September 30, 2008 and the years ended December 31, 2007 and 2006, respectively.
43
Business Strategy
Our primary objective is to operate as a profitable, community-oriented financial institution serving customers in our primary market areas. We have sought to accomplish this objective through the adoption of a
business strategy designed to maintain a strong capital position and high asset quality. This business strategy includes the following elements:
|
|
•
|
|
Remaining a community-oriented financial institution
.
We were established in 1921 and have been operating continuously since that time. We are
committed to meeting the financial needs of the communities in which we operate, and we are dedicated to providing quality personal service to our customers. We provide a broad range of consumer and business financial services from our 24 branch
offices.
|
|
|
•
|
|
Increasing loan production while maintaining high asset quality.
We have grown our loan portfolio to $629.6 million at September 30, 2008 from
$415.7 million at December 31, 2003. In growing the loan portfolio, we have emphasized maintaining strong asset quality by following conservative underwriting guidelines, and primarily originating loans secured by residential real estate. We
also underwrite all of our loans in our main office in Honolulu to ensure uniformity and consistency in underwriting decisions. Our non-performing assets at September 30, 2008 were $4,000, compared to $106,000 or 0.01% of total assets at
December 31, 2007, and $593,000 or 0.05% of total assets at December 31, 2006.
|
|
|
•
|
|
Emphasizing lower cost core deposits to maintain low funding costs.
We believe that it is easier to increase net income by controlling the cost of
funds instead of trying to maximize asset yields, as loans with high yields often involve greater credit risk or may be repaid during periods of decreasing market interest rates. We promote passbook and statement savings accounts, regular and
commercial checking accounts and Super NOW accounts, which generally are lower-cost sources of funds than certificates of deposits, and are less sensitive to withdrawal when interest rates fluctuate. We intend to grow our core deposit base through
branch expansion. In addition, we attract and retain deposits by offering competitive products and interest rates and by emphasizing quality customer service, and through our convenient locations and our advertising program.
|
|
|
•
|
|
Expanding our branch network.
We currently operate from 24 banking offices. We intend to evaluate additional branch expansion opportunities, through
acquisitions and
de novo
branching, to expand our presence in the State of Hawaii. In addition, we intend to evaluate acquisitions of other financial institutions, as opportunities present themselves. We would like to expand our branch office
network by at least two de novo branch offices over the next two years with a focus on areas of the State of Hawaii that we do not currently serve. We plan to open a new branch office in Kihei, Maui, in 2009.
|
Anticipated Increase in Non-Interest Expense
Following the completion of the conversion and offering, we anticipate that our non-interest expense will increase as a result of the increased costs associated with managing a public company, increased compensation expenses associated with
the purchases of shares of common stock by our employee stock ownership plan, and the adoption of one or more stock-based benefit plans, if approved by Territorial Bancorp Inc.’s stockholders.
44
Assuming that the adjusted maximum number of shares are sold in the offering (12,563,750 shares):
|
|
•
|
|
our employee stock ownership plan would acquire 1,005,100 shares of common stock with a $10.1 million loan that is expected to be repaid over 20 years, resulting in
an annual pre-tax expense of approximately $503,000 (assuming that the common stock maintains a value of $10.00 per share);
|
|
|
•
|
|
our stock-based benefit plans would grant stock options to purchase shares equal to 10% of the total shares issued in the offering, or 1,256,375 shares, to eligible
participants, which would result in compensation expense over the vesting period of the options. Assuming the market price of the common stock is $10.00 per share; all stock options are granted with an exercise price of $10.00 per share and have a
term of 6.5 years; the dividend yield on the stock is 0%; the risk free interest rate is 3.4%; and the volatility rate on the common stock is 23.42%, the estimated grant-date fair value of the stock options utilizing a Black-Scholes option pricing
analysis is $3.24 per option granted. Assuming this value is amortized over the five-year vesting period, the corresponding annual pre-tax expense associated with stock options granted under the stock-based benefit plans would be approximately
$814,000 ($497,000 after taxes assuming a tax rate of 39%); and
|
|
|
•
|
|
our stock-based benefit plans would award a number of shares equal to 4% of the shares issued in the offering, or 502,550 shares, to eligible participants, which
would be expensed as the awards vest. Assuming that all shares are awarded under the stock-based benefit plans at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax expense associated with
shares awarded under the stock-based benefit plans would be approximately $1.0 million ($611,000 after taxes assuming a tax rate of 39%).
|
The actual expense that will be recorded for the employee stock ownership plan will be determined by the market value of the shares of common stock as they are released to employees over the term of the loan, and
whether the loan is repaid faster than its contractual term. Accordingly, increases in the stock price above $10.00 per share will increase the total employee stock ownership plan expense, and any accelerated repayment of the loan would increase the
annual employee stock ownership plan expense. Additionally, the actual expense of shares awarded under one or more stock-based benefit plans will be determined by the fair market value of the stock on the grant date, which might be greater than
$10.00 per share. Further, the actual expense of stock options granted under one or more stock-based benefit plans would be determined by the grant-date fair value of the options, which would depend on a number of factors, including the valuation
assumptions used in the option pricing model ultimately used.
We may award shares of common stock and grant options in excess of 4% and
10%, respectively, of our shares of stock sold in the stock offering if our stock-based benefit plans are adopted more than one year following the stock offering. This would further increase our expenses associated with stock-based benefit plans.
Critical Accounting Policies
We
consider accounting policies that require management to exercise significant judgment or discretion or make significant assumptions that have, or could have, a material impact on the carrying value of certain assets or on income, to be critical
accounting policies. We consider the following to be our critical accounting policies:
Allowance for Loan Losses
. We maintain
an allowance for loan losses at an amount we believe to be necessary to absorb credit losses incurred in our loan portfolio that are both probable and reasonably estimable at a balance sheet date. We establish specific allowances for impaired loans,
and general allowances for the remaining loans in our loan portfolio. To estimate credit losses on non-impaired loans, we evaluate numerous factors, as described below in “—Allowance for Loan Losses.” Based on our estimate of the
level of allowance for loan losses required, we record a provision for loan and lease losses to maintain the allowance for loan losses at an appropriate level.
45
Since we cannot predict with certainty the amount of loan charge-offs that will be incurred and because
the eventual level of loan charge-offs is affected by numerous conditions beyond our control, a range of loss estimates can reasonably be used to determine the allowance for loan losses and the related provisions for loan losses. In addition,
various regulatory agencies, as an integral part of their examination processes, periodically review our allowance for loan losses. Such agencies may require that we recognize additions to the allowance for loan losses based on their judgments about
information available to them at the time of their examination. Accordingly, actual results could differ from those estimates.
Deterioration in the Hawaii real estate market could result in an increase in loan delinquencies, additional increases in our allowance for loan losses and provision for loan losses, as well as an increase in loan charge-offs.
Securities Impairment
. We periodically perform analyses to determine whether there has been an other-than-temporary decline in the value
of one or more of our securities. Our securities, all of which are classified as held to maturity, consist primarily of debt securities for which we have a positive intent and ability to hold to maturity, and are carried at amortized cost. We
conduct a quarterly review and evaluation of the securities portfolio to determine if the value of any security has declined below its cost or amortized cost, and whether such decline is other-than-temporary. If such decline is deemed
other-than-temporary, we would adjust the cost basis of the security by writing down the security to estimated fair market value through a charge to current period operations. The market values of our securities are affected by changes in interest
rates as well as shifts in the market’s perception of the issuers. The fair value of investment securities is based on quoted market prices or dealer quotes. Since there are no observable market inputs, we estimate the fair value of trust
preferred securities using unobservable inputs. We obtain estimates of the fair value of trust preferred securities from pricing services and by discounting projected cash flows using a risk-adjusted discount rate in accordance with FSP FAS
No. 157-3,
“
Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” The fair value of the trust preferred securities for disclosure purposes is estimated by considering the reasonableness
of the range of fair value estimates provided by a pricing service and the discounted cash values.
Deferred Tax Assets.
Deferred tax assets and liabilities are recognized for the estimated future tax effects attributable to temporary differences and carryforwards. A valuation allowance may be required if, based on the weight of available evidence, it is more
likely than not that some portion or all of the deferred tax assets will not be realized. In determining whether a valuation allowance is necessary, we consider the level of taxable income in prior years, to the extent that carrybacks are permitted
under current tax laws, as well as estimates of future taxable income and tax planning strategies that could be implemented to accelerate taxable income if necessary. If our estimates of future taxable income were
46
materially overstated or if our assumptions regarding the tax consequences of tax planning strategies were inaccurate, some or all of our deferred tax assets
may not be realized, which would result in a charge to earnings.
Defined Benefit Retirement Plan.
Defined benefit plan
obligations and related assets of our defined benefit retirement plan are presented in Note 13 to the Consolidated Financial Statements. Effective December 31, 2008, the defined benefit retirement plan was frozen and all plan benefits were
fixed as of that date. Plan assets, which consist primarily of marketable equity and debt securities, are typically valued using market quotations. Plan obligations and the annual pension expense are determined by independent actuaries through the
use of a number of assumptions. Key assumptions in measuring the plan obligations include the discount rate and the expected long-term rate of return on plan assets. In determining the discount rate, we utilize a yield that reflects the top 50% of
the universe of bonds, ranked in the order of the highest yield. Asset returns are based upon the anticipated average rate of earnings expected on the invested funds of the plans.
At December 31, 2007, we used a weighted-average discount rate of 6.0% and an expected long-term rate of return on plan assets of 8.0%, which
affected the amount of pension liability recorded as of year-end 2007 and the amount of pension expense to be recorded in 2008. At December 31, 2006, a weighted-average discount rate of 5.75% and an expected long-term rate of return on plan
assets of 8.0% were used in determining the pension liability recorded as of year-end 2006 and the amount of pension expense recorded in 2007. For both the discount rate and the asset return rate, a range of estimates could reasonably have been used
which would affect the amount of pension expense and pension liability recorded.
An increase in the discount rate or asset return rate
would reduce pension expense in 2007, while a decrease in the discount rate or asset return rate would have the opposite effect. A 25 basis points decrease in the discount rate assumption would increase 2008 pension expense by $57,166 and year-end
2007 pension liability by $371,425, while a 25 basis points decrease in the asset return rate would increase 2008 pension expense by $22,063.
47
Balance Sheet Analysis
Assets.
At September 30, 2008, our assets were $1.205 billion, an increase of $42.8 million, or 3.7%, from $1.162 billion at December 31, 2007. The increase was caused by an increase in loans
of $68.3 million, or 12.2%, which increase we funded with increased deposits, increased securities sold under agreements to repurchase and existing cash on hand. In 2007, assets decreased $137.8 million, or 10.6%, from $1.30 billion at
December 31, 2006. The decrease was due primarily to an $83.3 million, or 13.4%, decrease in investment securities held to maturity, and to a $68.8 million, or 77.7%, decrease in cash. We used proceeds from the sale of loans and investment
securities, and excess cash to fund deposit outflows and to reduce our balance of outstanding borrowings.
Loans.
At
September 30, 2008, total loans were $629.6 million, or 52.3% of total assets. During the nine months ended September 30, 2008, the loan portfolio grew $68.3 million, or 12.2%. The increase was caused by an increase in one- to four-family
residential real estate loans of $63.5 million, or 12.5%. In 2007, our loan portfolio increased $7.4 million, or 1.3%. Home equity loans and lines of credit increased $14.1 million, or 110.2%, which was offset by a decrease in one- to four-family
residential real estate loans of $10.1 million, or 2.0%. We shrank our portfolio of one- to four-family residential real estate loans by selling $43.0 million of 10-, 15- and 20-year fixed-rate mortgage loans in November 2007 to improve our interest
rate risk position in the event of rising interest rates.
48
Loan Portfolio Composition.
The following table sets forth the composition of our loan
portfolio at the dates indicated, including loans held for sale of $359,000, $0, $0, $0, $0 and $0 at September 30, 2008 and December 31, 2007, 2006, 2005, 2004 and 2003, respectively. Because of the immaterial amount of loans classified
as held for sale at September 30, 2008, this amount (consisting of one loan) was included in loans classified as held to maturity in our consolidated financial statements as of September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
2008
|
|
|
At December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
|
(Dollars in thousands)
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
569,861
|
|
|
90.51
|
%
|
|
$
|
506,410
|
|
|
90.21
|
%
|
|
$
|
516,554
|
|
|
93.26
|
%
|
|
$
|
498,809
|
|
|
95.69
|
%
|
|
$
|
463,851
|
|
|
95.43
|
%
|
|
$
|
397,009
|
|
|
95.50
|
%
|
|
Multi-family residential
|
|
|
3,711
|
|
|
0.59
|
|
|
|
4,488
|
|
|
0.80
|
|
|
|
4,983
|
|
|
0.90
|
|
|
|
4,759
|
|
|
0.91
|
|
|
|
6,592
|
|
|
1.36
|
|
|
|
4,521
|
|
|
1.09
|
|
|
Construction, commercial and other
|
|
|
20,908
|
|
|
3.32
|
|
|
|
17,041
|
|
|
3.04
|
|
|
|
14,784
|
|
|
2.67
|
|
|
|
8,625
|
|
|
1.65
|
|
|
|
10,588
|
|
|
2.18
|
|
|
|
10,711
|
|
|
2.58
|
|
|
Home equity loans and lines of credit
|
|
|
29,749
|
|
|
4.72
|
|
|
|
26,828
|
|
|
4.78
|
|
|
|
12,763
|
|
|
2.30
|
|
|
|
5,879
|
|
|
1.13
|
|
|
|
2,206
|
|
|
0.45
|
|
|
|
1,603
|
|
|
0.39
|
|
|
Other loans
|
|
|
5,389
|
|
|
0.86
|
|
|
|
6,579
|
|
|
1.17
|
|
|
|
4,830
|
|
|
0.87
|
|
|
|
3,232
|
|
|
0.62
|
|
|
|
2,823
|
|
|
0.58
|
|
|
|
1,839
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
629,618
|
|
|
100.00
|
%
|
|
$
|
561,346
|
|
|
100.00
|
%
|
|
$
|
553,914
|
|
|
100.00
|
%
|
|
$
|
521,304
|
|
|
100.00
|
%
|
|
$
|
486,060
|
|
|
100.00
|
%
|
|
$
|
415,683
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned fees and discounts, net
|
|
|
(4,978
|
)
|
|
|
|
|
|
(4,375
|
)
|
|
|
|
|
|
(4,415
|
)
|
|
|
|
|
|
(4,095
|
)
|
|
|
|
|
|
(3,719
|
)
|
|
|
|
|
|
(3,134
|
)
|
|
|
|
|
Undisbursed loan funds
|
|
|
(1,720
|
)
|
|
|
|
|
|
(1,408
|
)
|
|
|
|
|
|
(2,530
|
)
|
|
|
|
|
|
(349
|
)
|
|
|
|
|
|
(1,512
|
)
|
|
|
|
|
|
(1,243
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
|
(750
|
)
|
|
|
|
|
|
(768
|
)
|
|
|
|
|
|
(768
|
)
|
|
|
|
|
|
(770
|
)
|
|
|
|
|
|
(750
|
)
|
|
|
|
|
|
(743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
$
|
622,170
|
|
|
|
|
|
$
|
554,795
|
|
|
|
|
|
$
|
546,201
|
|
|
|
|
|
$
|
516,090
|
|
|
|
|
|
$
|
480,079
|
|
|
|
|
|
$
|
410,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49
Loan Portfolio Maturities and Yields.
The following table summarizes the scheduled
repayments of our loan portfolio at December 31, 2007. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
residential real estate
|
|
|
Multi-family residential
real estate
|
|
|
Construction, commercial
and other real estate
|
|
|
|
Amount
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Due During the Years
Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
459
|
|
6.93
|
%
|
|
$
|
—
|
|
—
|
%
|
|
$
|
3,844
|
|
7.83
|
%
|
|
2009
|
|
|
51
|
|
7.75
|
|
|
|
—
|
|
—
|
|
|
|
2,165
|
|
7.75
|
|
|
2010
|
|
|
33
|
|
6.95
|
|
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
2011 to 2012
|
|
|
229
|
|
7.36
|
|
|
|
405
|
|
7.05
|
|
|
|
148
|
|
9.25
|
|
|
2013 to 2017
|
|
|
4,803
|
|
5.76
|
|
|
|
1,199
|
|
7.32
|
|
|
|
6,739
|
|
6.86
|
|
|
2018 to 2022
|
|
|
33,793
|
|
5.40
|
|
|
|
611
|
|
7.31
|
|
|
|
789
|
|
7.89
|
|
|
2023 and beyond
|
|
|
467,042
|
|
5.62
|
|
|
|
2,273
|
|
7.12
|
|
|
|
3,356
|
|
6.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
506,410
|
|
5.61
|
%
|
|
$
|
4,488
|
|
7.19
|
%
|
|
$
|
17,041
|
|
7.28
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity loans and
lines of credit
|
|
|
Other loans
|
|
|
Total
|
|
|
|
Amount
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
Weighted
Average
Rate
|
|
|
Amount
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
Due During the Years
Ending December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
118
|
|
9.75
|
%
|
|
$
|
2,321
|
|
6.21
|
%
|
|
$
|
6,742
|
|
7.24
|
%
|
|
2009
|
|
|
402
|
|
8.31
|
|
|
|
234
|
|
8.14
|
|
|
|
2,852
|
|
7.86
|
|
|
2010
|
|
|
2,147
|
|
7.67
|
|
|
|
192
|
|
8.75
|
|
|
|
2,372
|
|
7.75
|
|
|
2011 to 2012
|
|
|
4,961
|
|
7.83
|
|
|
|
1,039
|
|
8.59
|
|
|
|
6,782
|
|
7.91
|
|
|
2013 to 2017
|
|
|
1,017
|
|
7.43
|
|
|
|
1,317
|
|
8.01
|
|
|
|
15,075
|
|
6.69
|
|
|
2018 to 2022
|
|
|
1,134
|
|
7.04
|
|
|
|
1,476
|
|
7.00
|
|
|
|
37,803
|
|
5.59
|
|
|
2023 and beyond
|
|
|
17,049
|
|
6.72
|
|
|
|
—
|
|
—
|
|
|
|
489,720
|
|
5.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,828
|
|
7.08
|
%
|
|
$
|
6,579
|
|
7.27
|
%
|
|
$
|
561,346
|
|
5.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at
December 31, 2007 that are contractually due after December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due After December 31, 2008
|
|
|
|
Fixed
|
|
Adjustable
|
|
Total
|
|
|
|
(In thousands)
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
493,901
|
|
$
|
12,050
|
|
$
|
505,951
|
|
Multi-family residential
|
|
|
4,488
|
|
|
—
|
|
|
4,488
|
|
Construction, commercial and other
|
|
|
11,258
|
|
|
1,939
|
|
|
13,197
|
|
Home equity loans and lines of credit
|
|
|
18,113
|
|
|
8,597
|
|
|
26,710
|
|
Other loans
|
|
|
3,957
|
|
|
301
|
|
|
4,258
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
531,717
|
|
$
|
22,887
|
|
$
|
554,604
|
|
|
|
|
|
|
|
|
|
|
|
Securities.
At September 30, 2008, our securities portfolio was $521.8 million,
or 43.3% of assets. At that date, our securities portfolio consisted primarily of securities with the following amortized cost: $419.5 million of mortgage-backed securities issued by Fannie Mae or Freddie Mac; $95.2 million of collateralized
mortgage obligations (all of which are issued by government agencies or government
50
sponsored enterprises) and $7.0 million of trust preferred securities. At September 30, 2008, all of such securities were classified as
held-to-maturity, and none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as loans having less than full documentation) loans. At September 30, 2008, we held no common or preferred stock of Fannie Mae or
Freddie Mac.
During the nine months ended September 30, 2008, our securities portfolio decreased $16.2 million, or 3.0%, as we used
excess cash to fund loan originations instead of purchasing securities. The decrease included the sale of all $10.5 million of the municipal bonds we held at December 31, 2007. In 2007, our securities portfolio decreased $83.3 million, or
13.4%, as we used proceeds from the sale of investment securities and loans to reduce our balance of outstanding borrowings.
The following
table sets forth the amortized cost and estimated fair value of our securities portfolios (excluding Federal Home Loan Bank of Seattle common stock) at the dates indicated. All of such securities were classified as held to maturity at the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008
|
|
At December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
Amortized
Cost
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
U.S. government sponsored mortgage-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
$
|
105,622
|
|
$
|
103,086
|
|
$
|
115,004
|
|
$
|
113,040
|
|
$
|
146,090
|
|
$
|
142,205
|
|
$
|
161,216
|
|
$
|
158,158
|
|
Freddie Mac
|
|
|
313,861
|
|
|
306,044
|
|
|
316,546
|
|
|
310,614
|
|
|
354,458
|
|
|
342,186
|
|
|
391,572
|
|
|
380,610
|
|
Collateralized mortgage obligations
|
|
|
95,249
|
|
|
94,667
|
|
|
88,779
|
|
|
88,481
|
|
|
100,645
|
|
|
97,882
|
|
|
103,209
|
|
|
100,538
|
|
Other
|
|
|
68
|
|
|
66
|
|
|
83
|
|
|
80
|
|
|
2,498
|
|
|
2,576
|
|
|
3,298
|
|
|
3,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. government sponsored mortgage-backed securities
|
|
|
514,800
|
|
|
503,863
|
|
|
520,412
|
|
|
512,215
|
|
|
603,691
|
|
|
584,849
|
|
|
659,295
|
|
|
642,737
|
|
Municipal bonds
|
|
|
—
|
|
|
—
|
|
|
10,539
|
|
|
10,592
|
|
|
10,548
|
|
|
10,489
|
|
|
10,558
|
|
|
10,340
|
|
Trust preferred securities
|
|
|
7,034
|
|
|
3,026
|
|
|
7,074
|
|
|
6,500
|
|
|
7,100
|
|
|
7,121
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
521,834
|
|
$
|
506,889
|
|
$
|
538,025
|
|
$
|
529,307
|
|
$
|
621,339
|
|
$
|
602,459
|
|
$
|
669,853
|
|
$
|
653,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses on our investment in mortgage-backed securities have been caused by
increases in current market interest rates. All of the mortgage-backed securities are guaranteed by U.S. government-sponsored enterprises. Since the decline in market value has been attributable to changes in interest rates and not credit quality,
and we have had, and continue to have, the intent and ability to hold these investments to maturity, we have not considered these investments to be other-than-temporarily impaired as of September 30, 2008, December 31, 2007 or
December 31, 2006.
We sold our municipal bonds in 2008 because $5.5 million of these securities had experienced a credit
downgrade and the possibility of a potential downgrade of the insurers on the remaining bonds. The unrealized losses on our investment in municipal bonds at December 31, 2007 and December 31, 2006 were caused by increases in current market
interest rates. All of the municipal bonds were rated AA or better by S&P and/or Moody’s and insured. Prior to sale, we expected full repayment at maturity, and had the ability to hold these investments to maturity. Therefore, we did not
consider these investments to be other-than-temporarily impaired as of December 31, 2007 or December 31, 2006.
51
We continue to receive full interest payments on the trust preferred securities, and they have not been
downgraded. The cash flows indicate that the trust preferred securities are performing in accordance with their original contractual terms. We have had, and continue to have, the ability and intent to hold these securities to maturity, and we did
not consider these investments to be other-than-temporarily impaired as of September 30, 2008, December 31, 2007 or December 31, 2006.
At September 30, 2008, we had no investments in a single company or entity that had an aggregate book value in excess of 10% of our consolidated equity.
52
Portfolio Maturities and Yields.
The composition and maturities of the investment
securities portfolio at September 30, 2008 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. No tax-equivalent
adjustments have been made, as we did not hold any tax-free investment securities at September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
|
More than One Year
through Five Years
|
|
|
More than Five Years
through Ten Years
|
|
|
More than Ten Years
|
|
|
Total Securities
|
|
|
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
Weighted
Average
Yield
|
|
|
Amortized
Cost
|
|
Fair Value
|
|
Weighted
Average
Yield
|
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. government sponsored mortgage-backed securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fannie Mae
|
|
$
|
—
|
|
—
|
%
|
|
$
|
—
|
|
—
|
%
|
|
$
|
—
|
|
—
|
%
|
|
$
|
105,622
|
|
5.10
|
%
|
|
$
|
105,622
|
|
$
|
103,086
|
|
5.10
|
%
|
|
Freddie Mac
|
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
313,861
|
|
4.97
|
|
|
|
313,861
|
|
|
306,044
|
|
4.97
|
|
|
Collateralized mortgage obligations
|
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
29,284
|
|
4.40
|
|
|
|
65,965
|
|
5.00
|
|
|
|
95,249
|
|
|
94,667
|
|
4.81
|
|
|
Other
|
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
68
|
|
5.97
|
|
|
|
68
|
|
|
66
|
|
5.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total U.S. government sponsored mortgage-backed securities
|
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
29,284
|
|
4.40
|
|
|
|
485,516
|
|
5.00
|
|
|
|
514,800
|
|
|
503,863
|
|
4.97
|
|
|
Trust preferred securities
|
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
7,034
|
|
4.87
|
|
|
|
7,034
|
|
|
3,026
|
|
4.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
—
|
%
|
|
$
|
—
|
|
—
|
%
|
|
$
|
29,284
|
|
4.40
|
%
|
|
|
492,550
|
|
5.00
|
%
|
|
|
521,834
|
|
|
506,889
|
|
4.97
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Deposits.
We accept deposits primarily from the areas in which our offices are located. We
rely on our competitive pricing, convenient locations and customer service to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of passbook and statement
savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and Super NOW accounts. Historically, we have not accepted brokered deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based
primarily on current operating strategies and market interest rates, liquidity requirements and our deposit growth goals.
During the nine
months ended September 30, 2008, our deposits grew $17.9 million, or 2.0%. The increase was caused by our promoting higher than market rates for our passbook and statement savings accounts and our advertising certificates of deposit at market
rates. In 2007, our deposits decreased $89.0 million, or 9.1%, as we chose not to match the interest rates offered by some of our competitors on certificates of deposit.
At September 30, 2008, we had a total of $411.8 million in certificates of deposit, of which $392.8 million had remaining maturities of one year or less. Based on historical experience and our current pricing
strategy, we believe we will retain a large portion of these accounts upon maturity.
The following tables set forth the distribution of
our average total deposit accounts (including interest-bearing and non-interest bearing deposits), by account type, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30, 2008
|
|
|
For the Year Ended
December 31, 2007
|
|
|
|
|
Average
Balance
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
Average
Balance
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
|
|
(Dollars in thousands)
|
|
|
Deposit type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
13,101
|
|
1.4
|
%
|
|
—
|
%
|
|
$
|
12,319
|
|
1.4
|
%
|
|
—
|
%
|
|
Savings accounts
|
|
|
393,082
|
|
43.1
|
|
|
1.52
|
%
|
|
|
396,209
|
|
42.5
|
|
|
1.40
|
%
|
|
Certificates of deposit
|
|
|
401,846
|
|
44.1
|
|
|
3.23
|
%
|
|
|
422,173
|
|
45.3
|
|
|
4.32
|
%
|
|
Money market
|
|
|
82,514
|
|
9.1
|
|
|
0.06
|
%
|
|
|
80,283
|
|
8.6
|
|
|
0.07
|
%
|
|
Checking and Super NOW
|
|
|
20,773
|
|
2.3
|
|
|
0.06
|
%
|
|
|
20,799
|
|
2.2
|
|
|
0.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
911,316
|
|
100.0
|
%
|
|
|
|
|
$
|
931,783
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Average
Balance
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
Average
Balance
|
|
Percent
|
|
|
Weighted
Average
Rate
|
|
|
|
|
(Dollars in thousands)
|
|
|
Deposit type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest bearing
|
|
$
|
10,873
|
|
1.1
|
%
|
|
—
|
%
|
|
$
|
9,176
|
|
0.9
|
%
|
|
—
|
%
|
|
Savings accounts
|
|
|
520,476
|
|
53.2
|
|
|
1.55
|
%
|
|
|
810,764
|
|
80.0
|
|
|
1.74
|
%
|
|
Certificates of deposit
|
|
|
347,852
|
|
35.6
|
|
|
3.88
|
%
|
|
|
95,090
|
|
9.4
|
|
|
2.79
|
%
|
|
Money market
|
|
|
78,160
|
|
8.0
|
|
|
0.11
|
%
|
|
|
79,353
|
|
7.8
|
|
|
0.11
|
%
|
|
Checking and Super NOW
|
|
|
20,223
|
|
2.1
|
|
|
0.10
|
%
|
|
|
19,164
|
|
1.9
|
|
|
0.10
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
977,584
|
|
100.0
|
%
|
|
|
|
|
$
|
1,013,547
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54
The following table sets forth certificates of deposit classified by interest rate as of the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30,
2008
|
|
At December 31,
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(In thousands)
|
|
Interest Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 2.00%
|
|
$
|
33,170
|
|
$
|
—
|
|
$
|
193
|
|
$
|
1,287
|
|
2.00% to 2.99%
|
|
|
273,343
|
|
|
30,116
|
|
|
14,802
|
|
|
67,950
|
|
3.00% to 3.99%
|
|
|
74,834
|
|
|
81,918
|
|
|
50,119
|
|
|
130,924
|
|
4.00% to 4.99%
|
|
|
30,320
|
|
|
285,906
|
|
|
319,123
|
|
|
5,695
|
|
5.00% to 5.99%
|
|
|
100
|
|
|
100
|
|
|
34,049
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
411,767
|
|
$
|
398,040
|
|
$
|
418,286
|
|
$
|
205,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth, by interest rate ranges, information concerning our certificates
of deposit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008
|
|
|
|
|
Period to Maturity
|
|
|
|
|
Less Than or
Equal to
One Year
|
|
More Than
One to
Two Years
|
|
More Than
Two to
Three Years
|
|
More Than
Three Years
|
|
Total
|
|
Percent of
Total
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest Rate Range:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.99% and below
|
|
$
|
302,801
|
|
$
|
2,873
|
|
$
|
839
|
|
$
|
—
|
|
$
|
306,513
|
|
74.45
|
%
|
|
3.00% to 3.99%
|
|
|
61,406
|
|
|
9,251
|
|
|
632
|
|
|
3,545
|
|
|
74,834
|
|
18.17
|
|
|
4.00% to 4.99%
|
|
|
28,496
|
|
|
290
|
|
|
975
|
|
|
559
|
|
|
30,320
|
|
7.36
|
|
|
5.00% to 5.99%
|
|
|
100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
392,803
|
|
$
|
12,414
|
|
$
|
2,446
|
|
$
|
4,104
|
|
$
|
411,767
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, the aggregate amount of outstanding certificates of deposit in
amounts greater than or equal to $100,000 was approximately $188.4 million. The following table sets forth the maturity of those certificates as of September 30, 2008.
|
|
|
|
|
|
|
|
At
September 30, 2008
|
|
|
|
(In thousands)
|
|
Three months or less
|
|
$
|
125,629
|
|
Over three months through six months
|
|
|
33,492
|
|
Over six months through one year
|
|
|
23,382
|
|
Over one year to three years
|
|
|
4,099
|
|
Over three years
|
|
|
1,810
|
|
|
|
|
|
|
Total
|
|
$
|
188,412
|
|
|
|
|
|
Borrowings.
Our borrowings consist primarily of advances from the Federal Home Loan
Bank of Seattle and funds borrowed under repurchase agreements. At September 30, 2008, our repurchase agreements totaled $115.2 million, or 10.4% of total liabilities, and our Federal Home Loan Bank advances totaled $28.5 million, or 2.6%
of total liabilities. At September 30, 2008, we had access to additional Federal Home Loan Bank advances of up to $272.5 million.
55
During the nine months ended September 30, 2008, our borrowings grew $16.5 million, or 13.0%. The
increase was caused by our using borrowings, along with cash on hand and increased deposits, to fund an increase in the loan portfolio. In addition, during the first nine months of 2008 Federal Home Loan Bank advances decreased by $43.5 million
while we added $60.0 million of long-term, fixed-rate reverse repurchase agreements. The shift from Federal Home Loan Bank advances to longer-term reverse purchase agreements, along with our purchase of $18.2 million of shorter-duration
mortgage-backed securities, is part of our continued effort to reduce interest rate risk. See “Management of Market Risk.”
In 2007, our borrowings decreased $33.3 million, or 20.8%, as we used proceeds from the sale of loans and investment securities, and excess cash to reduce our balance of outstanding borrowings.
The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at the dates and for the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Nine Months
Ended September 30,
|
|
|
At or For the Years
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at end of period
|
|
$
|
28,504
|
|
|
$
|
97,308
|
|
|
$
|
72,000
|
|
|
$
|
100,000
|
|
|
$
|
100,317
|
|
|
Average balance during period
|
|
$
|
17,414
|
|
|
$
|
67,517
|
|
|
$
|
70,178
|
|
|
$
|
91,571
|
|
|
$
|
90,417
|
|
|
Maximum outstanding at any month end
|
|
$
|
43,875
|
|
|
$
|
127,659
|
|
|
$
|
127,659
|
|
|
$
|
114,820
|
|
|
$
|
119,315
|
|
|
Weighted average interest rate at end of period
|
|
|
1.49
|
%
|
|
|
5.50
|
%
|
|
|
4.62
|
%
|
|
|
5.33
|
%
|
|
|
3.29
|
%
|
|
Average interest rate during period
|
|
|
3.38
|
%
|
|
|
5.42
|
%
|
|
|
5.28
|
%
|
|
|
3.98
|
%
|
|
|
2.96
|
%
|
The following table sets forth information concerning balances and interest rates on our
repurchase agreements at the dates and for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Nine Months
Ended September 30,
|
|
|
At or For the Years
Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at end of period
|
|
$
|
115,200
|
|
|
$
|
43,300
|
|
|
$
|
55,200
|
|
|
$
|
60,545
|
|
|
$
|
—
|
|
|
Average balance during period
|
|
$
|
109,417
|
|
|
$
|
47,667
|
|
|
$
|
48,912
|
|
|
$
|
27,038
|
|
|
$
|
11,053
|
|
|
Maximum outstanding at any month end
|
|
$
|
123,200
|
|
|
$
|
61,422
|
|
|
$
|
61,422
|
|
|
$
|
63,304
|
|
|
$
|
41,212
|
|
|
Weighted average interest rate at end of period
|
|
|
3.95
|
%
|
|
|
4.90
|
%
|
|
|
4.85
|
%
|
|
|
5.35
|
%
|
|
|
—
|
%
|
|
Average interest rate during period
|
|
|
4.06
|
%
|
|
|
5.39
|
%
|
|
|
5.26
|
%
|
|
|
5.33
|
%
|
|
|
3.96
|
%
|
Equity.
At September 30, 2008, our equity was $99.1 million, an increase of
$6.6 million, or 7.1%, from $92.5 million at December 31, 2007. The increase resulted from net income of $6.5 million for the nine months ended September 30, 2008. In 2007, equity increased $5.7 million, or 6.5%, from $86.8 million at
December 31, 2006, resulting from net income of $5.8 million for the year ended December 31, 2007.
56
Average Balances and Yields
The following tables set forth average balance sheets, average yields and rates, and certain other information at and for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was
not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect
of net deferred costs, discounts and premiums that are amortized or accreted to interest income.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
September 30,
2008
|
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
Yield/ Rate
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
Yield/
Rate (1)
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
Yield/
Rate (1)
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
5.61
|
%
|
|
$
|
536,761
|
|
|
$
|
23,038
|
|
5.73
|
%
|
|
$
|
521,106
|
|
|
$
|
22,109
|
|
5.67
|
%
|
|
Multi-family residential
|
|
7.22
|
|
|
|
4,348
|
|
|
|
235
|
|
7.22
|
|
|
|
4,830
|
|
|
|
262
|
|
7.25
|
|
|
Construction, commercial and other
|
|
6.77
|
|
|
|
19,118
|
|
|
|
1,000
|
|
6.99
|
|
|
|
12,555
|
|
|
|
688
|
|
7.33
|
|
|
Home equity loans and lines of credit
|
|
6.89
|
|
|
|
28,640
|
|
|
|
1,500
|
|
7.00
|
|
|
|
15,981
|
|
|
|
861
|
|
7.20
|
|
|
Other loans
|
|
6.97
|
|
|
|
6,253
|
|
|
|
338
|
|
7.22
|
|
|
|
5,264
|
|
|
|
290
|
|
7.37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
5.73
|
|
|
|
595,120
|
|
|
|
26,111
|
|
5.86
|
|
|
|
559,736
|
|
|
|
24,210
|
|
5.78
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored mortgage-backed securities
|
|
4.97
|
|
|
|
520,095
|
|
|
|
19,085
|
|
4.90
|
|
|
|
567,015
|
|
|
|
20,933
|
|
4.94
|
|
|
Municipal bonds
|
|
—
|
|
|
|
4,008
|
|
|
|
112
|
|
3.73
|
|
|
|
10,545
|
|
|
|
294
|
|
3.73
|
|
|
Trust preferred securities
|
|
4.87
|
|
|
|
7,064
|
|
|
|
296
|
|
5.60
|
|
|
|
7,100
|
|
|
|
400
|
|
7.53
|
|
|
Other
|
|
—
|
|
|
|
613
|
|
|
|
9
|
|
1.96
|
|
|
|
201
|
|
|
|
8
|
|
5.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
4.97
|
|
|
|
531,780
|
|
|
|
19,502
|
|
4.90
|
|
|
|
584,861
|
|
|
|
21,635
|
|
4.95
|
|
|
Other
|
|
1.14
|
|
|
|
14,480
|
|
|
|
146
|
|
1.35
|
|
|
|
13,729
|
|
|
|
103
|
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
5.34
|
|
|
|
1,141,380
|
|
|
|
45,759
|
|
5.36
|
|
|
|
1,158,326
|
|
|
|
45,948
|
|
5.30
|
|
|
Non-interest-earning assets
|
|
|
|
|
|
58,210
|
|
|
|
|
|
|
|
|
|
47,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
$
|
1,199,590
|
|
|
|
|
|
|
|
|
$
|
1,205,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
1.50
|
%
|
|
$
|
393,082
|
|
|
|
4,483
|
|
1.52
|
%
|
|
$
|
404,649
|
|
|
$
|
4,224
|
|
1.40
|
%
|
|
Certificates of deposit
|
|
2.76
|
|
|
|
401,846
|
|
|
|
9,721
|
|
3.23
|
|
|
|
425,683
|
|
|
|
13,865
|
|
4.35
|
|
|
Money market accounts
|
|
0.06
|
|
|
|
82,514
|
|
|
|
37
|
|
0.06
|
|
|
|
80,823
|
|
|
|
46
|
|
0.08
|
|
|
Checking and Super NOW accounts
|
|
0.06
|
|
|
|
20,773
|
|
|
|
9
|
|
0.06
|
|
|
|
20,854
|
|
|
|
12
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
1.92
|
|
|
|
898,215
|
|
|
|
14,250
|
|
2.12
|
|
|
|
932,009
|
|
|
|
18,147
|
|
2.60
|
|
|
Federal Home Loan Bank advances
|
|
1.49
|
|
|
|
17,414
|
|
|
|
440
|
|
3.38
|
|
|
|
67,517
|
|
|
|
2,736
|
|
5.42
|
|
|
Other borrowings
|
|
4.43
|
|
|
|
135,511
|
|
|
|
4,636
|
|
4.57
|
|
|
|
72,792
|
|
|
|
3,587
|
|
6.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
2.24
|
|
|
|
1,051,140
|
|
|
|
19,326
|
|
2.46
|
|
|
|
1,072,318
|
|
|
|
24,470
|
|
3.05
|
|
|
Non-interest-bearing liabilities
|
|
|
|
|
|
52,056
|
|
|
|
|
|
|
|
|
|
42,998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
|
|
1,103,196
|
|
|
|
|
|
|
|
|
|
1,115,316
|
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
96,394
|
|
|
|
|
|
|
|
|
|
90,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
|
|
|
$
|
1,199,590
|
|
|
|
|
|
|
|
|
$
|
1,205,527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
|
|
|
$
|
26,433
|
|
|
|
|
|
|
|
|
$
|
21,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread (2)
|
|
3.10
|
%
|
|
|
|
|
|
|
|
|
2.90
|
%
|
|
|
|
|
|
|
|
|
2.25
|
%
|
|
Net interest-earning assets (3)
|
|
|
|
|
$
|
90,240
|
|
|
|
|
|
|
|
|
$
|
86,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
|
|
|
3.09
|
%
|
|
|
|
|
|
|
|
|
2.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average interest-earning assets to interest-bearing liabilities
|
|
|
|
|
|
108.58
|
%
|
|
|
|
|
|
|
|
|
108.02
|
%
|
|
|
|
|
|
|
(footnotes on following page)
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
Yield/
Rate
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
Yield/
Rate
|
|
|
Average
Outstanding
Balance
|
|
|
Interest
|
|
Yield/
Rate
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
521,348
|
|
|
$
|
29,524
|
|
5.66
|
%
|
|
$
|
504,557
|
|
|
$
|
28,095
|
|
5.57
|
%
|
|
$
|
477,814
|
|
|
$
|
26,482
|
|
5.54
|
%
|
|
Multi-family residential
|
|
|
4,746
|
|
|
|
343
|
|
7.23
|
|
|
|
5,112
|
|
|
|
370
|
|
7.24
|
|
|
|
5,686
|
|
|
|
402
|
|
7.07
|
|
|
Construction, commercial and other
|
|
|
12,946
|
|
|
|
952
|
|
7.35
|
|
|
|
9,563
|
|
|
|
688
|
|
7.19
|
|
|
|
9,049
|
|
|
|
646
|
|
7.14
|
|
|
Home equity loans and lines of credit
|
|
|
18,060
|
|
|
|
1,293
|
|
7.16
|
|
|
|
8,130
|
|
|
|
566
|
|
6.96
|
|
|
|
3,727
|
|
|
|
255
|
|
6.84
|
|
|
Other loans
|
|
|
5,472
|
|
|
|
402
|
|
7.35
|
|
|
|
4,078
|
|
|
|
287
|
|
7.04
|
|
|
|
3,039
|
|
|
|
198
|
|
6.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
562,572
|
|
|
|
32,514
|
|
5.78
|
|
|
|
531,440
|
|
|
|
30,006
|
|
5.65
|
|
|
|
499,315
|
|
|
|
27,983
|
|
5.60
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored mortgage-backed securities
|
|
|
556,629
|
|
|
|
27,356
|
|
4.91
|
|
|
|
633,206
|
|
|
|
31,352
|
|
4.95
|
|
|
|
674,112
|
|
|
|
32,982
|
|
4.89
|
|
|
Municipal bonds
|
|
|
10,544
|
|
|
|
392
|
|
3.72
|
|
|
|
10,554
|
|
|
|
393
|
|
3.72
|
|
|
|
4,288
|
|
|
|
157
|
|
3.66
|
|
|
Trust preferred securities
|
|
|
7,096
|
|
|
|
539
|
|
7.60
|
|
|
|
1,179
|
|
|
|
89
|
|
7.55
|
|
|
|
—
|
|
|
|
—
|
|
—
|
|
|
Other
|
|
|
150
|
|
|
|
13
|
|
8.67
|
|
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
574,419
|
|
|
|
28,300
|
|
4.93
|
|
|
|
644,939
|
|
|
|
31,834
|
|
4.94
|
|
|
|
678,400
|
|
|
|
33,139
|
|
4.88
|
|
|
Other
|
|
|
13,528
|
|
|
|
133
|
|
0.98
|
|
|
|
12,982
|
|
|
|
47
|
|
0.36
|
|
|
|
14,937
|
|
|
|
108
|
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
|
1,150,519
|
|
|
|
60,947
|
|
5.30
|
|
|
|
1,189,361
|
|
|
|
61,887
|
|
5.20
|
|
|
|
1,192,652
|
|
|
|
61,230
|
|
5.13
|
|
|
Non-interest-earning assets
|
|
|
47,400
|
|
|
|
|
|
|
|
|
|
45,864
|
|
|
|
|
|
|
|
|
|
49,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,197,919
|
|
|
|
|
|
|
|
|
$
|
1,235,225
|
|
|
|
|
|
|
|
|
$
|
1,242,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
396,209
|
|
|
$
|
5,546
|
|
1.40
|
%
|
|
$
|
520,476
|
|
|
$
|
8,088
|
|
1.55
|
%
|
|
$
|
810,764
|
|
|
$
|
14,071
|
|
1.74
|
%
|
|
Certificates of deposit
|
|
|
422,173
|
|
|
|
18,243
|
|
4.32
|
|
|
|
347,852
|
|
|
|
13,484
|
|
3.88
|
|
|
|
95,090
|
|
|
|
2,653
|
|
2.79
|
|
|
Money market accounts
|
|
|
80,283
|
|
|
|
60
|
|
0.07
|
|
|
|
78,160
|
|
|
|
85
|
|
0.11
|
|
|
|
79,353
|
|
|
|
89
|
|
0.11
|
|
|
Checking and Super NOW accounts
|
|
|
20,799
|
|
|
|
14
|
|
0.07
|
|
|
|
20,223
|
|
|
|
21
|
|
0.10
|
|
|
|
19,164
|
|
|
|
19
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
919,464
|
|
|
|
23,863
|
|
2.60
|
|
|
|
966,711
|
|
|
|
21,678
|
|
2.24
|
|
|
|
1,004,371
|
|
|
|
16,832
|
|
1.68
|
|
|
Federal Home Loan Bank advances
|
|
|
70,178
|
|
|
|
3,709
|
|
5.29
|
|
|
|
91,571
|
|
|
|
3,647
|
|
3.98
|
|
|
|
90,417
|
|
|
|
2,675
|
|
2.96
|
|
|
Other borrowings
|
|
|
74,051
|
|
|
|
4,796
|
|
6.48
|
|
|
|
51,398
|
|
|
|
3,511
|
|
6.83
|
|
|
|
35,197
|
|
|
|
2,335
|
|
6.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
|
1,063,693
|
|
|
|
32,368
|
|
3.04
|
|
|
|
1,109,680
|
|
|
|
28,836
|
|
2.60
|
|
|
|
1,129,985
|
|
|
|
21,842
|
|
1.93
|
|
|
Non-interest-bearing liabilities
|
|
|
43,379
|
|
|
|
|
|
|
|
|
|
39,207
|
|
|
|
|
|
|
|
|
|
38,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,107,072
|
|
|
|
|
|
|
|
|
|
1,148,887
|
|
|
|
|
|
|
|
|
|
1,168,178
|
|
|
|
|
|
|
|
|
Equity
|
|
|
90,847
|
|
|
|
|
|
|
|
|
|
86,338
|
|
|
|
|
|
|
|
|
|
74,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,197,919
|
|
|
|
|
|
|
|
|
$
|
1,235,225
|
|
|
|
|
|
|
|
|
$
|
1,242,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
28,579
|
|
|
|
|
|
|
|
|
$
|
33,051
|
|
|
|
|
|
|
|
|
$
|
39,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread (2)
|
|
|
|
|
|
|
|
|
2.25
|
%
|
|
|
|
|
|
|
|
|
2.60
|
%
|
|
|
|
|
|
|
|
|
3.20
|
%
|
|
Net interest-earning assets (3)
|
|
$
|
86,826
|
|
|
|
|
|
|
|
|
$
|
79,681
|
|
|
|
|
|
|
|
|
$
|
62,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin (4)
|
|
|
|
|
|
|
|
|
2.48
|
%
|
|
|
|
|
|
|
|
|
2.78
|
%
|
|
|
|
|
|
|
|
|
3.30
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average of interest-earning assets to interest-bearing liabilities
|
|
|
108.16
|
%
|
|
|
|
|
|
|
|
|
107.18
|
%
|
|
|
|
|
|
|
|
|
105.55
|
%
|
|
|
|
|
|
|
|
(1)
|
Yields and rates for the nine months ended September 30, 2008 and 2007 are annualized.
|
|
(2)
|
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
|
|
(3)
|
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
|
|
(4)
|
Net interest margin represents net interest income divided by average total interest-earning assets.
|
58
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate
multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the prior columns. For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
2008 vs.
2007
|
|
|
Years Ended December 31,
2007 vs. 2006
|
|
|
Years Ended December 31,
2006 vs. 2005
|
|
|
|
|
Increase (Decrease)
Due to
|
|
|
Total
Increase
(Decrease)
|
|
|
Increase (Decrease)
Due to
|
|
|
Total
Increase
(Decrease)
|
|
|
Increase (Decrease)
Due to
|
|
|
Total
Increase
(Decrease)
|
|
|
|
|
Volume
|
|
|
Rate
|
|
|
|
Volume
|
|
|
Rate
|
|
|
|
Volume
|
|
|
Rate
|
|
|
|
|
|
(In thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
670
|
|
|
$
|
259
|
|
|
$
|
929
|
|
|
$
|
945
|
|
|
$
|
484
|
|
|
$
|
1,429
|
|
|
$
|
1,489
|
|
|
$
|
124
|
|
|
$
|
1,613
|
|
|
Multi-family residential
|
|
|
(26
|
)
|
|
|
(1
|
)
|
|
|
(27
|
)
|
|
|
(26
|
)
|
|
|
(1
|
)
|
|
|
(27
|
)
|
|
|
(42
|
)
|
|
|
10
|
|
|
|
(32
|
)
|
|
Construction, commercial and other
|
|
|
342
|
|
|
|
(30
|
)
|
|
|
312
|
|
|
|
248
|
|
|
|
16
|
|
|
|
264
|
|
|
|
37
|
|
|
|
5
|
|
|
|
42
|
|
|
Home equity loans and lines of credit
|
|
|
662
|
|
|
|
(23
|
)
|
|
|
639
|
|
|
|
710
|
|
|
|
17
|
|
|
|
727
|
|
|
|
306
|
|
|
|
5
|
|
|
|
311
|
|
|
Other loans
|
|
|
53
|
|
|
|
(5
|
)
|
|
|
48
|
|
|
|
102
|
|
|
|
13
|
|
|
|
115
|
|
|
|
72
|
|
|
|
17
|
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
1,701
|
|
|
|
200
|
|
|
|
1,901
|
|
|
|
1,979
|
|
|
|
529
|
|
|
|
2,508
|
|
|
|
1,862
|
|
|
|
161
|
|
|
|
2,023
|
|
|
Investment securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government sponsored mortgage-backed securities
|
|
|
(1,722
|
)
|
|
|
(126
|
)
|
|
|
(1,848
|
)
|
|
|
(3,765
|
)
|
|
|
(231
|
)
|
|
|
(3,996
|
)
|
|
|
(2,031
|
)
|
|
|
401
|
|
|
|
(1,630
|
)
|
|
Municipal bonds
|
|
|
(183
|
)
|
|
|
1
|
|
|
|
(182
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
233
|
|
|
|
3
|
|
|
|
236
|
|
|
Trust preferred securities
|
|
|
(2
|
)
|
|
|
(102
|
)
|
|
|
(104
|
)
|
|
|
449
|
|
|
|
1
|
|
|
|
450
|
|
|
|
89
|
|
|
|
—
|
|
|
|
89
|
|
|
Other
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
|
|
13
|
|
|
|
—
|
|
|
|
13
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
|
(1,906
|
)
|
|
|
(227
|
)
|
|
|
(2,133
|
)
|
|
|
(3,303
|
)
|
|
|
(231
|
)
|
|
|
(3,534
|
)
|
|
|
(1,709
|
)
|
|
|
404
|
|
|
|
(1,305
|
)
|
|
Other
|
|
|
6
|
|
|
|
37
|
|
|
|
43
|
|
|
|
2
|
|
|
|
84
|
|
|
|
86
|
|
|
|
(13
|
)
|
|
|
(48
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-earning assets
|
|
$
|
(199
|
)
|
|
$
|
10
|
|
|
$
|
(189
|
)
|
|
$
|
(1,322
|
)
|
|
$
|
382
|
|
|
$
|
(940
|
)
|
|
$
|
140
|
|
|
$
|
517
|
|
|
$
|
657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
(116
|
)
|
|
$
|
375
|
|
|
$
|
259
|
|
|
$
|
(1,796
|
)
|
|
$
|
(746
|
)
|
|
$
|
(2,542
|
)
|
|
$
|
(4,630
|
)
|
|
$
|
(1,353
|
)
|
|
$
|
(5,983
|
)
|
|
Certificates of deposit
|
|
|
(741
|
)
|
|
|
(3,403
|
)
|
|
|
(4,144
|
)
|
|
|
3,096
|
|
|
|
1,663
|
|
|
|
4,759
|
|
|
|
9,447
|
|
|
|
1,384
|
|
|
|
10,831
|
|
|
Money market accounts
|
|
|
1
|
|
|
|
(10
|
)
|
|
|
(9
|
)
|
|
|
2
|
|
|
|
(27
|
)
|
|
|
(25
|
)
|
|
|
(1
|
)
|
|
|
(3
|
)
|
|
|
(4
|
)
|
|
Checking and Super NOW accounts
|
|
|
—
|
|
|
|
(3
|
)
|
|
|
(3
|
)
|
|
|
1
|
|
|
|
(8
|
)
|
|
|
(7
|
)
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing deposits
|
|
|
(856
|
)
|
|
|
(3,041
|
)
|
|
|
(3,897
|
)
|
|
|
1,303
|
|
|
|
882
|
|
|
|
2,185
|
|
|
|
4,817
|
|
|
|
29
|
|
|
|
4,846
|
|
|
Federal Home Loan Bank advances
|
|
|
(1,523
|
)
|
|
|
(773
|
)
|
|
|
(2,296
|
)
|
|
|
(155
|
)
|
|
|
217
|
|
|
|
62
|
|
|
|
35
|
|
|
|
937
|
|
|
|
972
|
|
|
Other borrowings
|
|
|
1,626
|
|
|
|
(577
|
)
|
|
|
1,049
|
|
|
|
1,456
|
|
|
|
(171
|
)
|
|
|
1,285
|
|
|
|
1,105
|
|
|
|
71
|
|
|
|
1,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities
|
|
$
|
(753
|
)
|
|
$
|
(4,391
|
)
|
|
$
|
(5,144
|
)
|
|
$
|
2,604
|
|
|
$
|
928
|
|
|
$
|
3,532
|
|
|
$
|
5,957
|
|
|
$
|
1,037
|
|
|
$
|
6,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income
|
|
$
|
554
|
|
|
$
|
4,401
|
|
|
$
|
4,955
|
|
|
$
|
(3,926
|
)
|
|
$
|
(546
|
)
|
|
$
|
(4,472
|
)
|
|
$
|
(5,817
|
)
|
|
$
|
(520
|
)
|
|
$
|
(6,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison of Operating Results for the Nine Months Ended September 30, 2008 and 2007
General.
Net income increased $1.6 million, or 33.3%, to $6.5 million for the nine months ended September 30, 2008 from $4.9 million
for the nine months ended September 30, 2007. The increase was primarily caused by a $5.0 million increase in net interest income, partially offset by a $2.0 million increase in non-interest expense and an increase in income taxes of $1.0
million.
59
Net Interest Income
.
Net interest income increased $5.0 million, or 23.1%, for the
nine months ended September 30, 2008, compared to the same period in the prior year. Interest expense decreased $5.1 million as declining market interest rates for certificates of deposits allowed us to reduce our deposit expense by $3.9
million. A $2.3 million decrease in interest expense on Federal Home Loan Bank advances was partially offset by an increase in expense on other borrowings (including debentures relating to trust preferred securities) of $1.0
million. Interest and dividend income decreased $189,000 as interest income on loans increased $1.9 million due to portfolio growth and interest income on investment securities declined by $2.1 million primarily due to a lower average balance
of securities. The interest rate spread and net interest margin were 2.90% and 3.09%, respectively, for the nine months ended September 30, 2008, compared to 2.25% and 2.48% for the same period in 2007. The improvement in the interest rate
spread was the result of a decrease in the average cost of interest-bearing liabilities of 59 basis points, and an increase in the average yield on interest-earning assets of six basis points.
Interest and Dividend Income.
Interest and dividend income decreased $189,000 to $45.8 million for the nine months ended
September 30, 2008 from $45.9 million for the nine months ended September 30, 2007. A decrease in interest income on investment securities offset an increase in interest income on loans. Interest income on securities decreased $2.1
million, or 9.9%, to $19.5 million for the nine months ended September 30, 2008 from $21.6 million for the nine months ended September 30, 2007, as our average balance of investment securities decreased $53.1 million, or 9.1%. In an effort
to manage interest rate risk, we sold $21.7 million of fixed-rate mortgage-backed securities in May 2007 and used the proceeds of the sales to repay borrowings. We sold these securities, which were classified as held to maturity, without
reclassifying the remainder of our mortgage-backed securities portfolio to available for sale, as permitted by the guidance in Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity
Securities.” The remaining reduction in our average securities portfolio was caused by principal repayments exceeding securities purchases. Interest income on loans increased $1.9 million, or 7.9%, to $26.1 million for the nine months ended
September 30, 2008 from $24.2 million for the nine months ended September 30, 2007, as our average balance of loans increased $35.4 million, or 6.3%. We were able to grow our loan portfolio despite our selling $43.0 million of 10-, 15- and
20-year fixed-rate residential mortgage loans in November 2007 as part of our efforts to manage interest rate risk. There were no material changes in the rates we earned on loans or investment securities between the periods.
Interest Expense.
Interest expense decreased $5.1 million, or 21.0%, to $19.3 million for the nine months ended
September 30, 2008 from $24.5 million for the nine months ended September 30, 2007. Interest expense on deposits decreased $3.9 million, or 21.5%, caused by a decrease in interest expense on certificates of deposit of $4.1 million, or
29.9%. We were able to maintain the significant majority of our certificates of deposit during a period of declining market interest rates, as the rates we paid on certificates of deposit decreased 112 basis points. In addition, interest expense on
Federal Home Loan Bank advances decreased $2.3 million, or 83.9%, offsetting an increase in interest expense on other borrowings (primarily reverse repurchase agreements) of $1.0 million, or 29.2%. We experienced this modest increase in interest
expense on other borrowings despite an increase in the average balance of such borrowings of $62.7 million, or 86.2%, as the rate we paid on other borrowings decreased 202 basis points during a period of declining market interest rates. We increased
our balances of reverse repurchase agreements to lengthen the term of our liabilities in an effort to reduce interest rate risk.
Provision for Loan Losses.
Based on our analysis of the factors described in “—Allowance for Loan Losses,” we recorded a provision for loan losses of $69,000 for the nine months ended September 30, 2008
60
and a provision for loan losses of $21,000 for the nine months ended September 30, 2007. We recorded net chargeoffs of $87,000 and $21,000 for the nine
moths ended September 30, 2008 and 2007, respectively. The provisions recorded resulted in ratios of the allowance for loan losses to total loans of 0.12% and 0.13% at September 30, 2008 and 2007, respectively. Non-accrual loans totaled
$4,000 and $106,000 at September 30, 2008 and 2007, respectively. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at September 30, 2008 and 2007.
Non-Interest Income.
The following table summarizes changes in non-interest income between the nine months ended September 30, 2008
and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Change
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
(In thousands)
|
|
|
Service fees on loan and deposit accounts
|
|
$
|
2,184
|
|
$
|
2,001
|
|
$
|
183
|
|
|
9.1
|
%
|
|
Income on bank-owned life insurance
|
|
|
783
|
|
|
701
|
|
|
82
|
|
|
11.7
|
|
|
Gain on sale of investment securities
|
|
|
145
|
|
|
731
|
|
|
(586
|
)
|
|
(80.2
|
)%
|
|
Other
|
|
|
485
|
|
|
407
|
|
|
78
|
|
|
19.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,597
|
|
$
|
3,840
|
|
$
|
(243
|
)
|
|
(6.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on sale of investment securities decreased due to the sale of $36.5 million of
mortgage-backed securities during the nine months ended September 30, 2007. The sale of investment securities was part of the restructuring of our balance sheet to manage interest rate risk, as described below in “—Management of
Market Risk.” We sold $9.7 million of available-for-sale mortgage-backed securities during the nine months ended September 30, 2008. There were no securities classified as available for sale at September 30, 2008 or 2007. Service fees
on loan and deposit accounts increased due primarily to an increase in return item fees and in commissions earned on the sale of tax-deferred annuities.
Non-Interest Expense.
The following table summarizes changes in non-interest expense between the nine months ended September 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
Change
|
|
|
|
|
2008
|
|
2007
|
|
$ Change
|
|
% Change
|
|
|
|
|
(In thousands)
|
|
|
Salaries and employee benefits
|
|
$
|
11,363
|
|
$
|
10,439
|
|
$
|
924
|
|
8.9
|
%
|
|
Occupancy
|
|
|
3,191
|
|
|
2,958
|
|
|
233
|
|
7.9
|
%
|
|
Equipment
|
|
|
2,118
|
|
|
2,105
|
|
|
13
|
|
0.6
|
%
|
|
Federal deposit insurance premiums
|
|
|
813
|
|
|
95
|
|
|
718
|
|
755.8
|
%
|
|
Other
|
|
|
2,392
|
|
|
2,252
|
|
|
140
|
|
6.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,877
|
|
$
|
17,849
|
|
$
|
2,028
|
|
11.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits expense increased primarily as we have accrued for higher cash
bonuses under our Executive Incentive Compensation Plan (which plan is described in “Management—Executive Officer Compensation—Executive Incentive Compensation Plan”) and for other senior executive officers, and because of a
bank-wide budgeted salary increase of approximately 3.5%. Federal deposit insurance premiums increased due to higher insurance rates in 2008 and a one-time credit of $363,000 that we applied in 2007 resulting from the Federal Deposit Insurance
Reform Act of 2005.
61
Income Tax Expense.
Income taxes were $3.6 million for the nine months ended
September 30, 2008, reflecting an effective tax rate of 35.3% compared to $2.6 million for the nine months ended September 30, 2007, reflecting an effective tax rate of 34.3%. Our effective tax rate is below the expected statutory tax rate
because of the benefits derived from income from bank-owned life insurance and municipal securities, each of which is tax-free for federal and state tax purposes.
Comparison of Operating Results for the Years Ended December 31, 2007, 2006 and 2005
General.
Net income decreased $1.9 million, or 25.2%, to $5.8 million for the year ended December 31, 2007 from $7.7 million for the year ended December 31, 2006. The decrease was primarily caused by a $4.5
million decrease in net interest income offset by a $1.1 million decrease in non-interest expense and a decrease of $1.6 million in income taxes.
Net income decreased $5.3 million, or 40.5%, to $7.7 million for the year ended December 31, 2006 from $13.0 million for the year ended December 31, 2005. The decrease was primarily caused by a $6.3 million decrease in net
interest income and a $2.4 million increase in non-interest expense, offset by a decrease in income taxes of $3.7 million.
Net
Interest Income.
Net interest income decreased $4.5 million, or 13.5%, for the year ended December 31, 2007, compared to the prior year. Interest expense increased $3.5 million as expense on deposits increased $2.2 million during a
period of rising interest rates, and interest expense on other borrowings (primarily reverse repurchase agreements) increased $1.3 million due to increased balances. Interest and dividend income decreased $940,000 in 2007 due primarily to a
$3.5 million decrease in interest income on investment securities resulting from a $70.5 million decrease in the average balance of securities, offset by an increase of $2.5 million in interest income on loans due to portfolio growth. The interest
rate spread and net interest margin were 2.25% and 2.48%, respectively, for 2007, compared to 2.60% and 2.78% for 2006. The decline in the interest rate spread was the result of an increase in the average cost of interest-bearing liabilities of 44
basis points, offset by an increase in the average yield on interest-earning assets of ten basis points.
Net interest income decreased
$6.3 million, or 16.1%, for the year ended December 31, 2006, compared to the prior year. Interest expense increased $7.0 million as expense on deposits increased $4.8 million during a period of rising interest rates, and interest expense
on borrowings increased $2.1 million due to increased rates on Federal Home Loan Bank advances and increased balances of other borrowings. Interest and dividend income increased $657,000 in 2006 as a $2.0 million increase in interest income on
loans due to portfolio growth was offset by a $1.3 million decrease in interest income on investment securities. The interest rate spread and net interest margin were 2.60% and 2.78%, respectively, for 2006, compared to 3.20% and 3.30% for
2005. The decline in the interest rate spread was the result of an increase in the average cost of interest-bearing liabilities of 67 basis points, offset by an increase in the average yield on interest-earning assets of seven basis points.
Interest and Dividend Income.
Interest and dividend income decreased $940,000, or 1.5%, to $60.9 million for the year ended
December 31, 2007 from $61.9 million for the year ended December 31, 2006. A decrease in interest income on investment securities offset an increase in interest income on loans. Interest income on securities decreased $3.5 million, or
11.1%, to $28.3 million for the year ended December 31, 2007 from $31.8 million for the year ended December 31, 2006, as our average balance of investment securities decreased $70.5 million, or 10.9%. In an effort to manage interest rate
risk, we sold $21.7 million of fixed-rate mortgage-backed securities in May 2007 and used the proceeds of the sales to repay borrowings. We sold these securities, which were classified as held to maturity, without
62
reclassifying the remainder of our mortgage-backed securities portfolio to available for sale, as permitted by the guidance in Statement of Financial
Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The remaining reduction in our average securities portfolio was caused by principal repayments exceeding securities purchases. Interest
income on loans increased $2.5 million, or 8.4%, to $32.5 million for the year ended December 31, 2007 from $30.0 million for the year ended December 31, 2006, as our average balance of loans increased $31.1 million, or 5.9%. We were able
to grow our loan portfolio despite our selling $43.0 million of 10-, 15- and 20-year fixed-rate residential mortgage loans in November 2007 as part of our efforts to manage interest rate risk. There were no material changes in the rates we earned on
loans or investment securities between the years.
Interest and dividend income increased $657,000, or 1.1%, to $61.9 million for the year
ended December 31, 2006 from $61.2 million for the year ended December 31, 2005. An increase in interest income on loans offset a decrease in interest income on investment securities. Interest income on loans increased $2.0 million, or
7.2%, to $30.0 million for the year ended December 31, 2006 from $28.0 million for the year ended December 31, 2005, as our average balance of loans increased $32.1 million, or 6.4%. Except for multi-family residential mortgage loans, we
were able to grow the balances of all loan categories during 2006. Interest income on securities decreased $1.3 million, or 3.9%, to $31.8 million for the year ended December 31, 2006 from $33.1 million for the year ended December 31,
2005, as our average balance of investment securities decreased $33.5 million, or 4.9%. The decrease was caused primarily by principal repayments exceeding securities purchases.
There were no material changes in the rates we earned on loans
or investment securities between the years.
Interest Expense.
Interest expense increased $3.5 million, or
12.2%, to $32.4 million for the year ended December 31, 2007 from $28.8 million for the year ended December 31, 2006. Interest expense on deposits increased $2.2 million, or 10.1%. The rates we paid on interest-bearing deposits increased
36 basis points during a period of rising interest rates, offsetting a decrease in the average balance of deposits between the years. In addition, interest expense on other borrowings (primarily reverse repurchase agreements and debentures related
to trust preferred securities) increased $1.3 million, or 36.6%, as we increased our balances of reverse repurchase agreements by lengthening the term of our liabilities in an effort to reduce interest rate risk.
Interest expense increased $7.0 million, or 32.0%, to $28.8 million for the year ended December 31, 2006 from $21.8 million for the year ended
December 31, 2005. Interest expense on deposits increased $4.8 million, or 28.8%. The rates we paid on interest-bearing deposits increased 56 basis points during a period of rising interest rates, offsetting a decrease in the average balance of
deposits between the years. In addition, interest expense on total borrowings increased $2.1 million, or 42.9%, as we increased our balances of reverse repurchase agreements (which provided lower interest rates than Federal Home Loan Bank advances
available at that time) and as the rates we paid on borrowings increased between the years.
Provision for Loan Losses.
Based
on our analysis of the factors described in “—Allowance for Loan Losses,” we recorded a provision for loan losses of $25,000 for the year ended December 31, 2007, compared to a provision for loan losses of $6,000 for the year
ended December 31, 2006 and a reversal of allowance of $15,000 for the year ended December 31, 2005. We recorded net chargeoffs of $25,000 and $8,000 for the years ended December 31, 2007 and 2006, compared to a net recovery of
$35,000 for the year ended December 31, 2005. The provisions/reversal recorded resulted in ratios of the allowance for loan losses to total loans of 0.14%, 0.14% and 0.15% at December 31, 2007, 2006 and 2005, respectively. Non-accrual
loans totaled $106,000, $593,000 and $108,000 at December 31, 2007, 2006 and 2005, respectively. To the best of our knowledge, we have provided for all losses that are both probable and reasonable to estimate at December 31, 2007, 2006 and
2005.
63
Non-Interest Income.
The following table summarizes changes in non-interest income between
the years ended December 31, 2007, 2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Change 2007/2006
|
|
|
Change 2006/2005
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
(In thousands)
|
|
|
Service fees on loan and deposit accounts
|
|
$
|
2,729
|
|
|
$
|
2,681
|
|
|
$
|
2,244
|
|
|
$
|
48
|
|
|
1.8
|
%
|
|
$
|
437
|
|
|
19.5
|
%
|
|
Income on bank-owned life insurance
|
|
|
942
|
|
|
|
726
|
|
|
|
713
|
|
|
|
216
|
|
|
29.8
|
%
|
|
|
13
|
|
|
1.8
|
%
|
|
Gain on sale of investment securities
|
|
|
731
|
|
|
|
30
|
|
|
|
542
|
|
|
|
701
|
|
|
2,336.7
|
%
|
|
|
(512
|
)
|
|
(94.5
|
)%
|
|
Loss on sale of loans
|
|
|
(1,062
|
)
|
|
|
(20
|
)
|
|
|
(11
|
)
|
|
|
(1,042
|
)
|
|
(5,210.0
|
)%
|
|
|
(9
|
)
|
|
(81.8
|
)%
|
|
Other
|
|
|
536
|
|
|
|
596
|
|
|
|
655
|
|
|
|
(60
|
)
|
|
(10.1
|
)%
|
|
|
(59
|
)
|
|
(9.0
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,876
|
|
|
$
|
4,013
|
|
|
$
|
4,143
|
|
|
$
|
(137
|
)
|
|
(3.4
|
)%
|
|
$
|
(130
|
)
|
|
(3.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2007, we experienced significant gains on the sale of investment securities and losses on
the sale of loans as we sold investment securities and loans as part of the restructuring of our balance sheet to manage interest rate risk, as described below in “—Management of Market Risk.”
Non-Interest Expense.
The following table summarizes changes in non-interest expense between the years ended December 31, 2007, 2006
and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Years Ended December 31,
|
|
Change 2007/2006
|
|
|
Change 2006/2005
|
|
|
|
|
2007
|
|
2006
|
|
2005
|
|
$ Change
|
|
|
% Change
|
|
|
$ Change
|
|
|
% Change
|
|
|
|
|
(In thousands)
|
|
|
Salaries and employee benefits
|
|
$
|
13,447
|
|
$
|
15,526
|
|
$
|
13,653
|
|
$
|
(2,079
|
)
|
|
(13.4
|
)%
|
|
$
|
1,873
|
|
|
13.7
|
%
|
|
Occupancy
|
|
|
3,990
|
|
|
3,758
|
|
|
3,313
|
|
|
232
|
|
|
6.2
|
%
|
|
|
445
|
|
|
13.4
|
%
|
|
Equipment
|
|
|
2,858
|
|
|
2,414
|
|
|
2,345
|
|
|
444
|
|
|
18.4
|
%
|
|
|
69
|
|
|
2.9
|
%
|
|
Federal deposit insurance premiums
|
|
|
548
|
|
|
130
|
|
|
141
|
|
|
418
|
|
|
321.5
|
%
|
|
|
(11
|
)
|
|
(7.8
|
)%
|
|
Other
|
|
|
3,204
|
|
|
3,272
|
|
|
3,214
|
|
|
(68
|
)
|
|
(2.1
|
)%
|
|
|
58
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,047
|
|
$
|
25,100
|
|
$
|
22,666
|
|
$
|
(1,053
|
)
|
|
(4.2
|
)%
|
|
$
|
2,434
|
|
|
10.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits expense decreased between 2007 and 2006 as we paid lower cash
bonuses under our Executive Incentive Compensation Plan (which plan is described in “Management—Executive Officer Compensation—Executive Incentive Compensation Plan”) and as we reduced executive compensation following a
comprehensive review of peer group executive compensation. Salaries and employee benefits expense increased between 2006 and 2005 due to normal salary increases, increased compensation for loan agents, and increased retirement plan and other benefit
plan expenses.
Income Tax Expense.
Income taxes were $2.6 million for 2007, reflecting an effective tax rate of 31.2%
compared to $4.2 million for 2006, reflecting an effective tax rate of 35.5%, and $7.9 million for 2005, reflecting an effective tax rate of 37.9%. The decline in our effective tax rate was primarily attributable to the benefits derived from income
from bank-owned life insurance and municipal securities, each of which is tax-free for federal and state tax purposes.
64
Non-performing and Problem Assets
When a residential mortgage loan or home equity line of credit is 15 days past due, we attempt
personal, direct contact with the borrower to determine when payment will be made. On the first day of the following month, we mail a letter reminding the borrower of the delinquency, and will send an additional letter when a loan is 60 days or more
past due. If necessary, subsequent late charges are issued and the account will be monitored on a regular basis thereafter. By the 75
th
day of
delinquency, unless the borrower has made arrangements to bring the loan current on its payments, we will refer the loan to legal counsel to commence foreclosure proceedings. Upon the recommendation of our Vice President of Mortgage Loan Servicing,
our Senior Vice President of Special Credits can shorten these time frames.
Commercial business loans, commercial real estate loans and
consumer loans are generally handled in the same manner as residential mortgage loans or home equity lines of credit. All commercial business loans that are 15 days past due are immediately referred to our senior lending officer. In addition, we
generate past due notices and attempt direct contact with a borrower when a consumer loan is 10 days past due. Because of the nature of the collateral securing consumer loans, we may commence collection procedures faster for consumer loans than for
residential mortgage loans or home equity lines of credit.
Generally, loans are placed on non-accrual status when payment of principal or
interest is more than 90 days delinquent unless the loan is considered well-secured and in the process of collection. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on a
non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current and full payment of
principal and interest is expected.
65
Non-Performing Assets.
The table below sets forth the amounts and categories of our
non-performing assets at the dates indicated. At September 30, 2008 and December 31, 2007, 2006, 2005, 2004 and 2003, we had troubled debt restructurings (loans for which a portion of interest or principal has been forgiven and loans
modified at interest rates less than current market rates) of $0, $0, $0, $0, $0 and $28,000, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
2008
|
|
|
At December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Dollars in thousands)
|
|
|
Non-accrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
—
|
|
|
$
|
99
|
|
|
$
|
561
|
|
|
$
|
104
|
|
|
$
|
—
|
|
|
$
|
261
|
|
|
Multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Construction, commercial and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Home equity loans and lines of credit
|
|
|
|
|
|
|
—
|
|
|
|
32
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other loans
|
|
|
4
|
|
|
|
7
|
|
|
|
—
|
|
|
|
4
|
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accrual loans
|
|
|
4
|
|
|
|
106
|
|
|
|
593
|
|
|
|
108
|
|
|
|
1
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans delinquent 90 days or greater and still accruing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Construction, commercial and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Home equity loans and lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans delinquent 90 days or greater and still accruing
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
|
|
4
|
|
|
|
106
|
|
|
|
593
|
|
|
|
108
|
|
|
|
1
|
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate owned:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Construction, commercial and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Home equity loans and lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other loans
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing assets
|
|
$
|
4
|
|
|
$
|
106
|
|
|
$
|
593
|
|
|
$
|
108
|
|
|
$
|
1
|
|
|
$
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-performing loans to total loans
|
|
|
0.00
|
%
|
|
|
0.02
|
%
|
|
|
0.11
|
%
|
|
|
0.02
|
%
|
|
|
0.00
|
%
|
|
|
0.06
|
%
|
|
Non-performing assets to total assets
|
|
|
0.00
|
|
|
|
0.01
|
|
|
|
0.05
|
|
|
|
0.01
|
|
|
|
0.00
|
|
|
|
0.03
|
|
For the nine months ended September 30, 2008 and for the year ended December 31, 2007,
gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $0 and $11,000, respectively. We did not recognize any interest income on such non-accruing loans on a cash basis
during those periods.
66
Delinquent Loans
. The following table sets forth our loan delinquencies by type and by
amount at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Delinquent For
|
|
Total
|
|
|
|
60-89 Days
|
|
90 Days and Over
|
|
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
At September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
Multi-family residential
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Construction, commercial and other
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Other loans
|
|
3
|
|
|
5
|
|
1
|
|
|
4
|
|
4
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
3
|
|
$
|
5
|
|
1
|
|
$
|
4
|
|
4
|
|
$
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
—
|
|
$
|
—
|
|
1
|
|
$
|
99
|
|
1
|
|
$
|
99
|
|
Multi-family residential
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Construction, commercial and other
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
1
|
|
|
55
|
|
—
|
|
|
—
|
|
1
|
|
|
55
|
|
Other loans
|
|
3
|
|
|
4
|
|
2
|
|
|
7
|
|
5
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
4
|
|
$
|
59
|
|
3
|
|
$
|
106
|
|
7
|
|
$
|
165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
1
|
|
$
|
99
|
|
2
|
|
$
|
561
|
|
3
|
|
$
|
660
|
|
Multi-family residential
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Construction, commercial and other
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
—
|
|
|
—
|
|
1
|
|
|
32
|
|
1
|
|
|
32
|
|
Other loans
|
|
1
|
|
|
3
|
|
—
|
|
|
—
|
|
1
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
2
|
|
$
|
102
|
|
3
|
|
$
|
593
|
|
5
|
|
$
|
695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
—
|
|
$
|
—
|
|
1
|
|
$
|
104
|
|
1
|
|
$
|
104
|
|
Multi-family residential
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Construction, commercial and other
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Other loans
|
|
3
|
|
|
8
|
|
2
|
|
|
4
|
|
5
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
3
|
|
$
|
8
|
|
3
|
|
$
|
108
|
|
6
|
|
$
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Delinquent For
|
|
Total
|
|
|
|
60-89 Days
|
|
90 Days and Over
|
|
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
At December 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
Multi-family residential
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Construction, commercial and other
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Other loans
|
|
3
|
|
|
4
|
|
1
|
|
|
1
|
|
4
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
3
|
|
$
|
4
|
|
1
|
|
$
|
1
|
|
4
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
1
|
|
$
|
182
|
|
1
|
|
$
|
261
|
|
2
|
|
$
|
443
|
|
Multi-family residential
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Construction, commercial and other
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Home equity loans and lines of credit
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
Other loans
|
|
1
|
|
|
1
|
|
1
|
|
|
—
|
|
2
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
2
|
|
$
|
183
|
|
2
|
|
$
|
261
|
|
4
|
|
$
|
444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real Estate Owned
. Real estate acquired by us as a result of foreclosure or by deed
in lieu of foreclosure is classified as real estate owned. When property is acquired it is recorded at the lower of cost or estimated fair market value at the date of foreclosure, establishing a new cost basis. Estimated fair value generally
represents the sale price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions, less the estimated costs to sell the property. Holding costs and declines in estimated
fair market value result in charges to expense after acquisition. At September 30, 2008 and December 31, 2007, 2006, 2005, 2004 and 2003, we had no real estate owned.
Classification of Assets.
Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets
that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if
any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified
substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets)
classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but
which possess potential weaknesses that deserve our close attention, are required to be designated as special mention. As of September 30, 2008, we had no assets designated as special mention.
The allowance for loan losses is the amount estimated by management as necessary to absorb credit losses incurred in the loan portfolio that are both
probable and reasonably estimable at the balance sheet date. Our determination as to the classification of our assets and the amount of our loss allowances is subject to review by our principal federal regulator, the Office of Thrift Supervision,
which can require
68
that we establish additional loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance
with applicable regulations. On the basis of our review of our assets at September 30, 2008, classified assets consisted of substandard assets of $3,800, no doubtful assets and no loss assets. The classified assets total at September 30,
2008 includes $3,700 of nonperforming loans.
Allowance for Loan Losses
We provide for loan losses based upon the consistent application of our documented allowance for loan loss methodology. All loan losses are charged to the
allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses.
We regularly review the loan portfolio and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with GAAP. The allowance for loan losses consists primarily of two components:
|
|
(1)
|
specific allowances established for impaired loans (generally defined as loans delinquent 90 days or greater). The amount of impairment provided for as a specific allowance is
represented by the deficiency, if any, between the estimated fair value of the loan, or the loan’s observable market price, if any, or the underlying collateral, if the loan is collateral dependent, and the carrying value of the loan. Impaired
loans for which the estimated fair value of the loan, or the loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in
establishing specific allowances for loan losses; and
|
|
|
(2)
|
general allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired. The portfolio is grouped into similar risk
characteristics, primarily loan type, loan-to-value, if collateral dependent, and delinquency status. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for the
environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions. Actual loan losses
may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.
|
The adjustments to historical loss experience are based on our evaluation of several qualitative and environmental factors, including:
|
|
•
|
|
changes in lending policies and procedures, including changes in underwriting standards and collections, chargeoff and recovery practices;
|
|
|
•
|
|
changes in international, national, and local economic trends;
|
|
|
•
|
|
changes in the types of loans in the loan portfolio;
|
|
|
•
|
|
changes in the experience and ability of personnel in the mortgage loan origination and loan servicing departments;
|
|
|
•
|
|
changes in the number and amount of delinquent loans and classified assets;
|
69
|
|
•
|
|
changes in the type and volume of loans being originated;
|
|
|
•
|
|
changes in the value of underlying collateral for collateral dependent loans;
|
|
|
•
|
|
changes in any concentration of credit; and
|
|
|
•
|
|
external factors such as competition, legal and regulatory requirements on the level of estimated credit losses in the existing loan portfolio.
|
In addition, if we have a limited loss experience for any segment of our portfolio, we may utilize the loan loss experience of other
financial institutions in the State of Hawaii. The unallocated allowance is established to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.
We evaluate the allowance for loan losses based upon the combined total of the specific and general components. Generally when the loan portfolio
increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors,
the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.
Commercial real estate loans generally have greater credit risks compared to one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers.
In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and
in the general economy.
Construction loans generally have greater credit risk than traditional one- to four-family residential mortgage
loans. The repayment of these loans depends upon the sale of the property to third parties or the availability of permanent financing upon completion of all improvements. In the event we make a loan on property that is not yet approved for the
planned development, there is the risk that approvals will not be granted or will be delayed. These events may adversely affect the borrower and the collateral value of the property. Construction loans also expose us to the risk that improvements
will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated. An increase in the balances or concentration of these loans generally results
in an increase to our allowance for loan losses.
We evaluate the loan portfolio on a quarterly basis and the allowance is adjusted
accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral
part of their examination process, the Office of Thrift Supervision will periodically review the allowance for loan losses. The Office of Thrift Supervision may require us to recognize additions to the allowance based on their analysis of
information available to them at the time of their examination.
70
The following table sets forth activity in our allowance for loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the
Nine Months Ended
September 30,
|
|
|
At or For the Years Ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
(Dollars in thousands)
|
|
|
Balance at beginning of period
|
|
$
|
768
|
|
|
$
|
768
|
|
|
$
|
768
|
|
|
$
|
770
|
|
|
$
|
750
|
|
|
$
|
743
|
|
|
$
|
801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
One- to four-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Construction, commercial and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Home equity loans and lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other loans
|
|
|
90
|
|
|
|
23
|
|
|
|
27
|
|
|
|
10
|
|
|
|
10
|
|
|
|
271
|
|
|
|
94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
90
|
|
|
|
23
|
|
|
|
27
|
|
|
|
10
|
|
|
|
10
|
|
|
|
271
|
|
|
|
94
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Multi-family residential
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Construction, commercial and other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Home equity loans and lines of credit
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Other loans
|
|
|
3
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
45
|
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
3
|
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
45
|
|
|
|
1
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Net (charge-offs) recoveries
|
|
|
(87
|
)
|
|
|
(21
|
)
|
|
|
(25
|
)
|
|
|
(8
|
)
|
|
|
35
|
|
|
|
(270
|
)
|
|
|
(94
|
)
|
|
Provision (recovery to allowance) for loan losses
|
|
|
69
|
|
|
|
21
|
|
|
|
25
|
|
|
|
6
|
|
|
|
(15
|
)
|
|
|
277
|
|
|
|
36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
750
|
|
|
$
|
768
|
|
|
$
|
768
|
|
|
$
|
768
|
|
|
$
|
770
|
|
|
$
|
750
|
|
|
$
|
743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs (recoveries) to average loans outstanding (annualized)
|
|
|
0.02
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
(0.01
|
%)
|
|
|
0.06
|
%
|
|
|
0.03
|
%
|
|
Allowance for loan losses to non-performing loans at end of period
|
|
|
18,750.00
|
%
|
|
|
685.71
|
%
|
|
|
724.53
|
%
|
|
|
129.51
|
%
|
|
|
712.96
|
%
|
|
|
75,000.00
|
%
|
|
|
284.67
|
%
|
|
Allowance for loan losses to total loans at end of period
|
|
|
0.12
|
%
|
|
|
0.13
|
%
|
|
|
0.14
|
%
|
|
|
0.14
|
%
|
|
|
0.15
|
%
|
|
|
0.16
|
%
|
|
|
0.18
|
%
|
Allocation of Allowance for Loan Losses.
The following tables set forth the
allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any
particular category and does not restrict the use of the allowance to absorb losses in other categories. We have reduced the amount of the unallocated portion of the allowance for loan losses in recent years as a result of refinements to our
allowance for loan loss methodology.
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
2008
|
|
|
At December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Allowance for
Loan Losses
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
Allowance for
Loan Losses
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
Allowance for
Loan Losses
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
|
|
(Dollars in thousands)
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
19
|
|
90.51
|
%
|
|
$
|
17
|
|
90.21
|
%
|
|
$
|
17
|
|
93.26
|
%
|
|
Multi-family residential
|
|
|
—
|
|
0.59
|
|
|
|
—
|
|
0.80
|
|
|
|
—
|
|
0.90
|
|
|
Construction, commercial and other
|
|
|
164
|
|
3.32
|
|
|
|
169
|
|
3.04
|
|
|
|
109
|
|
2.67
|
|
|
Home equity loans and lines of credit
|
|
|
260
|
|
4.72
|
|
|
|
260
|
|
4.78
|
|
|
|
221
|
|
2.30
|
|
|
Other loans
|
|
|
186
|
|
0.86
|
|
|
|
238
|
|
1.17
|
|
|
|
174
|
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allocated allowance
|
|
|
629
|
|
100.00
|
|
|
|
684
|
|
100.00
|
|
|
|
521
|
|
100.00
|
|
|
Unallocated
|
|
|
121
|
|
—
|
|
|
|
84
|
|
—
|
|
|
|
247
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
750
|
|
100.00
|
%
|
|
$
|
768
|
|
100.00
|
%
|
|
$
|
768
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Allowance for
Loan Losses
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
Allowance for
Loan Losses
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
Allowance for
Loan Losses
|
|
Percent of
Loans in Each
Category to
Total Loans
|
|
|
|
|
(Dollars in thousands)
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First mortgage:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential
|
|
$
|
17
|
|
95.69
|
%
|
|
$
|
15
|
|
95.43
|
%
|
|
$
|
13
|
|
95.50
|
%
|
|
Multi-family residential
|
|
|
—
|
|
0.91
|
|
|
|
—
|
|
1.36
|
|
|
|
—
|
|
1.09
|
|
|
Construction, commercial and other
|
|
|
114
|
|
1.65
|
|
|
|
145
|
|
2.18
|
|
|
|
141
|
|
2.58
|
|
|
Home equity loans and lines of credit
|
|
|
134
|
|
1.13
|
|
|
|
45
|
|
0.45
|
|
|
|
27
|
|
0.39
|
|
|
Other loans
|
|
|
124
|
|
0.62
|
|
|
|
109
|
|
0.58
|
|
|
|
72
|
|
0.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allocated allowance
|
|
|
389
|
|
100.00
|
|
|
|
314
|
|
100.00
|
|
|
|
253
|
|
100.00
|
|
|
Unallocated
|
|
|
381
|
|
—
|
|
|
|
436
|
|
—
|
|
|
|
490
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
770
|
|
100.00
|
%
|
|
$
|
750
|
|
100.00
|
%
|
|
$
|
743
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management of Market Risk
General
. Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates.
Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our net interest income to changes in market interest rates. Our Board of Directors has established an Asset/Liability Management Committee,
which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our business strategy, operating environment, capital, liquidity and performance
objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors.
Because we have historically
operated as a traditional thrift institution, the significant majority of our assets consist of long-term, fixed rate residential mortgage loans and mortgage backed securities, which we have funded primarily with checking and savings accounts and
short-term borrowings. In addition, there is little demand for adjustable rate mortgage loans in the Hawaii market area. This has resulted in our being particularly vulnerable to increases in interest rates, as our interest-bearing liabilities
mature or reprice more quickly than our interest-earning assets. As a result, our net interest rate spread
72
(the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities) to decrease to 2.25% for the year
ended December 31, 2007 from 2.60% for the year ended December 31, 2006 and 3.20% for the year ended December 31, 2005. This has resulted in a corresponding decrease in net interest income (the difference between interest income and
interest expense) to $28.6 million for the year ended December 31, 2007 from $33.1 million for the year ended December 31, 2006 and $39.4 million for the year ended December 31, 2005. However, during the nine months ended September
2008, our net interest income increased $5.0 million over the same period in 2007 as interest rates have decreased.
In 2007, our Board of
Directors adopted an Interest Rate Risk Reduction Plan to assist us in reversing this trend and the negative effect on our net income. We hired an outside third-party consultant to assist us in formulating strategies to restructure our balance sheet
and reduce our interest rate risk. Following our review of the consultant’s suggestions, we have implemented the following strategies to manage our interest rate risk:
|
|
•
|
|
Selling $43.0 million of 10-, 15- and 20-year fixed-rate mortgage loans in November 2007 and using the net proceeds of the loan sales to repay short-term
borrowings;
|
|
|
•
|
|
Extending the maturity of our liabilities by obtaining $55.2 million of long-term, fixed-rate reverse repurchase agreements at interest rates that were
approximately 30 basis points lower than the rates paid on then-available Federal Home Loan Bank advances;
|
|
|
•
|
|
Using cash generated from repayments on fixed-rate mortgage-backed securities to fund savings withdrawals; and
|
|
|
•
|
|
Selling $21.7 million of fixed-rate mortgage-backed securities in May 2007 and using the net proceeds of the sales to repay short-term borrowings.
|
We have continued our efforts to reduce interest rate risk in 2008 by obtaining an additional $60.0 million of
long-term, fixed-rate reverse repurchase agreements and through the purchase of $18.2 million of shorter-duration mortgage-backed securities. We believe that the net proceeds we raise from the stock offering will assist us in managing interest rate
risk. In addition, we may utilize the following strategies to further reduce our interest rate risk:
|
|
•
|
|
Continuing our efforts to increase our personal and business checking accounts, which are less rate-sensitive than certificates of deposit and which provide us with
a stable, low-cost source of funds;
|
|
|
•
|
|
Continuing to repay short-term borrowings;
|
|
|
•
|
|
Purchasing mortgage-backed securities with shorter durations; and
|
|
|
•
|
|
Subject to the maintenance of our credit quality standards, originating commercial loans and home equity lines of credit, which have adjustable interest rates and
shorter average lives than first mortgage loans.
|
Our policies do not permit hedging activities, such as engaging in
futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit residual interests or stripped mortgage backed securities.
73
Net Portfolio Value
.
The Office of Thrift Supervision requires the computation of
amounts by which the difference between the present value of an institution’s assets and liabilities (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest
rates. The Office of Thrift Supervision provides all institutions that file a Consolidated Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report with a report that measures the sensitivity of net portfolio value. The Office of
Thrift Supervision simulation model uses a discounted cash flow analysis and an option-based pricing approach to measure the interest rate sensitivity of net portfolio value. Historically, the Office of Thrift Supervision model estimated the
economic value of each type of asset, liability and off-balance sheet contract using the current interest rate yield curve with instantaneous increases or decreases of 100 to 300 basis points in 100 basis point increments. A basis point equals
one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. Given the current
relatively low level of market interest rates, an NPV calculation for an interest rate decrease of greater than 100 basis points has not been prepared. The Office of Thrift Supervision provides us the results of the interest rate sensitivity model,
which is based on information we provide to the Office of Thrift Supervision to estimate the sensitivity of our net portfolio value.
The table below sets forth, as of September 30, 2008, the Office of Thrift Supervision’s calculation of the estimated changes in our net portfolio value that would result from the designated instantaneous changes in the
interest rate yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied
upon as indicative of actual results
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Interest Rates (bp)
|
|
Estimated NPV
|
|
Estimated
Increase
(Decrease) in
NPV
|
|
|
Percentage
Change in NPV
|
|
|
NPV ratio as a
Percent of
Present Value
of Assets
|
|
|
Increase
(Decrease) in
NPV ratio as a
Percent or
Present value of
Assets
|
|
|
+300
|
|
59,227
|
|
(100,277
|
)
|
|
(62.9
|
)%
|
|
5.3
|
%
|
|
(7.6
|
%
|
|
+200
|
|
92,056
|
|
(67,448
|
)
|
|
(42.3
|
)%
|
|
7.9
|
%
|
|
(5.0
|
)%
|
|
+100
|
|
126,385
|
|
(33,119
|
)
|
|
(20.8
|
)%
|
|
10.5
|
%
|
|
(2.4
|
)%
|
|
0
|
|
159,504
|
|
—
|
|
|
—
|
|
|
12.9
|
%
|
|
—
|
|
|
(100)
|
|
181,927
|
|
22,423
|
|
|
14.1
|
%
|
|
14.3
|
%
|
|
1.5
|
%
|
|
(1)
|
Assumes an instantaneous uniform change in interest rates at all maturities.
|
|
(2)
|
NPV is the difference between the present value of an institution’s assets and liabilities.
|
|
(3)
|
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
|
|
(4)
|
NPV Ratio represents NPV divided by the present value of assets.
|
The table above indicates that at September 30, 2008, in the event of a 200 basis point increase in interest rates, we would experience a 42.3% decrease in net portfolio value. In the event of a 100 basis point decrease in interest
rates, we would experience a 14.1% increase in net portfolio value.
In addition to the Office of Thrift Supervision’s calculations
with respect to the effects of changes in interest rates on net portfolio value, we prepare our own internal calculations, which utilizes a single interest rate scenario and prepayment assumption in calculating the market value of fixed- and
adjustable-
74
rate loans (compared to the Office of Thrift Supervision model, which uses an option-based pricing methodology). Our model also calculates the average life
and value for core deposit intangibles that is based on a core deposit study we completed in 2006, whereas the Office of Thrift Supervision model uses a nationwide study to estimate the average life and value for core deposit intangibles. As a
result of these changes, the Office of Thrift Supervision’s calculations presented in the table above indicate as of September 30, 2008 that we would be less sensitive to increases in interest rates than indicated by our own internal
calculations. The following table presents our internal calculations of the estimated changes in our net portfolio value that would result from the designated instantaneous changes in the interest rate yield curve.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Interest Rates (bp)
|
|
Estimated NPV
|
|
Estimated
Increase
(Decrease) in
NPV
|
|
|
Percentage
Change in NPV
|
|
|
NPV ratio as a
Percent of
Present Value
of Assets
|
|
|
Increase
(Decrease) in
NPV ratio as a
Percent or
Present value of
Assets
|
|
|
+300
|
|
70,544
|
|
(77,926
|
)
|
|
(52.5
|
)%
|
|
6.2
|
%
|
|
(5.9
|
)%
|
|
+200
|
|
96,037
|
|
(52,433
|
)
|
|
(35.3
|
)%
|
|
8.2
|
%
|
|
(3.9
|
)%
|
|
+100
|
|
122,899
|
|
(25,571
|
)
|
|
(17.2
|
)%
|
|
10.3
|
%
|
|
(1.8
|
)%
|
|
0
|
|
148,470
|
|
—
|
|
|
—
|
|
|
12.1
|
%
|
|
—
|
|
|
(100)
|
|
171,066
|
|
22,596
|
|
|
15.2
|
%
|
|
13.6
|
%
|
|
1.5
|
%
|
|
(1)
|
Assumes an instantaneous uniform change in interest rates at all maturities.
|
|
(2)
|
NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
|
|
(3)
|
Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
|
|
(4)
|
NPV Ratio represents NPV divided by the present value of assets.
|
Certain shortcomings are inherent in the methodologies used in determining interest rate risk through changes in net portfolio value. Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the
manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value tables presented assume that the composition of our interest-sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and assume that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly,
although the net portfolio value tables provide an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest
rates on our net interest income and will differ from actual results.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments,
advances from the Federal Home Loan Bank of Seattle, reverse repurchase agreements, and maturities and sales of securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. We have established a committee, consisting of our President and Chief Executive Officer, our Vice Chairman and Co-Chief Operating Officer,
our Senior Vice President and Treasurer and our Vice President and Controller, which is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing
needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2008. We anticipate that we will
maintain higher liquidity levels following the completion of the stock offering.
75
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
|
|
(i)
|
expected loan demand;
|
|
|
(ii)
|
expected deposit flows and borrowing maturities;
|
|
|
(iii)
|
yields available on interest-earning deposits and securities; and
|
|
|
(iv)
|
the objectives of our asset/liability management program.
|
Excess liquid
assets are invested generally in interest-earning deposits and short-term securities and are also used to pay off short-term borrowings.
Our most liquid asset is cash. The level of this asset is dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2008, cash totaled $10.1 million. On that date, we had $28.5
million in Federal Home Loan Bank advances outstanding and $115.2 million in reverse repurchase agreements outstanding, with the ability to borrow an additional $272.5 million under Federal Home Loan Bank advances.
Through statutory trusts formed under the laws of the State of Connecticut, we have sold adjustable-rate trust preferred securities in the aggregate
principal amount of $24.0 million, all in pooled trust preferred securities offerings. The proceeds from these sales were paid to Territorial Savings Group, Inc. in exchange for adjustable-rate junior subordinated debentures, which have the same
terms as the trust preferred securities. The sole asset of the statutory trusts is the debentures. The payment of dividends on the trust preferred securities depends on our payment of interest on the debentures, which payments are made on a
quarterly basis. Depending on the amount of proceeds from our stock offering, we expect that we will use a portion of the net proceeds of our stock offering to redeem some or all of the trust preferred securities. Depending on how much of the trust
preferred securities we redeem, we will also incur an expense of up to $527,000 for costs that are being amortized in future periods relating to the issuance of the trust preferred securities.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash
Flows included in our Consolidated Financial Statements.
At September 30, 2008, we had $9.2 million in loan commitments outstanding.
In addition to commitments to originate loans, we had $16.1 million in unused lines of credit to borrowers. Certificates of deposit due within one year of September 30, 2008 totaled $392.8 million, or 43.2% of total deposits. If these deposits
do not remain with us, we will be required to seek other sources of funds, including loan sales, brokered deposits, reverse repurchase agreements and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher
rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2009. We believe, however, based on past experience, that a significant portion of such deposits will remain with us.
We have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activity is originating
loans. During the nine months ended September 30, 2008 and the years ended December 31, 2007 and 2006, we originated $123.2 million, $114.7 million and $107.4 million of loans, respectively. During these periods, we purchased $44.4
million, $14.9 million and $36.6 million of securities, respectively.
76
Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank
advances. We experienced a net increase in deposits of $17.9 million for the nine months ended September 30, 2008, a net decrease in total deposits of $89.0 million for the year ended December 31, 2007 and a net decrease in total deposits
of $34.7 million for the year ended December 31, 2006. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally,
borrowing agreements exist with the Federal Home Loan Bank of Seattle, which provide an additional source of funds. We also utilize securities sold under agreements to repurchase as another borrowing source. Federal Home Loan Bank advances decreased
by $43.5 million for the nine months ended September 30, 2008, compared to a decrease of $28.0 million for the year ended December 31, 2007 and a decrease of $317,000 for the year ended December 31, 2006. At September 30, 2008,
we had the ability to borrow up to an additional $272.5 million from the Federal Home Loan Bank of Seattle. Securities sold under agreements to repurchase increased by $60.0 million for the nine months ended September 30, 2008, compared to a
decrease of $5.3 million for the year ended December 31, 2007 and an increase of $60.5 million for the year ended December 31, 2006.
Territorial Savings Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted
assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2008, Territorial Savings Bank exceeded all regulatory capital requirements. Territorial Savings Bank is considered “well
capitalized” under regulatory guidelines. See “Supervision and Regulation—Federal Banking Regulation—Capital Requirements” and Note 15 of the Notes to the Consolidated Financial Statements.
The net proceeds from the stock offering will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will
be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of loans. Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, resulting in
increased net interest-earning assets and net interest income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, our return on equity will be adversely affected following the stock offering.
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
Commitments.
As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of
credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and
approval process accorded to loans we make. In addition, we enter into commitments to sell mortgage loans. For additional information, see Note 14 of the Notes to our Consolidated Financial Statements.
Contractual Obligations.
In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include
operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities and agreements with respect to investments.
77
The following table summarizes our significant fixed and determinable contractual obligations and other
funding needs by payment date at December 31, 2007. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
One year or
less
|
|
More than one
year to three
years
|
|
More than
three years to
five years
|
|
More than
five years
|
|
Total
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
72,000
|
|
$
|
—
|
|
$
|
37,200
|
|
$
|
18,000
|
|
$
|
127,200
|
|
Operating leases
|
|
|
1,968
|
|
|
3,505
|
|
|
2,865
|
|
|
1,638
|
|
|
9,976
|
|
Purchase obligations
|
|
|
2,307
|
|
|
4,493
|
|
|
3,677
|
|
|
3,174
|
|
|
13,651
|
|
Certificates of deposit
|
|
|
387,424
|
|
|
8,679
|
|
|
1,937
|
|
|
—
|
|
|
398,040
|
|
Other long-term liabilities
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,199
|
|
|
24,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
463,699
|
|
$
|
16,677
|
|
$
|
45,679
|
|
$
|
47,011
|
|
$
|
573,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit
|
|
$
|
13,212
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
13,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair
Value Measurements” (“SFAS 157”). This standard defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America, and expands disclosures about fair value
measurements. The pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, the statement does not require any new fair value measurement. We adopted the provisions of SFAS 157 on
January 1, 2008 and such adoption did not have a material impact on our consolidated financial statements.
In February 2008, the
Financial Accounting Standards Board amended SFAS 157 through the issuance of FSP FAS No. 157-2, “Effective Date of FASB Statement No. 157” (“FSP FAS 157-2”). FSP FAS 157-2 is effective upon issuance and delays the
effective date of SFAS 157 to fiscal years beginning after November 15, 2008, for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in the financial statements on a recurring basis (at least
annually). As permitted under SFAS 157, we plan to adopt the provisions of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are not recognized or disclosed at fair value in our financial statements on a recurring basis effective
January 1, 2009. We are evaluating the impact of the adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities on our consolidated financial statements.
In October 2008, the Financial Accounting Standards Board issued FSP FAS No. 157-3,
“
Determining the Fair Value of a Financial Asset
When the Market for That Asset Is Not Active” (“FSP FAS 157-3”). FSP FAS 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value
of a financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation
technique or its application should be accounted for as a change in accounting estimate following the guidance in SFAS 154, “Accounting Changes and Error Corrections.” However, the
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disclosure provisions in SFAS 154 for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its
application. We adopted the provisions of FSP FAS 157-3 and such adoption did not have a material impact on our consolidated financial statements.
In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment of FASB Statement No. 115” (“SFAS
159”). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose
different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 on January 1, 2008 and such adoption did not have a material impact
on our consolidated financial statements.
In November 2007, the Securities and Exchange Commission issued Staff Accounting Bulletin
No. 109, “Written Loan Commitments Recorded at Fair Value through Earnings” (“SAB 109”). SAB 109 states that the expected net future cash flows related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value through earnings. SAB 109 is effective for loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. We adopted SAB 109 on
January 1, 2008 and such adoption did not have a material impact on our consolidated financial statements.
In December 2007, the
Financial Accounting Standards Board issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how the acquirer in a business combination recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest (minority interest) in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill
acquired in the business combination or a gain from a bargain purchase and determining what information should be disclosed to enable users of the financial statements to evaluate the nature and financial effects of the business combination.
SFAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after fiscal years beginning after December 15, 2008. We do not expect the adoption of this statement to have a material impact on
our consolidated financial statements.
In December 2007, the Financial Accounting Standards Board issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, this statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s
equity. The amount of net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary
that do not result in deconsolidation are equity transactions if the parent retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated.
Such gain or loss will be measured using the fair value of the noncontrolling equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling
interest. SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We do not expect the adoption of this statement to have a material
impact on our consolidated financial statements.
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In March 2008, the Financial Accounting Standards Board issued SFAS No. 161, “Disclosures about
Derivative Instruments and Hedging Activities—an amendment of FASB Statement 133” (“SFAS 161”). SFAS 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how
(a) an entity uses derivative instruments; (b) derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”; and (c) derivative
instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Specifically, SFAS 161 requires (1) disclosure of the objectives for using derivative instruments be disclosed in terms of
underlying risk and accounting designation; (2) disclosure of the fair values of derivative instruments and their gains and losses in a tabular format; (3) disclosure of information about credit-risk-related contingent features; and
(4) cross-reference from the derivative footnote to other footnotes in which derivative-related information is disclosed. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. We do not expect the
adoption of this statement to have a material impact on our consolidated financial statements.
In May 2008, the Financial Accounting
Standards Board issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be
used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS 162 is effective 60 days following the Securities and Exchange
Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411. We are evaluating the impact of this pronouncement on our consolidated financial statements.
In June 2008, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF No. 08-3, “Accounting by Lessees for Nonrefundable
Maintenance Deposits” (“EITF 08-3”). EITF 08-3 states that lessees shall account for nonrefundable maintenance deposits as a deposit asset if it is probable that the maintenance activities will occur and the deposit is realizable.
EITF 08-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. We do not expect the adoption of this statement to have any
impact on our consolidated financial statements.
Impact of Inflation and Changing Prices
Our consolidated financial statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of
financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our
operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
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BUSINESS OF TERRITORIAL BANCORP INC.
Territorial Bancorp Inc. is incorporated in the State of Maryland. We have not engaged in any business to date. Upon completion of the conversion, we will
own all of the issued and outstanding stock of Territorial Savings Bank. We will retain up to 50% of the net proceeds from the offering and initially invest the remaining net proceeds in Territorial Savings Bank as additional capital of Territorial
Savings Bank. Territorial Bancorp Inc. will use a portion of the net proceeds to make a loan to the employee stock ownership plan and to pay down all or a portion of our trust preferred securities. At a later date, we may use the net proceeds to pay
dividends to stockholders and may repurchase shares of common stock, subject to regulatory limitations. We will invest our initial capital as discussed in “How We Intend to Use the Proceeds from the Offering.”
In the future, Territorial Bancorp Inc., as the holding company of Territorial Savings Bank, will be authorized to pursue other business activities
permitted by applicable laws and regulations, which may include the acquisition of banking and financial services companies. See “Supervision and Regulation—Holding Company Regulation” for a discussion of the activities that are
permitted for savings and loan holding companies. We currently have no understandings or agreements to acquire other financial institutions. We may also borrow funds for reinvestment in Territorial Savings Bank.
Following the offering, our cash flow will depend on earnings from the investment of the net proceeds from the offering that we retain, and any dividends
we receive from Territorial Savings Bank. Initially, Territorial Bancorp Inc. will neither own nor lease any property, but will instead pay a fee to Territorial Savings Bank for the use of its premises, equipment and furniture. At the present time,
we intend to employ only persons who are officers of Territorial Savings Bank to serve as officers of Territorial Bancorp Inc. We will, however, use the support staff of Territorial Savings Bank from time to time. We will pay a fee to Territorial
Savings Bank for the time devoted to Territorial Bancorp Inc. by employees of Territorial Savings Bank. However, these persons will not be separately compensated by Territorial Bancorp Inc. Territorial Bancorp Inc. may hire additional employees, as
appropriate, to the extent it expands its business in the future.
BUSINESS OF TERRITORIAL SAVINGS BANK
General
Territorial Savings
Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in one- to four-family residential mortgage loans and investment
securities. To a much lesser extent, we also originate home equity loans and lines of credit, construction, commercial and other non-residential real estate loans, consumer loans, multi-family mortgage loans and other loans. Territorial Savings Bank
offers a variety of deposit accounts, including passbook and statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and Super NOW accounts. Through our subsidiary, Territorial Financial
Services, Inc., we engage in insurance agency activities. We also offer various non-deposit investments to our customers, including annuities and mutual funds, through a third-party broker-dealer.
Our website address is www.territorialsavings.net. Information on our website is not incorporated into this prospectus and should not be considered a
part of this prospectus.
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Market Area
We conduct our operations from our operations center and from our 24 full-service branch offices located throughout the State of Hawaii.
The two largest components of Hawaii’s economy are tourism and the federal government, including the military. However, the State of Hawaii has been striving to diversify the state’s economy by attracting more high-technology
businesses to the state. The Hawaii Department of Business, Economic Development and Tourism reported a 24.2% decline in tourists from August 2007 to August 2008, representing the largest year-to-year reduction recorded in the state’s history.
Some of the largest individual private employers in the state include a staffing company, financial services companies, the University of Hawaii System of higher education and research and health services companies.
The population in the State of Hawaii grew at an annualized rate of 1.0% from 2000 to 2008, compared to an annualized growth rate of 1.2% for the United
States as a whole during that time period. Median household income increased to $62,000 in 2008, representing an annualized growth rate of 3.1% from 2000, compared to median household income of $55,000 in 2008 for the United States as a whole, and
an annualized growth rate of 3.8% from 2000. The unemployment rate for the State of Hawaii was 4.2% as of August 2008, representing an increase from a rate of 2.7% as of August 2007. This was lower than the increase in the unemployment rate for the
United States as a whole during the same time period, which increased to 6.1% as of August 2008 from 4.7% from August 2007.
Competition
We face intense competition in our market area both in making loans and attracting deposits. We compete with commercial banks, savings institutions,
mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies and investment banking firms. Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer
certain services that we do not or cannot provide.
Our deposit sources are primarily concentrated in the communities surrounding our
banking offices, located in all four counties in the State of Hawaii. As of June 30, 2008 (the latest date for which information is publicly available), we ranked fifth in deposit market share (out of 11 banks and thrift institutions with
offices in Hawaii) in the State of Hawaii, with a 3.60% market share. As of that date, our largest market share was in the County of Honolulu, where we ranked fifth in deposit market share (out of 11 banks and thrift institutions with offices in
Hawaii) with a 3.82% market share.
Lending Activities
Our primary lending activity is the origination of one- to four-family residential mortgage loans. To a much lesser extent, we also originate home equity loans and lines of credit, construction, commercial and other
non-residential real estate loans, consumer loans, multi-family mortgage loans and commercial business loans.
One- to Four-Family
Residential Mortgage Loans.
At September 30, 2008, $569.9 million, or 90.5% of our total loan portfolio, consisted of one- to four-family residential mortgage loans. We offer conforming, fixed-rate and adjustable-rate residential
mortgage loans with maturities generally up to 30 years, and to a much more limited extent, of up to 40 years and non-conforming loans with maturities of up to 50 years. There has been little demand for adjustable rate mortgage loans in our market
area.
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One- to four-family residential mortgage loans are generally underwritten according to Fannie Mae and
Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established
by the Office of Federal Housing Enterprise Oversight, which is currently $625,500 for single-family homes located in the State of Hawaii. We also originate loans above this amount for conforming loans, which are referred to as “jumbo
loans.” Our maximum loan amount for these loans is generally $1.0 million. We originate fixed-rate jumbo loans with terms of up to 30 years due to customer preference for fixed-rate loans. We have not originated significant amounts of
adjustable-rate jumbo loans in recent years due to customer preference for fixed-rate loans in our market area. We generally underwrite jumbo loans in a manner similar to conforming loans. Jumbo loans are not uncommon in our market area.
We will originate loans with loan-to-value ratios in excess of 80%, up to and including a loan-to-value ratio of 100%. We generally require private
mortgage insurance for loans with loan-to-value ratios in excess of 80%. During the nine months ended September 30, 2008 and the year ended December 31, 2007, we originated $15.4 million and $12.4 million, respectively, of one- to
four-family residential mortgage loans with loan-to-value ratios in excess of 80%. We currently retain the servicing rights on loans sold to generate fee income. For the nine months ended September 30, 2008 and for the year ended
December 31, 2007, we received servicing fees of $184,000 and $185,000, respectively. As of September 30, 2008, the principal balance of loans serviced for others totaled $64.7 million.
We offer a variety of credit programs for low- to moderate-income and first-time home purchasers. These include our first time home purchaser program,
where the borrower will receive a free appraisal and a 100 basis points reduction in points charged in connection with the loan. We will also originate first mortgage loans to lower-income individuals who reside in rural census tracts where the U.S.
Department of Agriculture will issue a second mortgage and complete the underwriting of the loan, subject to our review before origination. We also offer both FHA and VA fixed-rate loans.
Other than our loans for the construction of one- to four-family residential mortgage loans (described under “—Nonresidential Real
Estate Loans”), we do not offer “interest only” mortgage loans on one- to four-family residential properties (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan).
We
also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on their loan, resulting in an increased principal balance during the life of
the loan. We do not offer “subprime loans” (loans that generally target borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with
questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (traditionally defined as loans having less than full documentation). Although we participate in Fannie Mae’s Expanded Approval program
and Freddie Mac’s A Minus program, which previously did not require income verification, we still verified income for these types of loans.
Home Equity Loans and Lines of Credit.
In addition to traditional one- to four-family residential mortgage loans, we offer home equity loans and home equity lines of credit that are secured by the
borrower’s primary residence. Home equity lines of credit have a maximum term of 10 years during which time the borrower is required to make payments to principal based on the amortization of 0.125% of principal outstanding per month. The
borrower is permitted to draw against the line during the entire term. Our home equity lines of credit are originated with adjustable rates of interest or with fixed rates of interest that convert to adjustable rates of interest after an initial
period of up to three years. Our home equity loans are originated with fixed rates of interest and with terms of up to 30 years. Home equity loans and lines of credit are generally underwritten with the same criteria that we use to underwrite one-
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to four-family residential mortgage loans. Home equity loans may be underwritten with a loan-to-value ratio of 80% when combined with the principal balance
of the existing mortgage loan, while lines of credit for owner-occupied properties and investment properties may be underwritten with loan-to-value ratios of 75% and 65%, respectively, when combined with the principal balance of the existing
mortgage loan. We require appraisals on home equity loans and lines of credit when the aggregate loan amount exceeds 60% of the property’s tax assessed value or when the home equity loan or line of credit is $250,000 or greater. At the time we
close a home equity loan or line of credit, we record a mortgage to perfect our security interest in the underlying collateral. At September 30, 2008, the outstanding balance of home equity loans totaled $21.0 million, or 3.3% of our total
loan portfolio, and the outstanding balance of home equity lines of credit totaled $8.7 million, or 1.4% of our total loan portfolio.
Nonresidential Real Estate Loans.
Our non-residential real estate loans consist primarily of commercial real estate loans and construction loans for residential real estate projects. These loans totaled $20.9 million, or 3.3%
of our loan portfolio as of September 30, 2008. The commercial real estate properties primarily include owner-occupied light industrial properties. We seek to originate commercial real estate loans with initial principal balances of $1.0
million or less. Loans secured by commercial real estate totaled $8.5 million, or 1.4%, of our total loan portfolio at September 30, 2008, and consisted of 15 loans outstanding with an average loan balance of approximately $570,000,
although we originate loans with balances greater than this average. All of our nonresidential real estate loans are secured by properties located in our primary market area. At September 30, 2008, our largest commercial real estate loan had a
principal balance of $1.9 million and was secured by real property and a warehouse office building. This loan was performing in accordance with its terms at September 30, 2008.
In the underwriting of commercial real estate loans, we generally lend up to the lesser of 75% of the property’s appraised value or purchase price.
We base our decision to lend primarily on the economic viability of the property and the creditworthiness of the borrower. In evaluating a proposed commercial real estate loan, we emphasize the ratio of the property’s projected net cash flow to
the loan’s debt service requirement (generally requiring a minimum ratio of 115%), computed after deduction for a vacancy factor and property expenses we deem appropriate. Personal guarantees are usually obtained from commercial real estate
borrowers. We require title insurance, fire and extended coverage casualty insurance, and, if appropriate, flood insurance, in order to protect our security interest in the underlying property. Almost all of our commercial real estate loans are
generated internally by our loan officers.
Commercial real estate loans generally carry higher interest rates and have shorter terms than
one- to four-family residential mortgage loans. Commercial real estate loans, however, entail greater credit risks compared to one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single
borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on
sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of
the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate than residential properties.
We also originate a limited amount of construction loans to experienced developers, almost exclusively for the construction of residential real estate projects. Construction loans are also made to individuals for the construction of their
personal residences. Construction loans to individuals are generally “interest-only” loans during the construction period, and convert to permanent, amortizing financing following the completion of construction. At September 30, 2008,
construction loans totaled $6.7 million, or 1.1% of total loans receivable. At September 30, 2008, the additional unadvanced portion of these construction loans totaled $1.7 million.
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Advances on construction loans are made in accordance with a schedule reflecting the cost of
construction, but are generally limited to an 80% loan-to-completed-appraised-value ratio. Repayment of construction loans on residential properties is normally expected from the sale of units to individual purchasers. In the case of
income-producing property, repayment is usually expected from permanent financing upon completion of construction. We typically provide the permanent mortgage financing on our construction loans on income-producing property.
Before making a commitment to fund a construction loan, we require an appraisal of the property by a licensed appraiser. We review and inspect properties
before disbursement of funds during the term of the construction loan.
Construction financing generally involves greater credit risk than
long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost
(including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property.
Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. In the event we make a land
acquisition loan on property that is not yet approved for the planned development, there is the risk that approvals will not be granted or will be delayed. Construction loans also expose us to the risk that improvements will not be completed on time
in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.
Loan Originations, Purchases, Sales, Participations and Servicing.
All loans that we originate are underwritten pursuant to our policies and procedures, which incorporate standard underwriting guidelines, including those of
Freddie Mac and Fannie Mae, to the extent applicable. We originate both adjustable-rate and fixed-rate loans. However, in our market area, customer demand is primarily for fixed-rate loans. Our loan origination and sales activity may be adversely
affected by a rising interest rate environment that typically results in decreased loan demand. Most of our one- to four-family residential mortgage loan originations are generated by our branch managers and employees located in our banking offices
and our additional commissioned loan officers located in our corporate headquarters. We also advertise throughout our market area.
Historically, we have retained in our portfolio the significant majority of loans that we originate. In 2007, in an effort to manage interest rate risk, we sold $43.0 million of fixed-rate loans with terms of 10, 15 and 20 years that we had
been holding in our portfolio. In addition, we are authorized to sell loans as originated, but we generally have not conducted such loan sales, and we do not expect to conduct material amounts of such loan sales unless required to assist us in
managing interest rate risk. We sold $500,000 and $43.0 million of residential mortgage loans (all fixed-rate loans, with terms of 10 years or longer) during the nine months ended September 30, 2008 and the year ended December 31, 2007,
respectively. We had $359,000 of loans classified as held for sale at September 30, 2008, consisting of one loan. Because of the immaterial amount, this loan was included in loans classified as held to maturity in our consolidated financial
statements as of September 30, 2008.
We sell our loans without recourse, except for normal representations and warranties provided in
sales transactions. Currently, we retain the servicing rights on residential mortgage loans that we sell, and
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we intend to continue this practice in the future. At September 30, 2008, we were servicing loans owned by others with a principal balance of $64.7
million. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain
insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities. We have not entered into
loan participations in recent years.
Loan Approval Procedures and Authority
. Our lending activities follow written,
non-discriminatory underwriting standards and loan origination procedures established by our board of directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and value of the property that will secure
the loan. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower. We require “full documentation” on
all of our loan applications.
Our policies and loan approval limits are established by the board of directors. Aggregate lending
relationships in amounts up to $2.0 million can be approved by designated individual officers or officers acting together with specific lending approval authority. Relationships in excess of $2.0 million require the approval of the board of
directors.
Territorial Savings Bank also uses automated underwriting systems to review one- to four-family residential mortgage loans. We
require appraisals of all real property securing one- to four-family residential real estate loans, and on property securing home equity lines of credit when the aggregate loan amount exceeds 60% of the property’s tax assessed value or when the
line of credit is $250,000 or greater. All appraisers are licensed appraisers and all third-party appraisers are approved by the board of directors annually.
Investments
Our board of directors has primary responsibility for establishing and overseeing our investment policy. The
board of directors has delegated authority to implement the investment policy to our Investment Committee, consisting of the same members as our Asset/Liability Management Committee. The investment policy is reviewed at least annually by the
Investment Committee, and any changes to the policy are subject to approval by the full board of directors. The overall objectives of the Investment Policy are to maintain a portfolio of high quality and diversified investments to maximize interest
income over the long term and to minimize risk, to provide collateral for borrowings, to provide additional earnings when loan production is low, and to reduce our tax liability. The policy dictates that investment decisions give consideration to
the safety of principal, liquidity requirements and potential returns. Our Senior Vice President and Treasurer executes our securities portfolio transactions as directed by the Investment Committee. All purchase and sale transactions are reported to
the Board of Directors on a monthly basis.
Our current investment policy permits investments in securities issued by the United States
Government as well as mortgage backed securities and direct obligations of Fannie Mae, Freddie Mac and Ginnie Mae. The investment policy also permits, with certain limitations, investments in certificates of deposit, bank owned life insurance,
collateralized mortgage obligations, trust preferred securities and municipal securities.
Our current investment policy does not permit
investment in stripped mortgage-backed securities, complex securities and derivatives as defined in federal banking regulations and other high-risk securities.
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As of September 30, 2008, we held no asset-backed securities other than mortgage-backed securities. As a federal savings bank, Territorial Savings Bank
is not permitted to invest in equity securities. This general restriction does not apply to Territorial Bancorp Inc.
Our current policies
do not permit hedging activities, such as engaging in futures, options or swap transactions, or investing in high-risk mortgage derivatives, such as collateralized mortgage obligation residual interests, real estate mortgage investment conduit
residual interests or stripped mortgage backed securities.
Statement of Financial Accounting Standards No. 115, “Investments in
Debt and Equity Securities,” requires that, at the time of purchase, we designate a security as either held to maturity, available-for-sale, or trading, based upon our ability and intent. Securities available-for-sale and trading securities are
reported at market value and securities held to maturity are reported at amortized cost. A periodic review and evaluation of the available-for-sale and held-to-maturity securities portfolios is conducted to determine if the fair value of any
security has declined below its carrying value and whether such decline is other-than-temporary. If such decline is deemed to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged against
earnings. The fair values of our securities, which, at September 30, 2008, consisted primarily of mortgage-backed-securities, are based on published or securities dealers’ market values.
Our securities portfolio at September 30, 2008, consisted primarily of securities with the following amortized cost: $419.5 million of
mortgage-backed securities issued by Fannie Mae or Freddie Mac; $95.2 million of collateralized mortgage obligations and $7.0 million of trust preferred securities, all of which were issued by pools of issuers consisting primarily of financial
institution holding companies. At September 30, 2008, all of such securities were classified as held-to-maturity. At September 30, 2008, none of the collateral underlying our securities portfolio was considered subprime or Alt-A, and we
did not hold any common or preferred stock issued by Freddie Mac or Fannie Mae as of that date.
We purchase mortgage-backed securities
insured or guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. Historically, we invested in mortgage-backed securities to achieve positive interest rate spreads with minimal administrative expense and to lower our credit risk as a result of the
guarantees provided by Freddie Mac, Fannie Mae or Ginnie Mae. However, in September 2008, the Federal Housing Finance Agency placed Freddie Mac and Fannie Mae into conservatorship. The U.S. Treasury Department has established financing agreements to
ensure that Freddie Mac and Fannie Mae meet their obligations to holders of mortgage-backed securities that they have issued or guaranteed.
Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Certain types of mortgage-backed securities are commonly referred to as “pass-through” certificates because
the principal and interest of the underlying loans is “passed through” to investors, net of certain costs, including servicing and guarantee fees. Mortgage-backed securities typically are collateralized by pools of one- to four-family or
multifamily mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as
Territorial Savings Bank. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. Ginnie Mae, a United States Government agency, and government sponsored
enterprises, such as Fannie Mae and Freddie Mac, either guarantee the payments or guarantee the timely payment of principal and interest to investors. Mortgage-backed securities are more liquid than individual mortgage loans since there is an active
trading market for such securities. In addition, mortgage-backed securities may be used to collateralize our borrowings. Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment
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rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such
interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Sources of Funds
General.
Deposits
traditionally have been our primary source of funds for our investment and lending activities. We also borrow from the Federal Home Loan Bank of Seattle and from securities dealers to supplement cash flow needs, to lengthen the maturities of
liabilities for interest rate risk management purposes and to manage our cost of funds. Our additional sources of funds are scheduled loan payments, maturing investments, loan repayments, retained earnings, income on other earning assets and the
proceeds of loan sales.
Deposits.
We accept deposits primarily from the areas in which our offices are
located. We rely on our competitive pricing and products, convenient locations and quality customer service to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist
of passbook and statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and Super NOW accounts. Historically, we have not accepted brokered deposits.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based
primarily on current operating strategies and market interest rates, liquidity requirements and our deposit growth goals.
Borrowings.
Our borrowings consist of advances from the Federal Home Loan Bank of Seattle and funds borrowed from securities dealers under repurchase agreements. At September 30, 2008, our repurchase agreements totaled
$115.2 million, or 10.4% of total liabilities, and our Federal Home Loan Bank advances totaled $28.5 million, or 2.6% of total liabilities. At September 30, 2008, we had access to additional Federal Home Loan Bank advances of up to $272.5
million. Advances from the Federal Home Loan Bank of Seattle are secured by our investment in the common stock of the Federal Home Loan Bank of Seattle as well as by a blanket pledge on our assets not otherwise pledged. Repurchase agreements are
secured by mortgage-backed securities.
Trust preferred securities.
Through statutory trusts formed under the laws of the
State of Connecticut, we have sold adjustable-rate trust preferred securities in the aggregate principal amount of $24.0 million, all in pooled trust preferred securities offerings. The proceeds from these sales were paid to Territorial Savings
Group, Inc. in exchange for adjustable-rate junior subordinated debentures, which have the same terms as the trust preferred securities. The sole asset of the statutory trusts is the debentures. The payment of dividends on the trust preferred
securities depends on our payment of interest on the debentures, which payments are made on a quarterly basis. Depending on the amount of proceeds from our stock offering, we expect that we will use a portion of the net proceeds of our stock
offering to redeem some or all of the trust preferred securities.
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Properties
We operate from our corporate office in Honolulu, Hawaii, and from our 24 full-service branches located in the State of Hawaii. The net book value of our premises, land and equipment was $4.5 million at September 30, 2008. The
following table sets forth information with respect to our full-service banking offices, including the expiration date of leases with respect to leased facilities.
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ALA MOANA CENTER
1450 Ala Moana Blvd.
Honolulu, Oahu 96814
1/31/2010
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KAILUA
19 Oneawa Street
Kailua, Oahu 96734
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KAPOLEI
Ace Center at Kapolei
480 Kamokila Blvd.
Kapolei, Oahu 96707
7/31/2014
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NUUANU
Nuuanu Shopping Center
1613 Nuuanu Avenue
Honolulu, Oahu 96817
7/22/2016
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DOWNTOWN
1000 Bishop Street
Honolulu, Oahu 96813
12/31/2015
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KAIMUKI
1108 12
th
Avenue
Honolulu, Oahu 96816
12/31/2018
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KAUAI
Kukui Grove Shopping Center
4393 Kukui Grove Street
Lihue, Kauai 96766
2/28/2013
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PEARL CITY
Pearl City Shopping Center
850 Kamehameha Highway
Pearl City, Oahu 96782
9/22/2009
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HAWAII KAI
Hawaii Kai Shopping Center
377 Keahole Street
Honolulu, Oahu 96825
9/30/2013
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KALIHI-KAPALAMA
1199 Dillingham
Boulevard
Honolulu, Oahu 96817
8/31/2012
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KONA
Crossroads Shopping Center
75-1027 Henry Street
Kailua-Kona, Hawaii 96770
8/31/2015
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PEARLRIDGE
98-084 Kamehameha Highway
Aiea, Oahu 96701
6/30/2012
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HILO
Waiakea Center
315 Makaala Street
Hilo, Hawaii 96720
12/31/2018
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KAMEHAMEHA SHOPPING CENTER
1620 North School St.
Honolulu, Oahu 96817
9/30/2015
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LAHAINA
Old Lahaina Center
170 Papalaua Street
Lahaina, Maui 96761
3/31/2013
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SALT LAKE
Salt Lake Shopping Center
848 Ala Lilikoi Street
Honolulu, Oahu 96818
1/31/2011
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KAHALA
4819 Kilauea Avenue
Honolulu, Oahu 96816
3/16/2015
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KANEOHE
46-005 Kawa Street
Kaneohe, Oahu 96744
12/31/2014
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McCULLY
1111 McCully Street
Honolulu, Oahu 96826
5/31/2013
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WAIPAHU
Waipahu Town Center
94-050 Farrington Highway
Waipahu, Oahu 96797
12/31/2014
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KAHULUI
Kaahumanu Center
275 W. Kaahumanu Ave.
Kahului, Maui 96732
12/31/2009
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KAPAHULU
Kilohana Square
1016 Kapahulu Avenue
Honolulu, Oahu 96816
11/14/2013
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MILILANI
Town Center of Mililani
95-1249 Meheula Park Way
Mililani, Oahu 96789
10/11/2014
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WAIPIO
Laniakea Plaza
94-1221 Ka Uka Blvd.
Waipahu, Oahu 96797
9/30/2016
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Subsidiary Activities
In addition to owning all of the outstanding capital stock of Territorial Savings Bank, Territorial Savings Group, Inc. owns all of the common stock of three statutory trusts formed under the laws of the State of
Connecticut: Territorial Savings Statutory Trust I, Territorial Savings Statutory Trust II and Territorial Savings Statutory Trust III. The three statutory trusts were formed to issue a total of $24.0 million of trust preferred securities. At
September 30, 2008, Territorial Savings Group, Inc.’s investment in the statutory trusts totaled $743,000, and these entities had assets of $24.8 million at that date.
Territorial Savings Bank owns 100% of the common stock of Territorial Holdings, Inc., a Hawaii corporation, which in turn owns 100% of the voting common
stock of Territorial Realty, Inc. Territorial Realty, Inc. is a Hawaii real estate investment trust that holds mortgage loans and mortgage-backed
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securities. These entities enable Territorial Savings Bank to segregate certain assets for management purposes, and promote Territorial Savings Bank’s
ability to raise regulatory capital in the future through the sale of preferred stock or other capital-enhancing securities by these entities. At September 30, 2008, Territorial Savings Bank’s investment in Territorial Holdings, Inc. was
$504.2 million, and Territorial Holdings, Inc. had assets of $504.2 million at that date. At September 30, 2008, Territorial Holdings, Inc.’s investment in Territorial Realty, Inc. was $504.1 million, and Territorial Realty, Inc. had
$524.1 million in assets at that date.
Territorial Savings Bank owns 100% of the common stock of Territorial Financial Services, Inc., a
Hawaii corporation that engages primarily in insurance activities. At September 30, 2008, Territorial Savings Bank’s investment in Territorial Financial Services, Inc. was $12,000, and Territorial Financial Services, Inc. had assets of
$51,000 at that date. Territorial Savings Bank also owns 100% of the common stock of Territorial Real Estate Co., Inc., an inactive Hawaii corporation that is authorized to manage and dispose of troubled real estate.
Legal Proceedings
Territorial Mutual Holding
Company, Territorial Savings Group, Inc., Territorial Savings Bank and Territorial Realty, Inc. (our real estate investment trust subsidiary) have filed appeals with the Tax Appeal Court of the State of Hawaii seeking refunds of approximately $4.5
million in taxes paid to the State of Hawaii from 2004 through 2007. The refunds represent 70% of the amount of dividends paid to Territorial Savings Bank by Territorial Realty, Inc. from 2004 to 2007. The claim for the refunds is based on a 70%
dividends-received deduction under Hawaii statutes, which refunds have been denied by the State of Hawaii Department of Taxation. Trial has been set for March 2010. At this time, we are unable to predict an outcome, favorable or unfavorable, with
respect to these actions.
Other than as disclosed in the preceding paragraph, at September 30, 2008, we were not involved in any
legal proceedings the outcome of which we believe would be material to our financial condition or results of operations.
Expense and Tax Allocation
Territorial Savings Bank will enter into an agreement with Territorial Bancorp Inc. to provide it with certain administrative
support services, whereby Territorial Savings Bank will be compensated at not less than the fair market value of the services provided. In addition, Territorial Savings Bank and Territorial Bancorp Inc. will enter into an agreement to establish a
method for allocating and for reimbursing the payment of their consolidated tax liability.
Personnel
As of September 30, 2008, we had 241 full-time employees and 11 part-time employees. Our employees are not represented by any collective bargaining
group. Management believes that we have a good working relationship with our employees.
SUPERVISION AND
REGULATION
General
Territorial
Savings Bank is examined and supervised by the Office of Thrift Supervision and is subject to examination by the Federal Deposit Insurance Corporation. This regulation and supervision
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establishes a comprehensive framework of activities in which an institution may engage and is intended primarily for the protection of the Federal Deposit
Insurance Corporation’s deposit insurance funds and depositors. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy,
assets, management, earnings, liquidity and sensitivity to market interest rates. Territorial Savings Bank also is a member of and owns stock in the Federal Home Loan Bank of Seattle, which is one of the twelve regional banks in the Federal Home
Loan Bank System. Territorial Savings Bank also is regulated to a lesser extent by the Board of Governors of the Federal Reserve System, governing reserves to be maintained against deposits and other matters. The Office of Thrift Supervision
examines Territorial Savings Bank and prepares reports for the consideration of its Board of Directors on any operating deficiencies. Territorial Savings Bank’s relationship with its depositors and borrowers also is regulated to a great extent
by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts and the form and content of Territorial Savings Bank’s loan documents.
Any change in these laws or regulations, whether by the Federal Deposit Insurance Corporation, the Office of Thrift Supervision or Congress, could have a
material adverse impact on Territorial Bancorp Inc., Territorial Savings Bank and their operations.
Territorial Bancorp Inc., as a savings
and loan holding company following the conversion, will be required to file certain reports with, will be subject to examination by, and otherwise must comply with the rules and regulations of the Office of Thrift Supervision. Territorial Bancorp
Inc. will also be subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Certain of the regulatory requirements that are or will be applicable to Territorial Savings Bank and Territorial Bancorp Inc. are described below. This description of statutes and regulations is not intended to be a complete explanation of
such statutes and regulations and their effects on Territorial Savings Bank and Territorial Bancorp Inc. and is qualified in its entirety by reference to the actual statutes and regulations.
Federal Banking Regulation
Business
Activities.
A federal savings bank derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and the regulations of the Office of Thrift Supervision. Under these laws and regulations, Territorial Savings Bank
may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. Territorial Savings Bank also may
establish subsidiaries that may engage in activities not otherwise permissible for Territorial Savings Bank, including real estate investment and securities and insurance brokerage.
Capital Requirements.
Office of Thrift Supervision regulations require savings banks to meet three minimum capital standards: a 1.5%
tangible capital ratio, a 4% leverage ratio (3% for savings banks receiving the highest rating on the CAMELS rating system) and an 8% risk-based capital ratio.
The risk-based capital standard for savings banks requires the maintenance of Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4%
and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, assigned by the Office of Thrift Supervision, based on the risks
believed inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of
consolidated subsidiaries, less
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intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital include cumulative preferred
stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock, the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and up to 45% of net
unrealized gains on available-for-sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Additionally, a savings bank
that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the savings bank. In assessing an institution’s capital adequacy, the Office of Thrift
Supervision takes into consideration not only these numeric factors but also qualitative factors as well, and has the authority to establish higher capital requirements for individual associations where necessary.
At September 30, 2008, Territorial Savings Bank’s capital exceeded all applicable requirements. See “Historical and Pro Forma Regulatory
Capital Compliance.”
Loans-to-One Borrower.
Generally, a federal savings bank may not make a loan or extend credit to a
single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally
does not include real estate. As of September 30, 2008, Territorial Savings Bank’s largest lending relationship with a single or related group of borrowers totaled $6.0 million, which represented 6.1% of unimpaired capital and surplus.
Therefore, Territorial Savings Bank was in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender
Test.
As a federal savings bank, Territorial Savings Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Territorial Savings Bank must maintain at least 65% of its “portfolio assets”
in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means
total assets of a savings institution, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings bank’s business.
Territorial Savings Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal
Revenue Code.
A savings bank that fails the qualified thrift lender test must either convert to a commercial bank charter or operate under
specified restrictions set forth in the Home Owners’ Loan Act. At September 30, 2008, Territorial Savings Bank maintained approximately 96.4% of its portfolio assets in qualified thrift investments and, therefore, satisfied the QTL test.
Capital Distributions.
Office of Thrift Supervision regulations govern capital distributions by a federal savings
bank, which include cash dividends, stock repurchases and other transactions charged to the savings bank’s capital account. A savings bank must file an application for approval of a capital distribution if:
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the total capital distributions for the applicable calendar year exceed the sum of the savings bank’s net income for that year to date plus the savings
bank’s retained net income for the preceding two years;
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the savings bank would not be at least adequately capitalized following the distribution;
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the distribution would violate any applicable statute, regulation, agreement or Office of Thrift Supervision-imposed condition; or
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the savings bank is not eligible for expedited treatment of its filings.
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Even if an application is not otherwise required, every savings bank that is a subsidiary of a holding company must still file a notice with the Office
of Thrift Supervision at least 30 days before the Board of Directors declares a dividend or approves a capital distribution.
The Office of
Thrift Supervision may disapprove a notice or application if:
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the savings bank would be undercapitalized following the distribution;
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the proposed capital distribution raises safety and soundness concerns; or
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the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
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In addition, the Federal Deposit Insurance Act provides that an insured depository institution shall not make any capital distribution, if after making
such distribution the institution would be undercapitalized.
Liquidity.
A federal savings bank is required to maintain a
sufficient amount of liquid assets to ensure its safe and sound operation. We anticipate that our liquidity levels will increase following the completion of the stock offering.
Community Reinvestment Act and Fair Lending Laws.
All savings banks have a responsibility under the Community Reinvestment Act and related
regulations of the Office of Thrift Supervision to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings bank, the Office of Thrift Supervision is
required to assess the savings bank’s record of compliance with the Community Reinvestment Act. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis
of characteristics specified in those statutes. A savings bank’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in
restrictions on its activities. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the Office of Thrift Supervision, as well as other federal regulatory agencies and the
Department of Justice. Territorial Savings Bank received a satisfactory Community Reinvestment Act rating in its most recent federal examination. The Community Reinvestment Act requires all Federal Deposit Insurance-insured institutions to publicly
disclose their rating.
Transactions with Related Parties.
A federal savings bank’s authority to engage in transactions
with its affiliates is limited by Office of Thrift Supervision regulations and by Sections 23A and 23B of the Federal Reserve Act and its implementing Regulation W promulgated by the Board of Governors of the Federal Reserve System. An affiliate is
generally a company that controls, is controlled by, or is under common control with an insured depository institution such as Territorial Savings Bank. Territorial Bancorp Inc. is an affiliate of Territorial Savings Bank. In general, transactions
between an insured depository institution and its affiliates are subject to certain quantitative and collateral requirements. In addition, Office of Thrift Supervision regulations prohibit a savings bank from lending to any of its affiliates that
are engaged in activities that are not permissible for bank holding companies and from
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purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking
practices, not involve low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. The Office of Thrift Supervision requires savings banks to maintain detailed records of all
transactions with affiliates.
Territorial Savings Bank’s authority to extend credit to its directors, executive officers and 10%
stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these
provisions require that extensions of credit to insiders:
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be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with
unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and
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(ii)
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not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Territorial
Savings Bank’s capital.
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In addition, extensions of credit in excess of certain limits must be approved by Territorial
Savings Bank’s Board of Directors.
Enforcement.
The Office of Thrift Supervision has primary enforcement responsibility
over federal savings institutions and has the authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, and attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action by the Office of Thrift Supervision may range from the issuance of a capital directive or cease and desist order to
removal of officers and/or directors of the institution, and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made,
in which case penalties may be as high as $1 million per day. The Federal Deposit Insurance Corporation also has the authority to terminate deposit insurance or to recommend to the Director of the Office of Thrift Supervision that enforcement action
be taken with respect to a particular savings institution. If action is not taken by the Director, the Federal Deposit Insurance Corporation has authority to take action under specified circumstances.
Standards for Safety and Soundness.
Federal law requires each federal banking agency to prescribe certain standards for all insured
depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational
and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital
becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve
compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further
enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
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Prompt Corrective Action Regulations
.
Under prompt corrective action regulations,
the Office of Thrift Supervision is authorized and, under certain circumstances, required to take supervisory actions against undercapitalized savings banks. For this purpose, a savings bank is placed in one of the following five categories based on
the savings bank’s capital:
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well-capitalized (at least 5% leverage capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);
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adequately capitalized (at least 4% leverage capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);
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undercapitalized (less than 3% leverage capital, 4% Tier 1 risk-based capital or 8% total risk-based capital);
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significantly undercapitalized (less than 3% leverage capital, 3% Tier 1 risk-based capital or 6% total risk-based capital); and
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critically undercapitalized (less than 2% tangible capital).
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Generally, the Office of Thrift Supervision is required to appoint a receiver or conservator for a savings bank that is “critically undercapitalized” within specific time frames. The regulations also provide
that a capital restoration plan must be filed with the Office of Thrift Supervision within 45 days of the date a savings bank receives notice that it is “undercapitalized,” “significantly undercapitalized” or “critically
undercapitalized.” Any holding company for the savings bank required to submit a capital restoration plan must guarantee the lesser of an amount equal to 5% of the savings bank’s assets at the time it was notified or deemed to be
undercapitalized by the Office of Thrift Supervision, or the amount necessary to restore the savings bank to adequately capitalized status. This guarantee remains in place until the Office of Thrift Supervision notifies the savings bank that it has
maintained adequately capitalized status for each of four consecutive calendar quarters, and the Office of Thrift Supervision has the authority to require payment and collect payment under the guarantee. Failure by a holding company to provide the
required guarantee will result in certain operating restrictions on the savings bank, such as restrictions on the ability to declare and pay dividends, pay executive compensation and management fees, and increase assets or expand operations. The
Office of Thrift Supervision may also take any one of a number of discretionary supervisory actions against undercapitalized associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At September 30, 2008, Territorial Savings Bank met the criteria for being considered “well-capitalized.”
Insurance of Deposit Accounts.
Territorial Savings Bank is a member of the Deposit Insurance Fund, maintained by the Federal Deposit
Insurance Corporation. Accounts in Territorial Savings Bank are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of $100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement
accounts. However, pursuant to its statutory authority, the Federal Deposit Insurance Corporation increased the deposit insurance available on deposit accounts to $250,000 effective until December 31, 2009. Territorial Savings Bank’s
deposits are subject to Federal Deposit Insurance Corporation deposit insurance assessments.
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The Federal Deposit Insurance Corporation imposes an assessment against institutions for deposit
insurance. This assessment is based on the risk category of the institution and ranges from five to 43 basis points of the institution’s deposits. On October 16, 2008, the Federal Deposit Insurance Corporation published a proposed rule
that would raise the current deposit insurance assessment rates uniformly for all institutions by seven basis points (to a range from 12 to 50 basis points) for the first quarter of 2009. The proposed rule would also alter the way the Federal
Deposit Insurance Corporation calculates federal deposit insurance assessment rates beginning in the second quarter of 2009 and thereafter.
Under the proposed rule, the Federal Deposit Insurance Corporation would first establish an institution’s initial base assessment rate. This initial base assessment rate would range, depending on the risk category of the institution,
from 10 to 45 basis points. The Federal Deposit Insurance Corporation would then adjust the initial base assessment (higher or lower) to obtain the total base assessment rate. The adjustments to the initial base assessment rate would be based upon
an institution’s levels of unsecured debt, secured liabilities, and brokered deposits. The total base assessment rate would range from eight to 77.5 basis points of the institution’s deposits.
Based upon our review of the Federal Deposit Insurance Corporation’s proposed rule, if the rule was implemented as proposed, our Federal Deposit
Insurance Corporation assessment rate for 2009, based on deposits as of September 30, 2008, would increase by approximately $481,000. Thereafter, because of adjustments to our initial base assessment rate, we believe the rule would not have a
material negative effect on our earnings. There can be no assurance that the proposed rule will be implemented by the Federal Deposit Insurance Corporation or implemented in its proposed form.
All Federal Deposit Insurance Corporation-insured institutions are required to pay a pro rata portion of the interest due on obligations issued by the
Financing Corporation (“FICO”) to impose and collect, with the approval of the Federal Deposit Insurance Corporation, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to
recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended December 31, 2008, the annualized FICO assessment was equal to 1.10 basis points
for each $100 in domestic deposits maintained at an institution.
Prohibitions Against Tying Arrangements
.
Federal
savings banks are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some
additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Home
Loan Bank System.
Territorial Savings Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member
institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Seattle, Territorial Savings Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of
September 30, 2008, Territorial Savings Bank was in compliance with this requirement.
Other Regulations
Interest and other charges collected or contracted for by Territorial Savings Bank are subject to state usury laws and federal laws concerning interest
rates. Territorial Savings Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial
institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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Truth in Savings Act; and
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rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
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The operations of Territorial Savings Bank also are subject to the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records;
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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’
rights and liabilities arising from the use of automated teller machines and other electronic banking services;
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Check Clearing for the 21
st
Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
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The USA PATRIOT Act, which requires savings banks operating to, among other things, establish broadened anti-money laundering compliance programs, due diligence
policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also applicable to financial institutions, under the Bank Secrecy Act and
the Office of Foreign Assets Control regulations; and
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The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties.
Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the
opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
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Holding Company Regulation
General
. Upon completion of the conversion, Territorial Bancorp Inc. will be a non-diversified savings and loan holding company within the meaning of the Home Owners’ Loan Act. As such, Territorial
Bancorp Inc. will be registered with the Office of Thrift Supervision and subject to Office of Thrift Supervision regulations, examinations, supervision and reporting requirements. In addition, the Office of Thrift Supervision will have enforcement
authority over Territorial Bancorp Inc. and its subsidiaries. Among other things, this authority permits the Office of Thrift Supervision to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings
institution. Unlike bank holding companies, federal savings and loan holding companies are not subject to any regulatory capital requirements or to supervision by the Federal Reserve Board.
Permissible Activities.
Under present law, the business activities of Territorial Bancorp Inc. will be generally limited to those
activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are
financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a financial activity. A multiple savings and loan holding company is generally limited
to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the Office of Thrift Supervision, and certain additional activities authorized by Office of Thrift
Supervision regulations.
Federal law prohibits a savings and loan holding company, including Territorial Bancorp Inc., directly or
indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior written approval of the Office of Thrift Supervision. It also prohibits the acquisition or
retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured.
In evaluating applications by holding companies to acquire savings institutions, the Office of Thrift Supervision must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the
acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The
Office of Thrift Supervision is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:
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(i)
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the approval of interstate supervisory acquisitions by savings and loan holding companies; and
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(ii)
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the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.
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The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Federal Securities Laws
We have filed with the
Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the registration of the shares of common stock to be issued pursuant to the stock offering. Upon completion of the stock offering, our common stock will
be registered with the
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Securities and Exchange Commission under the Securities Exchange Act of 1934. We will be subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of shares
of common stock to be issued in the stock offering does not cover the resale of those shares. Shares of common stock purchased by persons who are not our affiliates may be resold without registration. Shares purchased by our affiliates will be
subject to the resale restrictions of Rule 144 under the Securities Act of 1933. If we meet the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of ours that complies with the other conditions of
Rule 144, including those that require the affiliate’s sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater
of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, we may permit affiliates to have their shares registered for sale under the Securities Act of 1933.
Sarbanes-Oxley Act of 2002
The
Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive
Officer and Chief Financial Officer will be required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act
have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain
disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have
been changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting. We will be subject to further reporting and audit requirements beginning with the year ending
December 31, 2009 under the requirements of the Sarbanes-Oxley Act. We will prepare policies, procedures and systems designed to ensure compliance with these regulations.
TAXATION
Federal Taxation
General.
Territorial Bancorp Inc. and Territorial Savings Bank are subject to federal income taxation in the same general manner as other
corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Territorial
Bancorp Inc. and Territorial Savings Bank.
Method of Accounting
.
For federal income tax purposes, Territorial Savings
Bank currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31st for filing its consolidated federal income tax returns. The Small Business Protection Act of 1996 eliminated the use of
the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995.
Minimum Tax.
The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to
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as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an
exemption amount. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At
December 31, 2007, Territorial Savings Bank had no minimum tax credit carryforward.
Net Operating Loss Carryovers.
A
financial institution may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2007, Territorial Savings Bank had no net operating loss carryforward for federal
income tax purposes.
Corporate Dividends.
We may exclude from our income 100% of dividends received from Territorial Savings
Bank as a member of the same affiliated group of corporations.
Audit of Tax Returns.
Territorial Savings Bank’s federal
income tax returns have not been audited in the most recent five-year period.
State Taxation
Territorial Bancorp Inc. and Territorial Savings Bank are subject to a franchise tax imposed under Hawaii law at a rate of 7.92% of net income. The net
income to which the tax rate is applied is determined in a manner consistent with the taxable income determined for federal purposes with some adjustments. The principal adjustment to federal taxable income is the inclusion of interest received on
municipal bonds in gross income for Hawaii franchise tax purposes.
MANAGEMENT OF TERRITORIAL BANCORP INC.
Shared Management Structure
The
directors of Territorial Bancorp Inc. are the same persons who are the directors of Territorial Savings Bank. In addition, each executive officer of Territorial Bancorp Inc. is also an executive officer of Territorial Savings Bank. We expect that
Territorial Bancorp Inc. and Territorial Savings Bank will continue to have common executive officers until there is a business reason to establish separate management structures.
Executive Officers of Territorial Bancorp Inc. and Territorial Savings Bank
The following table sets
forth information regarding the executive officers of Territorial Bancorp Inc. and Territorial Savings Bank as of December 31, 2007.
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Name
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Age
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Position
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Allan S. Kitagawa
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62
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Chairman of the Board, President and Chief Executive Officer
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Vernon Hirata
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55
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Vice Chairman, Co-Chief Operating Officer, General Counsel and Corporate Secretary
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Ralph Y. Nakatsuka
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52
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Vice Chairman and Co-Chief Operating Officer
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Karen J. Cox
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62
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Senior Vice President-Administration
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Richard K.C. Lau
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65
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Senior Vice President and Chief Lending Officer
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Melvin M. Miyamoto
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54
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Senior Vice President and Treasurer
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The executive officers of Territorial Bancorp Inc. and Territorial Savings Bank are elected annually.
Directors of Territorial Bancorp Inc. and Territorial Savings Bank
Territorial Bancorp Inc. has six directors. Directors serve three-year staggered terms so that approximately one-third of the directors are elected at each annual meeting. Directors of Territorial Savings Bank will be
elected by Territorial Bancorp Inc. as its sole stockholder.
The following table states our directors’ names, their ages as of
December 31, 2007, the years when they began serving as directors of Territorial Savings Bank and when their current term expires:
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Name
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Position(s) Held With
Territorial Bancorp Inc.
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Age
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Director
Since
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Current Term
Expires
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Allan S. Kitagawa
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Chairman of the Board, President and Chief Executive Officer
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62
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1986
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2011
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Kirk W. Caldwell
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Director
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55
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2007
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2009
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Howard Y. Ikeda
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Director
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62
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1988
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2010
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David S. Murakami (1)
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Director
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68
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2006
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2010
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Richard I. Murakami (1)
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Director
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80
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1981
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2011
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Harold H. Ohama
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Director
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72
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1996
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2009
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(1)
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David S. Murakami and Richard I. Murakami are not related.
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Board
Independence
The Board of Directors has determined that each of our directors, with the exception of, Chairman of the Board, President
and Chief Executive Officer Allan S. Kitagawa, is “independent” as defined in the listing standards of the Nasdaq Stock Market. Mr. Kitagawa is not independent because he is one of our executive officers.
In determining the independence of the directors listed above, the Board of Directors reviewed the following transactions, none of which are required to
be reported under “—Transactions With Certain Related Persons,” below. Director Kirk Caldwell is a partner of a law firm that performs legal services for Territorial Savings Bank. Director Caldwell also has a mortgage loan with
Territorial Savings Bank. Director David Murakami performs appraisal services for Territorial Savings Bank. Director Murakami also has a mortgage loan, a home equity line of credit and overdraft protection with Territorial Savings Bank. Director
Richard Murakami has a mortgage loan and overdraft protection with Territorial Savings Bank.
The Business Background of Our Directors and Executive
Officers
Directors:
The
business experience for the past five years of each of our directors and executive officers is set forth below. Unless otherwise indicated, directors and executive officers have held their positions for the past five years.
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Allan S. Kitagawa
has served as Chairman of the Board and Chief Executive Officer of
Territorial Savings Bank since 1986, and was named President in 2007. Mr. Kitagawa worked with American Savings and Loan Association from 1974 to 1986, including service as Executive Vice President and Chief Executive Officer of the Hawaii
Division. Mr. Kitagawa is a Certified Public Accountant.
Kirk W. Caldwell
is a partner with the law firm of
Ashford & Wriston, where he has worked since 1984. Mr. Caldwell is also the majority leader of the State of Hawaii House of Representatives, and has served as a state representative since 2002.
Howard Y. Ikeda
is a principal with the firm Ikeda & Wong, CPA, Inc., an accounting firm that Mr. Ikeda established in 1973.
Mr. Ikeda is a Certified Public Accountant.
David S. Murakami
is a Certified Residential Appraiser in the State of
Hawaii, and has been the owner of DSM Appraisal Company since 1982. Mr. Murakami previously worked with financial institutions in the State of Hawaii beginning in 1962.
Richard I. Murakami
is a retired Hawaii area manager for a building and material house.
Harold H. Ohama
is a licensed real estate broker and currently acts as a real estate consultant. Mr. Ohama has also served as
a trustee for businesses in bankruptcy.
Executive Officers Who Are Not Also Directors:
Vernon Hirata
has served as Territorial Savings Bank’s Vice Chairman, Co-Chief Operating Officer, General Counsel and Corporate
Secretary since 2007. Mr. Hirata joined Territorial Savings Bank in 1986 as Senior Vice President/General Counsel, and was named Executive Vice President/General Counsel and Corporate Secretary in 1987. Previously, Mr. Hirata was employed
at American Savings and Loan Association from 1978 to 1986, including service as Senior Vice President and Staff Attorney.
Ralph Y.
Nakatsuka
joined Territorial Savings Bank in 2007 as Vice Chairman and Co-Chief Operating Officer, and was employed at American Savings Bank from 1980 to 2007, including service as Executive Vice President of Lending and Chief Lending
Officer from 1997 to 2007. Mr. Nakatsuka is a Certified Public Accountant.
Karen J. Cox
has served as Senior Vice
President of Administration of Territorial Savings Bank since 1984, and has been employed by Territorial Savings Bank since 1968. Ms. Cox previously worked with other financial institutions in the State of Hawaii beginning in 1964.
Richard K.C. Lau
has served as Senior Vice President and Chief Lending Officer of Territorial Savings Bank since 1982. Mr. Lau was
employed at other financial institutions in the State of Hawaii beginning in 1970.
Melvin M. Miyamoto
has
served as Senior Vice President and Treasurer of Territorial Savings Bank since 1986, and has been employed by Territorial Savings Bank since 1984. Mr. Miyamoto is a Certified Public Accountant.
102
Meetings and Committees of the Board of Directors
We conduct business through meetings of our Board of Directors and its committees. During the year ended December 31, 2007, the Board of Directors of
Territorial Bancorp Inc. did not meet and the Board of Directors of Territorial Savings Bank met 14 times. The Board of Directors of Territorial Bancorp Inc. has established the following standing committees: the Compensation Committee, the
Nominating and Corporate Governance Committee and the Audit Committee. Each of these committees operates under a written charter, which governs its composition, responsibilities and operations.
The table below sets forth the directors of each of the listed standing committees, and the number of meetings held by the comparable committee of
Territorial Savings Bank. Director Ikeda will be designated as an “Audit Committee Financial Expert” for the Audit Committee, as that term is defined by the rules and regulations of the Securities and Exchange Commission.
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Nominating
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Compensation
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Audit
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Howard Y. Ikeda*
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Harold H. Ohama*
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Howard Y. Ikeda*
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Richard I. Murakami
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Howard Y. Ikeda
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Harold H. Ohama
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David S. Murakami
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Kirk W. Caldwell
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Richard I. Murakami
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Number of Meetings in 2007:
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3
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4
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5
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*
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Denotes committee chair as of September 30, 2008.
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Director Fees
Each of Territorial Savings Bank’s outside directors is paid a quarterly retainer fee of $5,000. In addition, all directors of
Territorial Savings Bank receive a fee of $900 per board meeting attended, and our outside directors receive a fee of $750 per committee meeting attended. For Territorial Mutual Holding Company and Territorial Savings Group, Inc., outside directors
receive a fee of $500 per board meeting attended and $350 per committee meeting attended.
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The following table sets forth for the year ended December 31, 2007 certain information as to the
total remuneration we paid to our directors other than Mr. Kitagawa. Information with respect to director fees paid to Mr. Kitagawa is included below in “Executive Officer Compensation—Summary Compensation Table.”
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Director Compensation Table For the Year Ended December 31, 2007
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Name
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Fees earned or paid in
cash ($)
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Total ($)
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David S. Murakami
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44,100
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44,100
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Richard I. Murakami
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44,850
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44,850
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Howard Y. Ikeda
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45,200
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45,200
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Harold H. Ohama
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44,850
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44,850
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Kirk W. Caldwell (1)
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14,166
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14,166
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Wade McVay (2)
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10,450
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10,450
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(1)
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Mr. Caldwell joined the Board of Directors of Territorial Savings Bank on July 25, 2007 and the Boards of Directors of Territorial Savings Group, Inc. and Territorial
Mutual Holding Company on March 27, 2008.
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(2)
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Mr. McVay retired from the Boards of Directors effective May 1, 2007.
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Compensation Discussion And Analysis
Compensation Philosophy and Objectives.
Our compensation committee has
the responsibility for establishing and reviewing our compensation philosophy and objectives. In this role, the compensation committee has sought to design a compensation structure that attracts and retains qualified and experienced officers and, at
the same time, is reasonable and competitive, taking into account both short and long-term incentives. As a non-public mutual holding company that has not issued stock to the public, our compensation has consisted primarily of cash compensation,
salary and bonuses, and retirement benefits. As a public company, we will be able to offer stock-based benefit plans, subject to stockholder approval at a meeting no earlier than six months following completion of the conversion. We intend to
implement one or more stock-based benefit plans after our conversion and we expect that these stock-based plans will help us to attract and retain employees consistent with our growth plans as well as providing longer term incentives. We expect that
our proposed stock-based benefit plans will play a significant role in our future compensation considerations, particularly for our named executive officers (we refer to Allan S. Kitagawa, Chairman of the Board, President and Chief Executive
Officer, Melvin M. Miyamoto, Senior Vice President and Treasurer, Vernon Hirata, Vice Chairman, Co-Chief Operating Officer, General Counsel and Corporate Secretary, Ralph Y. Nakatsuka, Vice Chairman, Co-Chief Operating Officer and Richard K.C. Lau,
Senior Vice President and Chief Lending Officer, as our named executive officers.)
Role of Executive Officers and
Management.
The Chairman of the Board, President and Chief Executive Officer provides recommendations to the compensation committee on matters of compensation philosophy, plan design and the general guidelines for employee
compensation. These recommendations are then considered by the compensation committee. The Chairman of the Board, President and Chief Executive Officer generally attends compensation committee meetings but does not vote on and is not present for any
discussion of his own compensation. In addition, certain members of our management team participate in the compensation committee meetings to provide information to the committee on an as-needed basis.
104
During 2007, we retained Clark Consulting, a nationwide benefits consulting firm, to review our
compensation structure and levels of compensation. Clark Consulting reviewed our compensation practices, including salary, bonus and supplemental executive retirement plans in comparison to a number of different peer groups including approximately
17 regional banks and thrift institutions. Clark Consulting also assisted the compensation committee in reviewing, designing and implementing modifications to our cash bonus program and supplemental executive retirement plans described below. We
believe these programs properly allocate cash compensation between long-term and currently paid compensation. The compensation committee considered Clark Consulting’s review of compensation levels in establishing the compensation amounts for
the named executive officers in 2007.
Elements of Executive
Compensation.
When setting the compensation of our named executive officers, the compensation committee generally targets compensation at the 50
th
to the 75
th
percentiles of our peer group with respect to each of the components of cash compensation. The compensation we provide to our
named executive officers and other employees primarily consists of the following:
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•
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annual cash bonuses which, for certain executives, are based on specified goals and benchmarks designated each year and for other executives are discretionary;
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•
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retirement benefits, which are determined without regard to gains from other elements of compensation; and
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•
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perquisites and other personal benefits.
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Base Salary.
Base salary is the primary source of compensation for services performed during the year for all employees. Base salary ranges for named executive officers are determined based on the executive’s position,
performance and compensation levels paid by our peers to executives in similar positions.
During its review of base salaries for
executives, the compensation committee primarily considers:
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•
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market data for peer institutions, direct competitors and publicly held businesses located in Hawaii;
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•
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internal review of the executive’s compensation, both individually and relative to other officers;
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•
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individual performance of the executive;
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•
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qualifications and experience of the executive; and
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•
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our financial condition and results of operations, including the tax and accounting impact of particular forms of compensation.
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Base salaries are reviewed annually and adjusted from time to time to realign salaries with market levels after taking into account individual
responsibilities, performance and experience.
105
Cash Bonuses.
In addition to base salary, we have established a cash bonus plan for Messrs.
Kitagawa, Hirata and Nakatsuka, named the Executive Incentive Compensation Plan. The determination of cash bonuses paid to our other senior executives are not determined by a written cash bonus plan and are discretionary. Under the Executive
Incentive Compensation Plan, awards are granted annually. The amount of the incentive cash bonus ranges from 0% to 70% of an executive’s salary and is based on the following three components:
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•
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an award of up to 35% of the executive’s salary amount is based on return on assets and return on equity targets each year, equally weighted between these two
measurements. Beginning in 2009, this award will only be based on return on assets targets;
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•
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an award of up to 21% of an executive’s salary is based on non-financial goals for each year; and
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•
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an award of up to 14% of an executive’s salary is based on our long-term performance.
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The compensation committee has determined that the terms of the Executive Incentive Compensation Plan are appropriate in comparison to the bonuses paid
to employees with the same position at comparable organizations, as reported in publicly available salary surveys, as well as in the 2007 Clark Consulting Survey that was specifically prepared for us. The compensation committee also considers the
overall market for executive officer level positions at publicly held businesses located in Hawaii. In 2007, our President and Chief Executive Officer determined the amount of the discretionary cash bonuses paid to our senior executives who do not
participate in the Executive Incentive Compensation Plan. In 2008 and in subsequent years, all discretionary cash bonuses will be recommended by the President and Chief Executive Officer and approved by the compensation committee. Cash bonuses paid
under the Executive Incentive Compensation Plan are approved by the compensation committee.
The 2007 Clark Consulting Survey prepared for
us contained data from four peer groups that we use as a reference to assess our competitive position with respect to the overall compensation paid to Messrs. Kitagawa, Hirata and Nakatsuka. The 2007 Clark Consulting Survey utilized data from the
following peer groups of $1 billion to $5 billion in assets:
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•
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an Office of Thrift Supervision peer group that consists of 32 organizations,
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•
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a coast peer group, that consists of banks that are located on either the east or west coast (consisting of 17 institutions, which are a sub-set of the OTS peer
group),
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•
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a loan composition peer group, comprised of financial institutions that have the highest concentration of loans secured by residential real estate and consumer
loans (consisting of 19 institutions, which are a sub-set of the OTS peer group), and
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•
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Hawaiian public organizations, that consists of 11 publicly traded organizations located in Hawaii.
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106
The coast peer group consisted of the following institutions:
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Boston Private Financial Holdings, Inc.
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OceanFirst Financial Corp.
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Brookline Bancorp, Inc.
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Partners Trust Financial Group, Inc.
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Charter Financial Corporation (MHC)
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PFF Bancorp, Inc.
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Dime Community Bancshares, Inc.
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Provident Financial Holdings, Inc.
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First Financial Holdings, Inc.
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Provident New York Bancorp
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Flushing Financial Corporation
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TrustCo Bank Corp NY
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FMS Financial Corporation
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United Financial Bancorp, Inc.
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Harrington West Financial Bancorp, Inc.
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WSFS Financial Corporation
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Kearny Financial Corp. (MHC)
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The loan composition peer group consisted of the following institutions:
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Bank Mutual Corporation
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Partners Trust Financial Group, Inc.
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Boston Private Financial Holdings, Inc.
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PFF Bancorp, Inc.
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Brookline Bancorp, Inc.
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Provident Financial Holdings, Inc.
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Charter Financial Corporation (MHC)
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Provident New York Bancorp
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First Financial Holdings, Inc.
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Pulaski Financial Corp.
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First Place Financial Corp.
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TrustCo Bank Corp. NY
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FMS Financial Corporation
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United Financial Bancorp, Inc.
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Kearny Financial Corp. (MHC)
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ViewPoint Financial Group (MHC)
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OceanFirst Financial Corp.
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Willow Financial Bancorp, Inc
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Peoples Community Bancorp, Inc.
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The Office of Thrift Supervision peer group consisted of the following institutions:
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Anchor BanCorp Wisconsin Inc.
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NASB Financial, Inc.
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BankFinancial Corporation
|
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OceanFirst Financial Corp.
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Bank Mutual Corporation
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Partners Trust Financial Group, Inc.
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Boston Private Financial Holdings, Inc.
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Peoples Community Bancorp, Inc.
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Brookline Bancorp, Inc.
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PFF Bancorp, Inc.
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CFS Bancorp, Inc.
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Provident Financial Holdings, Inc.
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Charter Financial Corporation (MHC)
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Provident New York Bancorp
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Dime Community Bancshares, Inc.
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Pulaski Financial Corp.
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First Defiance Financial Corp.
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|
Superior Bancorp
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|
First Financial Holdings, Inc.
|
|
TierOne Corporation
|
|
First Place Financial Corp.
|
|
TrustCo Bank Corp NY
|
|
Flushing Financial Corporation
|
|
United Financial Bancorp, Inc.
|
|
FMS Financial Corporation
|
|
United Western Bancorp, Inc.
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|
Harrington West Financial Group, Inc.
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|
ViewPoint Financial Group (MHC)
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|
HMN Financial, Inc.
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Willow Financial Bancorp, Inc.
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Kearny Financial Corp. (MHC)
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|
WSFS Financial Corporation
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107
The Hawaiian public organization peer group consisted of the following institutions:
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Alexander & Baldwin, Inc.
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Hawaiian Holdings, Inc.
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Bank of Hawaii Corp.
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Hawaiian Telcom Communications, Inc.
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Barnwell Industries
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|
Hoku Scientific, Inc.
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|
Central Pacific Financial Corp.
|
|
Maui Land & Pineapple Co.
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|
Cyanotech Corp.
|
|
MI Macadamia Orchards -LP
|
|
Hawaiian Electric Industries
|
|
|
Employment Agreements.
We maintain employment agreements with Messrs. Kitagawa,
Hirata and Nakatsuka, which provide severance payments in the event of involuntary or good reason termination of employment or termination following a change in control. The rationale for providing these payments is to provide security for our key
executives and stability among our senior management team. For a discussion of these agreements and the payments that would be received by the named executive officers under certain scenarios with respect to those agreements, see
“—Employment Agreements” below.
Retirement Plans and Other Benefits
401(k) Plan.
We also provide all of our employees, including our named executive officers, with tax-qualified retirement benefits
through our 401(k) plan. All employees who meet the age and service requirements may participate in the 401(k) plan on a non-discriminatory basis. We provide a 401(k) match equal to at least 5% of a participant’s salary deferral and we may
exercise our discretion to increase the amount of the match. See “—Tax-Qualified Benefit Plans—Territorial Savings Bank Profit Sharing and 401(k) Plan” for further description of the terms of the 401(k) plan.
Employee Stock Ownership Plan.
In connection with our stock offering, we will implement a leveraged employee stock ownership plan, with a
trustee using the proceeds of a loan from Territorial Bancorp Inc. to purchase Territorial Bancorp Inc. common stock in the conversion pursuant to applicable regulatory guidelines. The employee stock ownership plan will provide our employees with
additional retirement savings in the form of our common stock and encourage employee ownership in the new public company. See “—Tax-Qualified Benefit Plans – Employee Stock Ownership Plan” for further description of the terms of
the employee stock ownership plan.
Supplemental Executive Retirement Agreement.
We provide supplemental executive retirement
benefits for Messrs. Kitagawa, Hirata and Nakatsuka. We provide these retirement benefits in order to remain competitive and to attract and retain our named executive officers. See “—Pension Benefits — Supplemental Executive
Retirement Agreement” for further description of the terms of the agreements.
Perquisites.
We offer various
fringe benefits to all of our employees, including our named executive officers, including group policies for medical insurance. We provide individual coverage to employees, with the employee being responsible for a portion of the premium. Our named
executive officers are provided with an automobile or automobile allowance, and we pay club dues for some of our named executive officers (Messrs. Kitagawa, Hirata and Nakatsuka). In addition, we provide our named executive officers life insurance,
long-term care insurance, long-term disability insurance, parking and cellular phone reimbursement. The compensation committee believes these benefits are appropriate and assist these officers in fulfilling their employment obligations.
Pension Plan.
In 2008, we froze our tax-qualified defined benefit plan such that no further benefit accruals will be earned after
December 31, 2008; however, participants will continue to earn
108
vesting credit. We made this change because many of our peer banks have also frozen or terminated their defined benefit pension plans, and we have found that
a 401(k) plan is a more attractive retirement vehicle in recruiting employees
Tax and Accounting Implications.
In consultation with our advisors, we evaluate the tax and accounting treatment of each of our compensation programs at the time of adoption and on an annual basis to ensure that we understand the financial impact of the program. Our
analysis includes a detailed review of recently adopted and pending changes in tax and accounting requirements. As part of our review, we consider modifications and/or alternatives to existing programs to take advantage of favorable changes in the
tax or accounting environment or to avoid adverse consequences. To preserve maximum flexibility in the design and implementation of our compensation program, we have not adopted a formal policy that requires all compensation to be tax deductible.
However, to the greatest extent possible, it is our intent to structure our compensation programs in a tax efficient manner.
109
Executive Officer Compensation
Summary Compensation Table.
The table below summarizes the total compensation paid to or earned by our named executive officers for the year ended December 31, 2007.
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Name and principal position
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|
Year
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|
Salary (1)
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|
Bonus(2)
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|
Non-Equity
Incentive Plan
Compensation (3)
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Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings (4)
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All Other
Compensation
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Total
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Allan S. Kitagawa
Chairman of the Board, President and Chief Executive Officer
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2007
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$
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738,800
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$
|
—
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$
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152,880
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$
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613,212
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$
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25,508
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(5)
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$
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1,530,400
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Melvin M. Miyamoto
Senior Vice President and Treasurer (principal financial officer)
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2007
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118,619
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14,513
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—
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31,621
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|
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19,713
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(6)
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184,466
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Vernon Hirata
Vice Chairman, Co-Chief Operating Officer, General Counsel and Corporate Secretary
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2007
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260,000
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—
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54,600
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169,589
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26,200
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(7)
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510,389
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Ralph Y. Nakatsuka
Vice Chairman and Co-Chief Operating Officer
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2007
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121,333
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|
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—
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54,600
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—
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12,792
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(8)
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188,725
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Richard K.C. Lau
Senior Vice President and Chief Lending Officer
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2007
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138,752
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16,946
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—
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44,343
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19,826
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(9)
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219,867
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(footnotes begin on following page)
110
(footnotes from previous page)
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(1)
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For Mr. Kitagawa, includes fees relating to service as Chairman of the Board. Mr. Kitagawa no longer receives fees for Board services. Mr. Nakatsuka was hired on
July 12, 2007 and his annual base salary is $260,000.
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(2)
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The amounts in this column represent a discretionary cash bonus earned for performance in 2007.
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(3)
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The amounts in this column represent the dollar value of the cash bonus incentives earned under the executive incentive compensation plan for performance in 2007.
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(4)
|
The amounts in this column for Mr. Kitagawa represent a change in value of $61,695 for the pension plan, $550,032 for the supplemental executive retirement agreement, $1,485
for above-market earnings (defined for these purposes as the difference between 7%, which is the annual amount of interest paid on the deferred account balances, and 5.51%, which is 120% of the applicable federal long-term rate), for
Mr. Miyamoto a change in value of $31,621 for the pension plan, for Mr. Hirata a change in value of $49,962 for the pension plan, $119,355 for the supplemental executive retirement agreement and $272 for above-market earnings and for
Mr. Lau a change in value of $44,343 for the pension plan. Mr. Miyamoto and Mr. Lau do not participate in a supplemental executive retirement agreement. During the year shown, there were no payments or allocations of above-market or
preferential earnings.
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(5)
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Includes $2,383 for 401(k) Plan matching contributions, $1,534 for long-term care premiums, $4,071 for health insurance premiums, $1,350 for long-term disability insurance premiums,
$800 for basic life insurance premiums, $2,636 for personal use of company automobile, $4,500 for parking, $7,134 for country club dues and $1,100 for cell phone reimbursement.
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(6)
|
Includes $2,383 for 401(k) Plan matching contributions, $773 for long-term care premiums, $4,071 for health insurance premiums, $593 for long-term disability insurance premiums,
$493 for basic life insurance premiums, $7,800 for automobile allowance and $3,600 for parking.
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(7)
|
Includes $2,383 for 401(k) Plan matching contributions, $1,195 for long-term care premiums, $4,071 for health insurance premiums, $900 for long-term disability insurance premiums,
$800 for basic life insurance premiums, $3,419 for personal use of company automobile, $6,400 for automobile allowance, $4,500 for parking, $2,046 for country club dues and $486 for cell phone reimbursement.
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(8)
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Includes $2,418 for health insurance premiums, $375 for long-term disability insurance premiums, $333 for basic life insurance premiums, $903 for personal use of company automobile,
$2,250 for parking, $6,347 for country club dues and $166 for cell phone reimbursement.
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(9)
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Includes $2,383 for 401(k) Plan matching contributions, $1,186 for long-term care premiums, $4,071 for health insurance premiums, $693 for long-term disability insurance premiums,
$574 for basic life insurance premiums, $419 for personal use of company automobile, $6,000 for automobile allowance and $4,500 for parking.
|
Plan-Based Awards
.
The following table sets forth for the year ended December 31, 2007 certain information as to grants of plan-based awards for the named executive officers under the terms
of the Executive Incentive Compensation Plan. For the year ended December 31, 2007, payments were paid in March 2008, in the amounts listed in the “Summary Compensation Table.” For a discussion of this plan, see “Compensation
Discussion and Analysis—Cash Bonuses” and “Executive Officer Compensation—Executive Incentive Compensation Plan.”
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Estimated Future Payouts Under Non-Equity Incentive Plan Awards
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Name
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Grant Date
|
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Threshold ($)
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Target ($)
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Maximum ($)
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Allan S. Kitagawa
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(1)
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$
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101,920
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$
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254,800
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$
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509,600
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Melvin M. Miyamoto
|
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—
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|
|
—
|
|
|
—
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|
|
—
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Vernon Hirata
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(1)
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36,400
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91,000
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|
|
182,000
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Ralph Y. Nakatsuka
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(1)
|
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36,400
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91,000
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|
182,000
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Richard K.C. Lau
|
|
—
|
|
|
—
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|
|
—
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|
|
—
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(1)
|
On an annual basis, Messrs. Kitagawa, Hirata and Nakatsuka are eligible to receive incentive cash bonuses under the Executive Incentive Compensation Plan. Mr. Miyamoto and
Mr. Lau do not participate in the plan.
|
Employment Agreements.
Territorial Savings Bank has entered into
separate employment agreements with Messrs. Kitagawa, Hirata and Nakatsuka (referred to below as the “executives” or “executive”). Upon completion of the conversion, Territorial Bancorp Inc. will enter into separate employment
agreements with each executive, which will have essentially identical provisions as the Territorial Savings Bank agreements, except that the employment agreements will provide that Territorial Bancorp Inc. will make any payments not made by
Territorial Savings Bank under its agreements with the executives and that the executives will not receive any duplicate payments. Our continued success depends to a significant degree on the skills and competence of these officers, and the
employment agreements are intended to ensure that we maintain a stable management base following the offering. The discussion below addresses the employment agreement for each executive with Territorial Savings Bank and those to be implemented by
Territorial Bancorp Inc.
111
The employment agreements each provide for three-year terms, subject to annual renewal by the board of
directors for an additional year beyond the then-current expiration date. The initial base salaries under the employment agreements are $753,480 for Mr. Kitagawa, $269,100 for Mr. Hirata and $269,100 for Mr. Nakatsuka. The agreements
also provide for participation in employee benefit plans and programs maintained for the benefit of senior management personnel, including discretionary bonuses, participation in stock-based benefit plans, and certain fringe benefits as described in
the agreements.
Upon termination of an executive’s employment for cause, as defined in each of the agreements, the executive will
receive no further compensation or benefits under the agreement. If we terminate the executive for reasons other than for cause or if the executive terminates voluntarily under specified circumstances that constitute constructive termination, the
executive will receive an amount equal to the base salary and cash bonus and employer contributions to benefit plans that would have been payable for the remaining term of the agreement. We will also continue to pay for each executive’s life,
health and dental coverage for up to three years, with the executive responsible for his share of the employee premium.
If the executive
terminates employment for any reason other than for cause within 12 months following a change in control, the executive will receive the greater of (a) the amount he would have received if we terminated the executive for a reason other than for
cause or if the executive voluntarily terminated under specified circumstances that constitute constructive termination (as described in the immediately preceding paragraph), or (b) three times his prior five-year average of taxable
compensation less one dollar. We will also continue to pay for each executive’s life, health and dental coverage for up to three years, with the executive responsible for his share of the employee premium.
Upon termination of employment (other than a termination in connection with a change in control), each executive will be required to adhere to a one-year
non-competition provision. The executive will be required to release us from any and all claims in order to receive any payments and benefits under their agreements. We will agree to pay all reasonable costs and legal fees of the executives in
relation to the enforcement of the employment agreements, provided the executives succeed on the merits in a legal judgment, arbitration proceeding or settlement. The employment agreements also provide for indemnification of the executives to the
fullest extent legally permissible.
Separation Pay Plan.
We have adopted the Territorial Savings Bank Separation Pay
Plan in connection with the conversion. The plan will provide severance benefits to eligible employees whose employment is involuntarily terminated within 24 months after a change in control of Territorial Bancorp Inc. All regular employees who do
not receive severance pay under an employment or change in control agreement are participants in this plan. Terminated employees will receive a severance payment of one month of base compensation for each year of service, up to a maximum of 24
months of base compensation, and employees who are at the level of Senior Vice President or above will receive a minimum severance payment of 12 months of base compensation. In addition, terminated employees who are at the level of senior vice
president and above will also be eligible to continue to participate in our health insurance plan for up to one year, with the employee responsible for his share of the employee premium.
Executive Incentive Compensation Plan.
Territorial Savings Bank maintains the Executive Incentive Compensation Plan (the “EICP”).
Messrs. Kitagawa, Hirata and Nakatsuka are currently the
112
only participants in the EICP. The purpose of the EICP is to provide structured annual bonuses to key management personnel for their contributions to the
achievement of strategic organizational objectives of Territorial Savings Bank. The participants’ bonuses are determined based on bank-wide performance measures, non-financial goals and Territorial Savings Bank’s long-term performance. The
bank-wide performance measures are based on Territorial Savings Bank’s return on assets for the fiscal year. The amount of the bonus for the participants is the sum of the bank-wide performance measures, non-financial goals and Territorial
Savings Bank’s long-term performance. The amount of bonus awarded shall be determined as a percentage of the participants’ base salary, where such percentage shall not exceed 70% of base salary. At the end of each fiscal year, the
compensation committee will calculate each participant’s award. Bonuses, if any, are paid in a single cash lump sum distribution within 75 days of the close of the fiscal year or as soon as the performance data is available to compute the
amount of the awards.
Pension Benefits
The following table sets forth the actuarial present value of each named executive officer’s accumulated benefit under our pension plan, along with the number of years of credited service, and for Messrs. Kitagawa, Hirata, and
Nakatsuka, the value of their benefits in each of their supplemental executive retirement agreements.
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|
Pension Benefits At And For The Year Ended December 31,
2007
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Name
|
|
Plan Name
|
|
Number of
Years
Credited
Service
|
|
Present Value of
Accumulated
Benefit (1)
|
|
Payments During
Last Fiscal Year
|
|
Allan S. Kitagawa
|
|
Pension Plan
|
|
20
|
|
$
|
579,807
|
|
$
|
—
|
|
|
|
Supplemental Executive
Retirement
Agreement
|
|
N/A
|
|
|
4,194,751
|
|
|
—
|
|
|
|
|
|
|
|
Melvin M. Miyamoto
|
|
Pension Plan
|
|
23
|
|
|
175,900
|
|
|
—
|
|
|
|
|
|
|
|
Vernon Hirata
|
|
Pension Plan
|
|
20
|
|
|
294,597
|
|
|
—
|
|
|
|
Supplemental Executive
Retirement
Agreement
|
|
N/A
|
|
|
458,092
|
|
|
—
|
|
|
|
|
|
|
|
Ralph Y. Nakatsuka
|
|
Pension Plan
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Supplemental Executive
Retirement
Agreement
|
|
N/A
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Richard K.C. Lau
|
|
Pension Plan
|
|
24
|
|
|
468,245
|
|
|
—
|
|
|
|
Supplemental Executive
Retirement
Agreement
|
|
N/A
|
|
|
—
|
|
|
—
|
|
(1)
|
Present value of accumulated benefits under the pension plan and the supplemental executive retirement agreement as of December 31, 2007, determined using interest rate and
mortality rate assumptions consistent with those used for our financial reporting purposes, assuming that the executive’s normal retirement age is his retirement date. The valuation method and all material assumptions applied in quantifying the
present value of the current accrued benefit are set forth in the footnotes to the consolidated financial statements.
|
113
Pension Plan.
Territorial Savings Bank sponsors the Territorial Savings Bank
Employee Retirement Plan, a defined benefit pension plan that covers substantially all of our employees. Employees become eligible for participation in the pension plan on the first day of the calendar month on or after completing one year of
service and attaining age 21. Effective December 31, 2008, the pension plan was frozen, such that no further benefit accruals will be earned after that date; however, participants will continue to earn vesting credit.
Participants in the pension plan become fully vested in their retirement benefits upon completion of five years of service. They also become 100% vested
upon attaining age 65 or upon death. A participant who terminates employment on or after reaching age 65 is entitled to the full retirement benefit. A participant’s normal retirement benefit is generally based on a formula that takes into
account the amount credited under the pension plan for service before January 1, 1984 and the amount credited under the pension plan for service from 1984 to 1998 and the amount credited from 1998 to 2008, as well as salary and certain other
compensation. The plan does not grant additional years of service for any purpose.
The pension plan permits early retirement at age
55. Participants who retire after age 65 will be entitled to the full amount of their benefit, generally calculated through their late retirement date. Eligible participants who elect an early retirement benefit will receive a reduced normal
retirement benefit. As of December 31, 2007, each named executive officer was eligible for early retirement, and Mr. Lau was eligible for normal retirement.
The normal form of retirement for participants who are not married is a single life annuity. The normal form of retirement benefit for participants who
are married is a 50% joint and survivor annuity. Other optional forms of benefit are available, such as an early retirement benefit, and all optional forms of benefit are the actuarial equivalent of the normal form (e.g., a participant does not
receive more or less by selecting an optional form of benefit). In the event of the participant’s death, benefits normally will be paid to the participant’s spouse unless the spouse consents to an alternative beneficiary in writing. In the
event of death any time after a participant is vested or eligible for a pension benefit, provided the participant has been married for at least one year and provided that benefits have not commenced at the time of death, the participant’s
spouse may either receive the full benefit when the participant would have reached age 65 or receive a reduced benefit anytime after the deceased participant would have attained age 55.
For the 2007 plan year, we made contributions to the pension plan of approximately $400,000.
Supplemental Executive Retirement Agreements.
We have entered into a supplemental executive retirement agreement with each of Messrs.
Kitagawa, Hirata and Nakatsuka. Under Mr. Kitagawa’s agreement, the executive is entitled to receive an amount equal to the present value of $600,000 per year for 15 years payable in a lump sum on the first day of the month upon retirement
after attaining age 66. Under the agreements with Messrs. Hirata and Nakatsuka, the executive will receive an annual benefit upon retirement after age 66 equal to 65% of the average of his compensation for the three years immediately preceding his
termination of employment reduced by the sum of the benefits payable under the pension plan and Social Security benefits. Mr. Hirata’s benefits will be paid in monthly installments for 15 years and Mr. Nakatsuka will receive a lump
sum.
Each executive may also retire early, before attaining age 66, and receive a reduced benefit. Mr. Kitagawa will receive the
amount accrued for accounting purposes as of the end of the calendar year before his termination of employment, payable in a lump sum. Messrs. Hirata and Nakatsuka benefits are reduced by a fraction, the numerator of which is completed years of
service and the denominator of which is the executive’s potential years of service if he had remained employed until age 66, with such benefits paid by lump sum for Mr. Nakatsuka and in installments for Mr. Hirata over 15 years.
114
For Mr. Kitagawa, if his employment is terminated within three years following a change in control,
he will receive his normal retirement benefit. Messrs. Hirata and Nakatsuka will each receive 65% of their final average compensation projected to age 66, without any reduction for amounts payable under the pension plan or Social Security. All
amounts are paid as a lump sum except Mr. Hirata will receive installments for 15 years. The agreements contain change of control “tax gross up” provisions such that if a payment to any of the three executives exceeds the limit on
such payments pursuant to Internal Revenue Code Section 280G, and thereby imposes an excise tax on the officer, Territorial Savings Bank, or its successor, will pay such executive additional amounts to compensate for the excise tax.
In the event of disability or death, Messrs. Hirata and Nakatsuka will receive the same benefit as if they had terminated employment following a
change in control. Upon death, Mr. Kitagawa will receive a lump-sum payment equal to the present value of his projected normal retirement benefit and upon disability Mr. Kitagawa will receive a lump sum equal to the amount accrued for
accounting purposes under the plan.
No benefits are payable in the event of a termination for cause.
Nonqualified Deferred Compensation Plans
The
following table provides information with respect to each nonqualified deferred compensation plan in which the named executive officers participated in 2007.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified Deferred Compensation At And For The Year Ended December 31,
2007
|
|
Name
|
|
Plan Name
|
|
Executive
Contributions
in Last Fiscal
Year
|
|
Registrant
Contributions
in Last Fiscal
Year
|
|
Aggregate
Earnings in
Last Fiscal
Year (1)
|
|
Aggregate
Withdrawals/
Distributions
|
|
Aggregate
Balance at Last
Fiscal
Year
End
|
|
Allan S. Kitagawa
|
|
Executive Deferred
Incentive Agreement
|
|
$
|
—
|
|
$
|
—
|
|
$
|
99,635
|
|
$
|
—
|
|
$
|
1,522,996
|
|
|
|
|
|
|
|
|
|
Vernon Hirata
|
|
Executive Deferred
Incentive Agreement
|
|
|
—
|
|
|
—
|
|
|
18,222
|
|
|
—
|
|
|
278,530
|
|
(1)
|
The amounts in this column include above-market earnings for the executive deferred incentive agreements in the amount of $1,485 and $272 for Messrs. Kitagawa and Hirata,
respectively. The account balances accrue interest at the rate of 7% per year. We ceased making contributions to the agreements for calendar years beginning after 2006 (other than the interest crediting).
|
Executive Deferred Incentive Agreement.
We have entered into an executive deferred incentive agreement with each of
Mr. Kitagawa and Mr. Hirata. Each agreement was frozen effective August 29, 2007. Before the agreements were frozen, each agreement provided for the grant of annual cash awards equal to a specified percentage of base salary, based on
the attainment of established criteria. Payment of all awards are deferred until the earlier of:
115
|
|
•
|
|
separation from service within three years following a change in control,
|
|
|
•
|
|
termination due to disability, or
|
|
|
•
|
|
death, when the executive will receive a lump sum.
|
116
Potential Payments on Termination or Change in Control
Assuming that each of our named executive officers terminated employment as of December 31, 2007, they would be entitled to certain payments and
benefits. The following tables set forth payments that would have been made to Messrs. Kitagawa and Hirata pursuant to their employment agreements had their employment been terminated for the following reasons as of December 31, 2007. No other
named executive officer was a party to an employment agreement as of December 31, 2007. There are no payments or benefits payable solely on account of a change in control.
Allan S. Kitagawa
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and Benefits
|
|
Voluntary
Termination or
Retirement
|
|
Involuntary
Termination
for Cause
|
|
Involuntary
Termination
Without Cause
or Termination by
the Executive for
Good Reason
|
|
Change in
Control
With
Termination of
Employment
|
|
Termination
Upon Death(3)
|
|
Termination
Upon
Disability(4)
|
|
Severance Pay (1)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,540,675
|
|
$
|
3,589,907
|
|
$
|
119,671
|
|
$
|
3,114,653
|
|
Health, Dental, Life
Insurance Continuation (2)
|
|
|
—
|
|
|
—
|
|
|
14,614
|
|
|
14,614
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5,555,289
|
|
$
|
3,604,521
|
|
$
|
119,671
|
|
$
|
3,114,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vernon Hirata
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments and Benefits
|
|
Voluntary
Termination or
Retirement
|
|
Involuntary
Termination
for Cause
|
|
Involuntary
Termination
Without Cause
or Termination by
the Executive for
Good Reason
|
|
Change in
Control
With
Termination of
Employment
|
|
Termination
Upon Death(3)
|
|
Termination
Upon
Disability(4)
|
|
Severance Pay (1)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,160,496
|
|
$
|
855,477
|
|
$
|
42,740
|
|
$
|
2,842,061
|
|
Health, Dental, Life
Insurance Continuation (2)
|
|
|
—
|
|
|
—
|
|
|
14,614
|
|
|
14,614
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,175,110
|
|
$
|
870,091
|
|
$
|
42,740
|
|
$
|
2,842,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(footnotes begin on following page)
117
(footnotes from previous page)
|
(1)
|
These severance payments are payable if the executive’s employment is terminated either (i) by Territorial
Savings Bank or Territorial Bancorp Inc. for any reason other than cause, death or disability or (ii) by the executive if Territorial Savings Bank or Territorial Bancorp Inc. takes certain adverse actions (a “good reason”
termination). The amounts are generally higher if the termination of employment occurs concurrently with or subsequent to a change in control. The Involuntary Termination Without Cause or Termination by the Executive for Good Reason column
represents a lump sum payment equal to the base salary and bonus and retirement benefits the executive would have received for the remaining term of his employment agreement, which is 2.25 years for Mr. Kitagawa and 2.0 years for
Mr. Hirata. The Change in Control With Termination of Employment column represents the greater of (a) the amount shown in the Involuntary Termination Without Cause or Termination by the Executive for Good Reason column, or (b) a lump
sum payment equal to three times the executive’s prior five year average of taxable compensation less one dollar, provided that the amount may not exceed three times the executive’s average taxable income for the five years ended
December 31, 2006 (the “280G Threshold”). The amounts in the Change in Control With Termination of Employment column for Mr. Kitagawa are reduced by $1,950,768 and for Mr. Hirata are reduced by $153,567 due to the 280G
Threshold. The amounts are not discounted to present value. The amounts shown in the above tables are based on the terms of the amended Territorial Savings Bank employment agreements, which were adopted on October 29, 2008, and the new
Territorial Bancorp Inc. employment agreements which will be effective as of the date of the completion of the conversion. If Mr. Kitagawa’s employment terminated in 2008 (instead of in 2007), we expect that the amount of his cash
severance payable upon an Involuntary Termination Without Cause or for Good Reason would be reduced by approximately $2.0 million because of the reduced cash bonus paid to Mr. Kitagawa in 2007.
|
|
(2)
|
Represents the estimated cost of continuing medical, dental and life insurance premiums for three years for each executive. The estimated costs do not assume an increase in current
premiums and the amounts have not been discounted to present value.
|
|
(3)
|
If the executive’s employment is terminated due to death, the executive’s beneficiaries or estate will receive an amount equal to sixty days of the executive’s
current base salary.
|
|
(4)
|
If an executive’s employment is terminated due to disability, Mr. Kitagawa would receive disability benefits of $93,661 per month and $24,395 per month for Mr. Hirata
until they reach their normal retirement age of 65. The Bank is required to pay these monthly amounts, less the amount of monthly disability income insurance benefits which are $15,000 for Mr. Kitagawa and $10,000 for Mr. Hirata. The
Termination Upon Disability column represents the total amount of disability benefits payable and the amount has not been discounted to present value.
|
The above table does not include the value of the benefits to be paid under the supplemental employee retirement agreement in the event an executive terminates employment due to early retirement, disability, change in
control or death, which had an estimated present value of $5,770,911 for each of early retirement, disability, change in control and $5,264,547 for death for Mr. Kitagawa, and $376,841, $2,635,181, $2,635,181 and $2,633,274, respectively, for
Mr. Hirata as of December 31, 2007. Neither Mr. Kitagawa nor Mr. Hirata would have been entitled to a normal retirement benefit as of December 31, 2007. Mr. Kitagawa’s benefits are payable by lump sum and
Mr. Hirata’s benefits are payable over 15 years. In addition, the above table does not include the value of the benefits to be paid under the executive deferred incentive agreement in the event the executive terminates employment due to
normal or early retirement, disability, change in control or death, which was $1,522,996 for Mr. Kitagawa and $278,530 for Mr. Hirata.
Messrs. Nakatsuka, Miyamoto and Lau would not have been entitled to any severance or continued insurance coverage if their employment terminated as of December 31, 2007. Under our pension plan, Messrs. Nakatsuka, Miyamoto and Lau would
have been entitled to $0, $2,635 and $3,695 respectively, if their employment terminated as of December 31, 2007; under our long-term disability insurance plan, Messrs. Nakatsuka, Miyamoto and Lau would have been entitled to $10,000, $6,956 and
$8,161, respectively, if their employment terminated as of December 31, 2007; and under life insurance policies, Messrs. Nakatsuka, Miyamoto and Lau would have been entitled to $530,000 (however $240,000 of the benefit is attributable to
premiums paid by Mr. Nakatsuka), $182,000, and $144,000, respectively, if their employment terminated as of December 31, 2007.
Tax-Qualified
Benefit Plans
Territorial Savings Bank Profit Sharing and 401(k) Plan.
We sponsor the Territorial Savings Bank Profit
Sharing and 401(k) Plan, a tax-qualified defined contribution plan, for all employees who have satisfied the plan’s eligibility requirements. Employees may begin deferring their compensation and are eligible to receive matching contributions
and profit sharing contributions as of the first day of the month following the completion of 12 months of employment during which they worked at least 1,000 hours. All contributions are 100% vested.
118
The plan has an individual account for each participant’s contributions and allows each participant
to direct the investment of his or her account in a variety of investment funds. In connection with the conversion, the plan will add an additional investment alternative, the Territorial Bancorp Stock Fund.
The Territorial Bancorp Stock Fund will permit participants to invest up to 100% of their account
balances in Territorial Bancorp Inc. common stock. A participant who elects to purchase common stock in the subscription offering through the plan will receive the same subscription priority and be subject to the same individual purchase limitations
as if the participant had elected to make such purchase using other funds. See “The Conversion and the Offering—Offering of Common Stock” and “—Limitations on Purchase of Shares.” The plan will purchase common stock for
participants in the offering, to the extent that shares are available. After the offering, the plan will purchase shares in open market transactions. Participants will direct the stock fund trustee on the voting of shares purchased for their plan
accounts. Benefits are payable upon termination of employment, disability, attaining age 59
1
/
2
, attaining age 65, financial
hardship or plan termination. Plan loans are also permitted. Rollovers can be withdrawn at anytime. All payments are made in a cash lump sum.
Employee Stock Ownership Plan.
Effective January 1, 2009, Territorial Savings Bank adopted an employee stock ownership plan for eligible employees. Eligible employees who have attained
age 21 and were employed by us as of January 1, 2009 will begin participation in the employee stock ownership plan on the later of the effective date of the employee stock ownership plan or upon the first entry date commencing on or after the
eligible employee’s completion of 1,000 hours of service during a continuous 12-month period.
The employee stock ownership
plan trustee is expected to purchase, on behalf of the employee stock ownership plan, 8% of the total number of shares of Territorial Bancorp Inc. common stock issued in the offering. We anticipate that the employee stock ownership plan will fund
its stock purchase with a loan from Territorial Bancorp Inc. equal to the aggregate purchase price of the common stock. The loan will be repaid principally through Territorial Savings Bank’s contribution to the employee stock ownership plan and
dividends payable on common stock held by the employee stock ownership plan over the anticipated 20-year term of the loan. The interest rate for the employee stock ownership plan loan is expected to be an adjustable rate equal to the prime rate, as
published in The Wall Street Journal, on the closing date of the offering. Thereafter the interest rate will adjust annually and will be the prime rate on the first business day of the calendar year, retroactive to January 1 of such year. See
“Pro Forma Data.”
The trustee will hold the shares purchased by the employee stock ownership plan in an unallocated suspense
account, and shares will be released from the suspense account on a pro-rata basis as we repay the loan. The trustee will allocate the shares released among participants on the basis of each participant’s proportional share of compensation
relative to all participants. Participants will become 100% vested upon the completion of three years of service. Participants who were employed by Territorial Savings Bank immediately prior to the offering will receive credit for vesting purposes
for years of service prior to adoption of the employee stock ownership plan. Participants also will become fully vested automatically upon normal retirement, death or disability, a change in control, or termination of the employee stock ownership
plan. Generally, participants will receive distributions from the employee stock ownership plan upon separation from service. The employee stock ownership plan reallocates any unvested shares forfeited upon termination of employment among the
remaining participants.
119
The employee stock ownership plan permits participants to direct the trustee as to how to vote the shares
of common stock allocated to their accounts. The trustee votes unallocated shares and allocated shares for which participants do not provide instructions on any matter in the same ratio as those shares for which participants provide instructions,
subject to fulfillment of the trustee’s fiduciary responsibilities.
Under applicable accounting requirements, Territorial Savings
Bank will record a compensation expense for the employee stock ownership plan at the fair market value of the shares as they are committed to be released from the unallocated suspense account to participants’ accounts. The compensation expense
resulting from the release of the common stock from the suspense account and allocation to plan participants will result in a corresponding reduction in Territorial Bancorp Inc.’s earnings.
Employee Stock Ownership Plan Restoration Plan.
We intend to implement an employee stock ownership plan restoration plan after the
conversion that will provide benefits to selected officers whose benefits under our employee stock ownership plan are limited by applicable tax limits. The amount of benefits will be limited to the amount that would have been provided under our
employee stock ownership plan but for the application of the tax limits. Benefits will be payable in cash to participants upon their termination of employment.
Benefits to be Considered Following Completion of the Stock Offering
Following the stock offering, we intend to adopt a new
stock-based incentive plan that will provide for grants of stock options and restricted common stock awards. In accordance with applicable regulations, we anticipate that the plan will authorize a number of stock options and a number of shares of
restricted stock, not to exceed 10% and 4%, respectively, of the shares issued in the offering. These limitations will not apply if the plan is implemented more than one year after the conversion.
The stock-based incentive plan will not be established sooner than six months after the stock offering and, if adopted within one year after the stock
offering, would require the approval by stockholders owning a majority of the outstanding shares of Territorial Bancorp Inc. common stock eligible to be cast. If the stock-based incentive plan is established after one year after the stock offering,
it would require the approval of our stockholders by a majority of votes cast.
The following additional restrictions would apply to our
stock-based incentive plan only if the plan is adopted within one year after the stock offering:
|
|
•
|
|
non-employee directors in the aggregate may not receive more than 30% of the options and restricted stock awards authorized under the plan;
|
|
|
•
|
|
any non-employee director may not receive more than 5% of the options and restricted stock awards authorized under the plan;
|
|
|
•
|
|
any officer or employee may not receive more than 25% of the options and restricted stock awards authorized under the plan;
|
|
|
•
|
|
the options and restricted stock awards may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plan;
and
|
120
|
|
•
|
|
accelerated vesting is not permitted except for death, disability or upon a change in control of Territorial Savings Bank or Territorial Bancorp Inc.
|
These restrictions do not apply to plans adopted after one year following the completion of the stock offering.
We have not yet determined whether we will present the stock-based incentive plan for stockholder approval within one year following the completion of the
conversion or whether we will present this plan for stockholder approval more than one year after the completion of the conversion. In the event the Office of Thrift Supervision changes its regulations or policies regarding stock-based incentive
plans, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable.
We may obtain the shares needed for our stock-based benefit plans by issuing additional shares of common stock from authorized but unissued shares or
through stock repurchases.
Transactions with Certain Related Persons
The Sarbanes-Oxley Act of 2002 generally prohibits us from making loans to our executive officers and directors, but it contains a specific exemption from such prohibition for loans made by Territorial Savings Bank to
our executive officers and directors in compliance with federal banking regulations.
At September 30, 2008, all of our loans to
directors and executive officers were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans with persons not related to
Territorial Savings Bank, and did not involve more than the normal risk of collectability or present other unfavorable features. These loans were performing according to their original terms at September 30, 2008, and were made in compliance
with federal banking regulations.
121
SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding intended common stock subscriptions by each of the directors and executive officers of Territorial
Savings Bank and their associates, and by all directors and executive officers as a group. However, there can be no assurance that any individual director or executive officer, or the directors and executive officers as a group, will purchase any
specific number of shares of our common stock. In the event the individual maximum purchase limitation is increased, persons subscribing for the maximum amount may increase their purchase order. Directors and executive officers will purchase shares
of common stock at the same $10.00 purchase price per share and on the same terms as other purchasers in the offering. This table excludes shares of common stock to be purchased by the employee stock ownership plan, as well as any stock awards or
stock option grants that may be made no earlier than six months after the completion of the offering. The directors and officers have indicated their intention to subscribe in the offering for an aggregate of
$
million of shares of common stock, equal to
% of the number of shares of common
stock to be sold in the offering at the minimum of the offering range, assuming shares are available. Purchases by directors, executive officers and their associates will be included in determining whether the required minimum number of shares has
been subscribed for in the offering. The shares being acquired by the directors, executive officers and their associates are being acquired for investment purposes, and not with a view towards resale.
|
|
|
|
|
|
|
|
|
|
|
Name and Title
|
|
Number of
Shares
|
|
Aggregate
Purchase Price
|
|
Percent at
Minimum of
Offering
Range
|
|
|
Allan S. Kitagawa,
Chairman of the Board,
President and Chief Executive Officer
|
|
|
|
$
|
|
|
|
%
|
|
|
|
|
|
|
Kirk W. Caldwell,
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard Y. Ikeda,
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
David S. Murakami,
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard I. Murakami,
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Harold H. Ohama,
Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vernon Hirata,
Vice Chairman, Co-Chief Operating Officer,
General Counsel and Corporate Secretary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ralph Nakatsuka,
Vice Chairman and Co-Chief Operating Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Karen J. Cox,
Senior Vice President-Administration
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Richard K. C. Lau,
Senior Vice President and Chief Lending Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Melvin M. Miyamoto,
Senior Vice President and Treasurer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive officers as a group (
persons)
|
|
|
|
$
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
122
THE CONVERSION; PLAN OF DISTRIBUTION
The Board of Directors of Territorial Mutual Holding Company has approved the plan of conversion and reorganization. The plan of conversion and
reorganization must also be approved by Territorial Mutual Holding Company’s members. A special meeting of members has been called for this purpose. The Office of Thrift Supervision has conditionally approved the plan of conversion and
reorganization; however, such approval does not constitute a recommendation or endorsement of the plan of conversion and reorganization by that agency.
General
The Board of Directors of Territorial Mutual Holding Company adopted the plan of conversion and reorganization on
November 4, 2008. Pursuant to the plan of conversion and reorganization, Territorial Mutual Holding Company will convert from the mutual form of organization to the fully stock form and we will sell shares of common stock to the public in our
offering. In the conversion, we will organize a new Maryland stock holding company named Territorial Bancorp Inc. When the conversion is completed, all of the capital stock of Territorial Savings Bank will be owned by Territorial Bancorp Inc., and
all of the common stock of Territorial Bancorp Inc. will be owned by public stockholders.
We intend to retain between $7.4 million and
$20.3 million of the net proceeds of the offering, or $27.1 million if the offering range is increased by 15%, and to contribute the balance of the net proceeds to Territorial Savings Bank. The conversion will be consummated only upon the issuance
of at least 8,075,000 shares of our common stock offered pursuant to the plan of conversion and reorganization.
The plan of conversion and
reorganization provides that we will offer shares of common stock for sale in the subscription offering to eligible account holders, our tax-qualified employee benefit plans, including our employee stock ownership plan and 401(k) plan, supplemental
eligible account holders and other members. If all shares are not subscribed for in the subscription offering, we may, in our discretion, offer common stock for sale in a community offering to members of the general public, with a preference given
to natural persons residing in the State of Hawaii.
We have the right to accept or reject, in whole or in part, any orders to purchase
shares of the common stock received in the community offering. The community offering, if any, may begin at the same time as, during, or after the subscription offering, and must be completed within 45 days after the completion of the subscription
offering unless otherwise extended by us with the approval of the Office of Thrift Supervision. See “—Community Offering.”
We determined the number of shares of common stock to be offered in the offering based upon an independent valuation of the estimated consolidated pro forma market value of Territorial Bancorp Inc. All shares of common stock to be sold in
the offering will be sold at $10.00 per share. Investors will not be charged a commission to purchase shares of common stock. The independent valuation will be updated and the final number of the shares of common stock to be issued in the offering
will be determined at the completion of the offering. See “—Determination of Share Price and Number of Shares to be Issued” for more information as to the determination of the estimated pro forma market value of the common stock.
The following is a brief summary of the conversion. We recommend reading the plan of conversion and reorganization in its entirety for
more information. A copy of the plan of conversion and reorganization is available for inspection at each branch office of Territorial Savings Bank and at the West Regional Office and the Washington, D.C. Office of the Office of Thrift Supervision.
The plan of
123
conversion and reorganization is also filed as an exhibit to Territorial Mutual Holding Company’s application to convert from mutual to stock form of
which this prospectus is a part, copies of which may be obtained from the Office of Thrift Supervision. See “Where You Can Find Additional Information.”
Reasons for the Conversion
Our primary reasons for converting and raising additional capital through the offering are:
|
|
•
|
|
to support our internal growth through lending in communities we serve or may serve in the future and through the establishment of
de novo branch offices.
We
currently intend to establish one new branch office per year over the next two years;
|
|
|
•
|
|
to assist us in the management of interest rate risk;
|
|
|
•
|
|
to repay trust preferred securities and short-term borrowings;
|
|
|
•
|
|
to provide additional financial resources to pursue future acquisitions of banks, thrifts and other financial services companies, and branch offices, although we
have no current arrangements or agreements with respect to any such acquisitions;
|
|
|
•
|
|
to provide better capital management tools, including the ability to pay dividends and to repurchase shares of our common stock, subject to market conditions; and
|
|
|
•
|
|
to retain and attract qualified personnel by establishing stock-based benefit plans for management and employees.
|
In the stock holding company structure, we will have greater flexibility in structuring mergers and acquisitions. Our current mutual structure prevents
us from offering shares of our common stock as consideration for a merger or acquisition. Potential sellers often want stock for at least part of the acquisition consideration. Our new stock holding company structure will enable us to offer stock or
cash consideration, or a combination thereof, and will therefore enhance our ability to compete with other bidders when acquisition opportunities arise.
We have no current arrangements or agreements to acquire other banks, thrifts, credit unions, financial service companies or branch offices. However, we have had, and intend to continue to have, discussions with local
financial institutions to determine whether they would be interested in exploring the possibility of our acquiring them after the offering is completed, and we have sufficient capital resources to fund an acquisition. In addition, we have
participated in, and intend to continue to participate in, sales processes initiated on behalf of local financial institutions that have made a decision to explore the possibility of a sale. We have also explored, and intend to continue to explore,
the possibility of acquiring financial service companies. There can be no assurance that we will be able to consummate any acquisitions or establish any new branches.
Approvals Required
The affirmative vote of a majority of the total eligible votes of members of
Territorial Mutual Holding Company at the special meeting of members is required to approve the plan of conversion and reorganization. The plan of conversion and reorganization also must be approved by the Office of Thrift Supervision, which has
given its conditional approval to the plan of conversion and reorganization.
124
A special meeting of members to consider and vote upon the plan of conversion and reorganization has been
set for [meeting date].
Effects of Conversion on Depositors, Borrowers and Members
Continuity
.
While the conversion is being accomplished, our normal business of accepting deposits and making loans will continue
without interruption. We will continue to be a federally chartered savings bank and will continue to be regulated by the Office of Thrift Supervision. After the conversion, we will continue to offer existing services to depositors, borrowers and
other customers. The directors serving Territorial Savings Bank at the time of the conversion will be the directors of Territorial Savings Bank and of Territorial Bancorp Inc., a Maryland corporation, after the conversion.
Effect on Deposit Accounts
.
Pursuant to the plan of conversion and reorganization, each depositor of Territorial Savings Bank at the
time of the conversion will automatically continue as a depositor after the conversion, and the deposit balance, interest rate and other terms of such deposit accounts will not change as a result of the conversion. Each such account will be insured
by the Federal Deposit Insurance Corporation to the same extent as before the conversion. Depositors will continue to hold their existing certificates, passbooks and other evidences of their accounts.
Effect on Loans
.
No loan outstanding from Territorial Savings Bank will be affected by the conversion, and the amount, interest
rate, maturity and security for each loan will remain as it was contractually fixed prior to the conversion.
Effect on Voting Rights
of Members
.
At present, all of our depositors and certain of our borrowers are members of, and have voting rights in, Territorial Mutual Holding Company as to all matters requiring membership action. Upon completion of the conversion,
depositors and borrowers will cease to be members of Territorial Mutual Holding Company and will no longer have voting rights. Upon completion of the conversion, all voting rights in Territorial Savings Bank will be vested in Territorial Bancorp
Inc. as the sole stockholder of Territorial Savings Bank. The stockholders of Territorial Bancorp Inc. will possess exclusive voting rights with respect to Territorial Bancorp Inc. common stock.
Tax Effects
.
We will receive an opinion of counsel or tax advisor with regard to federal and state income tax consequences of the
conversion to the effect that the conversion will not be taxable for federal or state income tax purposes to Territorial Savings Bank or its members. See “—Material Income Tax Consequences.”
Effect on Liquidation Rights
.
Each depositor in Territorial Savings Bank has both a deposit account in Territorial
Savings Bank and a pro rata ownership interest in the net worth of Territorial Savings Bank based upon the deposit balance in his or her account. This ownership interest is tied to the depositor’s account and has no tangible market value
separate from the deposit account. This interest may only be realized in the event of a complete liquidation of Territorial Savings Bank. Any depositor who opens a deposit account obtains a pro rata ownership interest in Territorial Savings Bank
without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all, respectively, of the balance in the deposit account but nothing for his or her ownership interest in the
net worth of Territorial Savings Bank, which is lost to the extent that the balance in the account is reduced or closed.
Consequently,
depositors in a mutual savings bank normally have no way of realizing the value of their ownership interest, which has realizable value only in the unlikely event that the association is completely liquidated. If this occurs, the depositors of
record at that time, as owners, would share pro rata in any residual surplus and reserves of Territorial Savings Bank after other claims, including claims of depositors to the amounts of their deposits, are paid.
125
In the unlikely event that Territorial Savings Bank were to liquidate after the conversion, all claims of
creditors, including those of depositors, also would be paid first, followed by distribution of the “liquidation account” to depositors as of September 30, 2007 and December 31, 2008 who continue to maintain their deposit
accounts as of the date of liquidation, with any assets remaining thereafter distributed to Territorial Bancorp Inc. as the holder of Territorial Savings Bank’s capital stock. Pursuant to the rules and regulations of the Office of Thrift
Supervision, a post-conversion merger, consolidation, sale of bulk assets or similar combination or transaction with another insured savings institution would not be considered a liquidation and, in such a transaction, the liquidation account would
be assumed by the surviving institution. See “—Liquidation Rights.”
Determination of Share Price and Number of Shares to be Issued
The plan of conversion and reorganization and federal regulations require that the aggregate purchase price of the common stock sold in the
offering be based on the appraised pro forma market value of the common stock, as determined by an independent valuation. We have retained FinPro, Inc. to prepare an independent valuation appraisal. For its services in preparing the initial
valuation, FinPro, Inc. will receive a fee of $70,000, and will be reimbursed up to $5,000 for its expenses. FinPro, Inc. will receive an additional fee of $10,000 for each update to the valuation appraisal. We have agreed to indemnify FinPro, Inc.
and its employees and affiliates against specified losses, including any losses in connection with claims under the federal securities laws, arising out of its services as independent appraiser, except where such liability results from its
negligence or bad faith.
The independent valuation appraisal considered the pro forma impact of the offering. Consistent with the Office
of Thrift Supervision appraisal guidelines, the appraisal applied three primary methodologies: the pro forma price-to-book value approach applied to both reported book value and tangible book value; the pro forma price-to-earnings approach applied
to reported and core earnings; and the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based upon the current market valuations of the peer group companies identified by FinPro, Inc., subject to
valuation adjustments applied by FinPro, Inc. to account for differences between us and our peer group.
The independent valuation was
prepared by FinPro, Inc. in reliance upon the information contained in this prospectus, including our consolidated financial statements. FinPro, Inc. also considered the following factors, among others:
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our present and projected results and financial condition;
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the economic and demographic conditions in our existing market area;
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certain historical, financial and other information relating to us;
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a comparative evaluation of our operating and financial characteristics with those of other similarly situated publicly traded savings institutions;
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•
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the impact of the conversion and the offering on our equity and earnings potential;
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•
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our potential to pay cash dividends; and
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the trading market for securities of comparable institutions and general conditions in the market for such securities.
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Included in the independent valuation were certain assumptions as to our pro forma earnings after the conversion that were utilized in determining the
appraised value. These assumptions included estimated expenses, an assumed after-tax rate of return on the net offering proceeds and purchases in the open market of 4% of the common stock issued in the offering by the stock-based benefit plan at the
$10.00 purchase price. See “Pro Forma Data” for additional information concerning these assumptions. The use of different assumptions may yield different results.
The independent valuation states that as of November 7, 2008, the estimated pro forma market value of Territorial Bancorp Inc. ranged from $80.8
million to $109.3 million, with a midpoint of $95.0 million. Our Board of Directors decided to offer the shares of common stock for a price of $10.00 per share primarily because it is the price most commonly used in mutual-to-stock conversions of
financial institutions. The number of shares offered will be equal to the aggregate offering price of the shares divided by the price per share. Based on the valuation range and the $10.00 price per share, the minimum of the offering range will be
8,075,000 shares, the midpoint of the offering range will be 9,500,000 shares and the maximum of the offering range will be 10,925,000 shares, or 12,563,750 shares if the maximum amount is adjusted because of demand for shares or changes in market
conditions.
The following table presents a summary of selected pricing ratios for Territorial Bancorp Inc. and our peer group companies
identified by FinPro, Inc. Our pro forma price-to-core earnings multiple is based on core earnings for the twelve months ended September 30, 2008, while information for the peer group companies is based on core earnings for the twelve months
ended September 30, 2008 or June 30, 2008. Our pro forma price-to-book value and price-to-tangible book value ratios are based on our equity as of September 30, 2008, while information for the peer group is based on equity as of
September 30, 2008 or June 30, 2008. Compared to the median pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a premium of 52.53% on a price-to-core earnings basis, a discount of 12.67%
on a price-to-book basis and a discount of 26.24% on a price-to-tangible book basis. The pricing ratios result from our generally having higher levels of equity but lower earnings than the companies in the peer group on a pro forma basis. Our Board
of Directors, in reviewing and approving the valuation, considered the range of price-to-core earnings multiples and the range of price-to-book value ratios and price-to-tangible book value ratios at the different amounts of shares to be sold in the
offering.
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Pro forma
price-to-core earnings
multiple
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Pro forma
price-to-book
value ratio
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Pro forma
price-to-tangible
book value ratio
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Territorial Bancorp Inc.
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Maximum, as adjusted
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14.71x
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60.98
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%
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61.05
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%
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Maximum
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12.66x
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56.98
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%
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57.05
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%
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Minimum
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9.80x
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48.83
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%
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48.40
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%
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Valuation of peer group companies using stock prices as of November 7, 2008
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Averages
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20.58x
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71.66
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%
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80.73
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%
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Medians
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8.30x
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65.25
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%
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77.35
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%
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Our Board of Directors reviewed the independent valuation and, in particular, considered the following:
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Our financial condition and results of operations;
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comparison of our financial performance ratios to those of other financial institutions of similar size; and
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market conditions generally and, in particular, for financial institutions.
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All of these factors are set forth in the independent valuation. Our Board of Directors also reviewed the methodology and the assumptions used by FinPro,
Inc. in preparing the independent valuation and believes that such assumptions were reasonable. The offering range may be amended with the approval of the Office of Thrift Supervision, if required, as a result of subsequent developments in our
financial condition or market conditions generally. In the event the independent valuation is updated to amend our pro forma market value to less than $80.8 million or more than $125.6 million, the appraisal will be filed with the Securities
and Exchange Commission by a post-effective amendment to our registration statement.
The independent valuation is not intended, and
must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of our common stock. FinPro, Inc. did not independently verify our consolidated financial statements and other information that we provided to them,
nor did FinPro, Inc. independently value our assets or liabilities. The independent valuation considers Territorial Savings Bank as a going concern and should not be considered as an indication of the liquidation value of Territorial Savings Bank.
Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which may change from time to time, no assurance can be given that persons purchasing our common stock in the offering will thereafter
be able to sell their shares at prices at or above the $10.00 offering price per share.
Following commencement of the subscription
offering, the maximum of the valuation range may be increased by up to 15%, or up to $125.6 million, without resoliciting subscribers, which would result in a corresponding increase of up to 15% in the maximum of the offering range to up to
12,563,750 shares, to reflect changes in the market and financial conditions or demand for the shares. We will not decrease the minimum of the valuation range and the minimum of the offering range without a resolicitation of subscribers. The
subscription price of $10.00 per share will remain fixed. See “—Limitations on Common Stock Purchases” as to the method of distribution and allocation of additional shares that may be issued in the event of an increase in the offering
range to fill unfilled orders in the offering.
If the update to the independent valuation at the conclusion of the offering results in an
increase in the maximum of the valuation range to more than $125.6 million and a corresponding increase in the offering range to more than 12,563,750 shares, or a decrease in the minimum of the valuation range to less than $80.8 million and a
corresponding decrease in the offering range to fewer than 8,075,000 shares, then we may promptly return with interest at our current passbook savings rate of interest all funds previously delivered to us to purchase shares of common stock and
cancel deposit account withdrawal authorizations, and, after consulting with the Office of Thrift Supervision, we may terminate the plan of conversion and reorganization. Alternatively, we may hold a new offering, establish a new offering range,
extend the offering period and commence a resolicitation of subscribers or take other actions as
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permitted by the Office of Thrift Supervision in order to complete the conversion and the offering. In the event that a resolicitation is commenced, we will
notify subscribers of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. If a person does not respond, we will cancel his or her stock order and return his or her subscription funds,
with interest, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. Any resolicitation following the conclusion of the subscription and community offerings would not exceed 45 days unless
further extended by the Office of Thrift Supervision for periods of up to 90 days.
An increase in the number of shares to be issued in the
offering would decrease both a subscriber’s ownership interest and our pro forma earnings and stockholders’ equity on a per share basis while increasing pro forma earnings and stockholders’ equity on an aggregate basis. A decrease in
the number of shares to be issued in the offering would increase both a subscriber’s ownership interest and our pro forma earnings and stockholders’ equity on a per share basis, while decreasing pro forma earnings and stockholders’
equity on an aggregate basis. For a presentation of the effects of these changes, see “Pro Forma Data.”
Copies of the
independent valuation appraisal report of FinPro, Inc. and the detailed memorandum setting forth the method and assumptions used in the appraisal report are available for inspection at our main office and as specified under “Where You Can Find
Additional Information.”
Subscription Offering and Subscription Rights
In accordance with the plan of conversion and reorganization, rights to subscribe for shares of common stock in the subscription offering have been
granted in the following descending order of priority. The filling of all subscriptions that we receive will depend on the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription
offering and to the maximum, minimum and overall purchase limitations set forth in the plan of conversion and reorganization and as described below under “—Limitations on Common Stock Purchases.”
Priority 1: Eligible Account Holders
.
Each depositor with aggregate deposit account balances of $50.00 or more (a “Qualifying
Deposit”) on September 30, 2007 (an “Eligible Account Holder”) will receive, without payment therefor, nontransferable subscription rights to purchase, subject to the overall purchase limitations, up to the greater of 50,000
shares of our common stock, 0.10% of the total number of shares of common stock issued in the offering, or 15 times the number of subscription shares offered multiplied by a fraction of which the numerator is the aggregate Qualifying Deposit account
balances of the Eligible Account Holder and the denominator is the aggregate Qualifying Deposit account balances of all Eligible Account Holders, subject to the overall purchase limitations. See “—Limitations on Common Stock
Purchases.” If there are not sufficient shares available to satisfy all subscriptions, shares will first be allocated so as to permit each Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation
equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each Eligible Account Holder whose subscription remains unfilled in the proportion that the amount of his
or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Eligible
Account Holders, the excess shall be reallocated (one or more times as necessary) among those Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated.
To ensure proper allocation of shares of our common stock, each Eligible Account Holder must list on his or her stock order and certification form all
deposit accounts in which he or she has an
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ownership interest on September 30, 2007. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than
if all accounts had been disclosed. In the event of an oversubscription, the subscription rights of Eligible Account Holders who are also our directors or executive officers or their associates will be subordinated to the subscription rights of
other Eligible Account Holders to the extent attributable to increased deposits during the year preceding September 30, 2007.
Priority 2: Tax-Qualified Plans
.
Our tax-qualified employee benefit plans, including our employee stock ownership plan and 401(k) plan, will receive, without payment therefor, nontransferable subscription rights to
purchase in the aggregate up to 10% of the shares of common stock sold in the offering.
Priority 3: Supplemental Eligible Account
Holders
.
To the extent that there are sufficient shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders and our tax-qualified employee benefit plans, each depositor with a Qualifying Deposit
on December 31, 2008 who is not an Eligible Account Holder (“Supplemental Eligible Account Holder”) will receive, without payment therefor, nontransferable subscription rights to purchase up to the greater of 50,000 shares of common
stock, 0.10% of the total number of shares of common stock issued in the offering, or 15 times the number of subscription shares offered multiplied by a fraction of which the numerator is the aggregate Qualifying Deposit account balances of the
Supplemental Eligible Account Holder and the denominator is the aggregate Qualifying Deposit account balances of all Supplemental Eligible Account Holders, subject to the overall purchase limitations. See “—Limitations on Common Stock
Purchases.” If there are not sufficient shares available to satisfy all subscriptions, shares will be allocated so as to permit each Supplemental Eligible Account Holder to purchase a number of shares sufficient to make his or her total
allocation equal to the lesser of 100 shares of common stock or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each Supplemental Eligible Account Holder whose subscription remains unfilled in
the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount
subscribed for by any one or more Supplemental Eligible Account Holders, the excess shall be reallocated (one or more times as necessary) among those Supplemental Eligible Account Holders whose subscriptions are not fully satisfied until all
available shares have been allocated.
To ensure proper allocation of common stock, each Supplemental Eligible Account Holder must list on
the stock order and certification form all deposit accounts in which he or she has an ownership interest at December 31, 2008. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than if all
accounts had been disclosed.
Priority 4: Other Members
.
To the extent that there are shares of common stock remaining
after satisfaction of subscriptions by Eligible Account Holders, our tax-qualified employee benefit plans and Supplemental Eligible Account Holders, each depositor on the voting record date of [other member date] who is not an Eligible Account
Holder or Supplemental Eligible Account Holder, and each borrower as of September 18, 2002 whose borrowings remain outstanding as of [other member date] who is not an Eligible Account Holder or Supplemental Eligible Account Holder (“Other
Members”) will receive, without payment therefor, nontransferable subscription rights to purchase up to the greater of 50,000 shares of common stock or 0.10% of the total number of shares of common stock issued in the offering, subject to the
overall purchase limitations. See “—Limitations on Common Stock Purchases.” If there are not sufficient shares available to satisfy all subscriptions, available shares will be allocated so as to permit each Supplemental Eligible
Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares of common stock or the number of shares for
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which he or she subscribed. Thereafter, unallocated shares will be allocated to each Other Member whose subscription remains unfilled in the proportion that
the amount of his or her subscription bears to the total amount of subscriptions of all Other Members whose subscriptions remain unfilled
Expiration Date
. The Subscription Offering will expire at 3:00 p.m., local time, on [expiration date], unless extended by us for up to 45 days or such additional periods with the approval of the Office of Thrift Supervision,
if necessary. Subscription rights will expire whether or not each eligible depositor or borrower can be located. We may decide to extend the expiration date of the subscription offering for any reason, whether or not subscriptions have been received
for shares at the minimum, midpoint or maximum of the offering range. Subscription rights that have not been exercised prior to the expiration date will become void.
We will not execute orders until we have received orders to purchase at least the minimum number of shares of common stock. If we have not received orders to purchase at least 8,075,000 shares within 45 days after the
expiration date and the Office of Thrift Supervision has not consented to an extension, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to the subscribers with interest at our current passbook
savings rate and all deposit account withdrawal authorizations will be canceled. If an extension beyond [extension date] is granted by the Office of Thrift Supervision, we will resolicit subscribers, giving them an opportunity to change or cancel
their orders. We will notify subscribers of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. If a subscriber does not respond, we will cancel his or her stock order and return his or
her subscription funds, with interest, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. Extensions may not go beyond [final date], which is two years after the special meeting of our
members to vote on the conversion.
Community Offering
To the extent that shares of common stock remain available for purchase after satisfaction of all subscriptions of the Eligible Account Holders, our tax-qualified employee benefit plans, Supplemental Eligible Account
Holders and Other Members, we may offer shares pursuant to the plan of conversion and reorganization to members of the general public in a community offering. Shares may be offered with a preference to natural persons residing in the State of
Hawaii.
Subscribers in the community offering may purchase up to 50,000 shares of common stock, subject to the overall purchase
limitations. See “—Limitations on Common Stock Purchases.”
The opportunity to purchase shares of common stock in the community offering category is subject to our right, in our sole discretion, to accept or reject any such orders
in whole or in part either at the time of receipt of an order or as soon as practicable following the expiration date of the offering.
If we do not have sufficient shares of common stock available to fill the orders of natural persons residing in the State of Hawaii, we will allocate the available shares among those persons in a manner that permits each of them, to the
extent possible, to purchase the lesser of 100 shares, or the number of shares subscribed for by such person. Thereafter, unallocated shares will be allocated among natural persons residing in the State of Hawaii, whose orders remain unsatisfied on
an equal number of shares basis per order. If, after the allocation of shares to natural persons residing in the State of Hawaii, we do not have sufficient shares of common stock available to fill the orders of other members of the general public,
we will allocate the available shares among those persons in a manner that permits each of them, to the extent possible, to purchase the lesser of 100 shares, or the number of shares subscribed for by such person. Thereafter, unallocated shares will
be allocated among members of the general public whose orders remain unsatisfied on an equal number of shares basis per order.
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The term “residing” or “resident” as used in this prospectus means any person who
occupies a dwelling within the State of Hawaii, has a present intent to remain within the community for a period of time and manifests the genuineness of that intent by establishing an ongoing physical presence within the community, together with an
indication that this presence within the community is something other than merely transitory in nature. We may utilize deposit or loan records or other evidence provided to us to decide whether a person is a resident. In all cases, however, the
determination shall be in our sole discretion.
Expiration Date.
The community offering may begin at the same time as, during
or after the subscription offering. It is currently expected to terminate at the same time as the subscription offering, although it must terminate no more than 45 days following the subscription offering. We may decide to extend the community
offering for any reason and are not required to give purchasers notice of any such extension unless such period extends beyond [extension date]. If an extension beyond [extension date] is granted by the Office of Thrift Supervision, we will
resolicit persons whose orders we accept in the community offering, giving them an opportunity to change or cancel their orders. If a person does not respond, we will cancel his or her stock order and return purchase funds, with interest, and cancel
any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. These extensions may not go beyond [final date], which is two years after the special meeting of our members to vote on the conversion.
Syndicated Community Offering
The plan of
conversion and reorganization provides that, if necessary, all shares of common stock not purchased in the subscription offering and community offering may be offered for sale to the general public in a syndicated community offering to be managed by
Keefe, Bruyette & Woods, Inc., acting as our agent. In such capacity, Keefe, Bruyette & Woods, Inc. may form a syndicate of other broker-dealers. Neither Keefe, Bruyette & Woods, Inc. nor any registered broker-dealer will
have any obligation to take or purchase any shares of the common stock in the syndicated community offering; however, Keefe, Bruyette & Woods, Inc. has agreed to use its best efforts in the sale of shares in any syndicated community
offering. The syndicated community offering would terminate no later than [extension date], unless extended by us, with approval of the Office of Thrift Supervision. See “—Community Offering” above for a discussion of rights of
persons who place orders in the syndicated community offering in the event an extension is granted.
The opportunity to order shares of
common stock in the syndicated community offering is subject to our right to reject orders, in whole or in part, either at the time of receipt of an order or as soon as practicable following the expiration date of the offering. If your order is
rejected in part, you will not have the right to cancel the remainder of your order.
Purchasers in the syndicated community offering are
eligible to purchase up to 50,000 shares of common stock, subject to the overall purchase limitations. See “—Limitations on Common Stock Purchases.” We may begin the syndicated community offering at any time following the commencement
of the subscription offering.
If we are unable to find purchasers from the general public for all unsubscribed shares, we will make other
purchase arrangements, if feasible. Other purchase arrangements must be approved by the Office of Thrift Supervision and may provide for purchases by directors, officers, their associates and
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other persons in excess of the limitations provided in the plan of conversion and reorganization and in excess of the proposed director purchases discussed
earlier, although no purchases are currently intended. If other purchase arrangements cannot be made, we may do any of the following: terminate the offering and promptly return all funds; set a new offering range, notify all subscribers and give
them the opportunity to confirm, cancel or change their orders; or take such other actions as may be permitted by the Office of Thrift Supervision.
Limitations on Common Stock Purchases
The plan of conversion and reorganization includes the following limitations on the
number of shares of common stock that may be purchased in the offering:
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No person or entity together with any associate or group of persons acting in concert may purchase more than 100,000 shares of common stock in the offering, except
that our tax-qualified employee benefit plans, including our employee stock ownership plan and 401(k) plan, may purchase in the aggregate up to 10% of the shares of common stock issued in the offering (including shares issued in the event of an
increase in the offering range of up to 15%);
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The maximum number of shares of common stock that may be purchased in all categories of the offering by our executive officers and directors and their associates,
in the aggregate, may not exceed 25% of the shares issued in the offering; and
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The minimum purchase by each person purchasing shares in the offering is 25 shares, to the extent those shares are available.
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Depending upon market or financial conditions, our Board of Directors, with the approval of the Office of Thrift Supervision and without further approval
of our members, may decrease or increase the purchase limitations. If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be, and, in our sole discretion, some other large subscribers may
be, given the opportunity to increase their subscriptions up to the then applicable limit. The effect of this type of resolicitation would be an increase in the number of shares of common stock owned by subscribers who choose to increase their
subscriptions.
In the event of an increase in the offering range of up to 15% of the total number of shares of common stock offered in the
offering, shares will be allocated in the following order of priority in accordance with the plan of conversion and reorganization:
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(1)
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to fill our tax-qualified employee benefit plans’ subscriptions for up to 10% of the total number of shares of common stock issued in the offering;
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(2)
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in the event that there is an oversubscription at the Eligible Account Holder, Supplemental Eligible Account Holder or Other Member levels, to fill unfulfilled subscriptions of
these subscribers according to their respective priorities; and
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(3)
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to fill unfulfilled subscriptions in the community offering, with preference given first to natural persons residing in the State of Hawaii.
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The term “associate” of a person means:
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(1)
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any corporation or organization, other than Territorial Mutual Holding Company, Territorial Savings Group, Inc., Territorial Savings Bank, Territorial Bancorp Inc. or a
majority-owned subsidiary of these entities, of which the person is a senior officer, partner or 10% beneficial stockholder;
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(2)
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any trust or other estate in which the person has a substantial beneficial interest or serves as a trustee or in a fiduciary capacity, excluding any employee stock benefit plan in
which the person has a substantial beneficial interest or serves as trustee or in a fiduciary capacity; and
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(3)
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any blood or marriage relative of the person, who either lives in the same home as the person or who is a director or officer of Territorial Savings Bank or Territorial Bancorp Inc.
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The term “acting in concert” means:
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(1)
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knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or
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(2)
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a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise.
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A person or company that acts in concert with another person or company
(“other party”) shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee stock benefit plan will not be deemed to be acting in
concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether common stock held by the trustee and common stock held by the employee stock benefit plan will be aggregated.
Our directors are not treated as associates of each other solely because of their membership on the Board of Directors. We have the right to determine
whether prospective purchasers are associates or acting in concert. Shares of common stock purchased in the offering will be freely transferable except for shares purchased by our executive officers and directors and except as described below. Any
purchases made by any associate of Territorial Savings Bank or Territorial Bancorp Inc. for the explicit purpose of meeting the minimum number of shares of common stock required to be sold in order to complete the offering shall be made for
investment purposes only and not with a view toward redistribution. In addition, under the guidelines of the Financial Industry Regulatory Authority, members of the Financial Industry Regulatory Authority and their associates are subject to certain
restrictions on transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of these securities. For a further discussion of limitations on purchases of shares of our common stock at
the time of conversion and thereafter, see “—Certain Restrictions on Purchase or Transfer of Our Shares After Conversion” and “Restrictions on Acquisition of Territorial Bancorp Inc.”
Marketing and Distribution; Compensation
Offering
materials have been initially distributed to certain persons by mail, with additional copies made available through our Stock Information Center.
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We have engaged Keefe, Bruyette & Woods, Inc., a broker-dealer registered with the Financial
Industry Regulatory Authority, as a financial advisor in connection with the offering of our common stock. In its role as financial advisor, Keefe, Bruyette & Woods, Inc., will:
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provide advice on the financial and securities market implications of the plan of conversion and reorganization and related corporate documents, including our
business plan;
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assist in structuring our stock offering, including developing and assisting in implementing a market strategy for the stock offering;
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review all offering documents, including this prospectus, stock order forms and related offering materials (we are responsible for the preparation and filing of
such documents);
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assist us in preparing for and scheduling meetings with potential investors and broker-dealers, as necessary;
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assist us in analyzing proposals from outside vendors retained in connection with the stock offering, including printers, transfer agents and appraisal firms;
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assist us in the drafting and distribution of press releases as required or appropriate in connection with the stock offering
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meet with the board of directors and management to discuss any of these services; and
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provide such other financial advisory and investment banking services in connection with the stock offering as may be agreed upon by Keefe, Bruyette &
Woods, Inc. and us.
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For these services, Keefe, Bruyette & Woods, Inc. will receive a management fee of $50,000,
payable in four consecutive monthly installments commencing October 2008, and a fee of 1.00% of the aggregate dollar amount of the common stock sold in the subscription offering if the conversion is consummated, excluding shares purchased by our
directors, officers and employees and members of their immediate families, our employee stock ownership plan and our tax-qualified or stock-based compensation or similar plans (except individual retirement accounts). The management fee will be
credited against the fee payable upon the consummation of the conversion.
The plan of conversion and reorganization provides that, if
necessary, all shares of common stock not purchased in the subscription offering and community offering may be offered for sale to the general public in a syndicated community offering to be managed by Keefe, Bruyette & Woods, Inc. In such
capacity, Keefe, Bruyette & Woods, Inc. may form a syndicate of other broker-dealers. Neither Keefe, Bruyette & Woods, Inc. nor any registered broker-dealer will have any obligation to take or purchase any shares of common stock in
the syndicated community offering; however, Keefe, Bruyette & Woods, Inc. has agreed to use its best efforts in the sale of shares in any syndicated community offering. If there is a syndicated community offering, Keefe, Bruyette &
Woods, Inc. will receive a management fee not to exceed 5.5% of the aggregate dollar amount of the common stock sold in the syndicated community offering. Of this amount, Keefe, Bruyette & Woods, Inc. will pass on to selected
broker-dealers, who assist in the syndicated community offering, an amount competitive with gross underwriting discounts charged at such time for comparable amounts of stock sold at a comparable price per share in a similar market environment.
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We also will reimburse Keefe, Bruyette & Woods, Inc. for its reasonable out-of-pocket expenses
associated with its marketing effort, and in addition the fees and expenses of its counsel up to a maximum of $75,000 unless otherwise agreed by us. If the plan of conversion and reorganization is terminated or if Keefe, Bruyette & Woods,
Inc.’s engagement is terminated in accordance with the provisions of the agreement, Keefe, Bruyette & Woods, Inc. will only receive reimbursement of its reasonable out-of-pocket expenses and the portion of the management fee payable
and will return any amounts paid or advanced by us in excess of these amounts. We will indemnify Keefe, Bruyette & Woods, Inc. against liabilities and expenses (including legal fees) related to or arising out of Keefe, Bruyette &
Woods, Inc.’s engagement as our financial advisor and performance of services as our financial advisor.
We have also engaged Keefe,
Bruyette & Woods, Inc. to act as our conversion agent in connection with the stock offering. In its role as conversion agent, Keefe, Bruyette & Woods, Inc. will, among other things:
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consolidate accounts and develop a central file;
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prepare proxy forms and proxy materials;
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tabulate proxies and ballots;
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act as inspector of election at the special meeting of members;
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assist our financial printer with labeling of stock offering materials;
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process stock order forms and certification forms and produce daily reports and analysis;
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assist our transfer agent with the generation and mailing of stock certificates;
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advise us on interest and refund calculations; and
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create tax forms for interest reporting.
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For these services, Keefe, Bruyette & Woods, Inc. will receive a fee of $100,000, and we have made an advance payment of $10,000 to Keefe, Bruyette & Woods, Inc. with respect to this fee. We also will reimburse Keefe,
Bruyette & Woods, Inc. for its reasonable out-of-pocket expenses associated with its acting as conversion agent. If the plan of conversion and reorganization is terminated or if Keefe, Bruyette & Woods, Inc.’s engagement is
terminated in accordance with the provisions of the agreement, Keefe, Bruyette & Woods, Inc. will be entitled to the advance payment and also receive reimbursement of its reasonable out-of-pocket expenses. We will indemnify Keefe,
Bruyette & Woods, Inc. against liabilities and expenses (including legal fees) related to or arising out of Keefe, Bruyette & Woods, Inc.’s engagement as our conversion agent and performance of services as our conversion
agent.
Our directors and executive officers may participate in the solicitation of offers to purchase common stock. These persons will be
reimbursed for their reasonable out-of-pocket expenses incurred in connection with the solicitation. Other trained employees of Territorial Savings Bank or its affiliates may assist in the offering in ministerial capacities, providing clerical work
in effecting a sales transaction or
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answering questions of a ministerial nature. No offers or sales may be made by tellers or at the teller counters. All sales activity will be conducted in a
segregated or separately identifiable area of our main office facility apart from the area accessible to the general public. Other questions of prospective purchasers will be directed to executive officers or registered representatives of Keefe,
Bruyette & Woods, Inc. Our other employees have been instructed not to solicit offers to purchase shares of common stock or provide advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under the Securities Exchange Act
of 1934, as amended, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors and employees to participate in the sale of common stock. None of our officers, directors or employees will
be compensated in connection with their participation in the offering by the payment of commissions or other remuneration based either directly or indirectly on the transactions in the shares of common stock.
The offering will comply with the requirements of Rule 10b-9 under the Securities Exchange Act of 1934.
Procedure for Purchasing Shares
Expiration Date
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The offering will expire at 3:00 p.m., local time, on [expiration date], unless we extend it for up to 45 days. This extension may be approved by us, in our sole discretion, without
further approval or additional notice to purchasers in the offering. Any extension of the subscription and/or community offering beyond [extension date] would require the Office of Thrift Supervision’s approval. If an extension beyond
[extension date] is granted by the Office of Thrift Supervision, we will resolicit subscribers/persons who place orders, giving them an opportunity to change or cancel their orders. We will notify these persons of the extension of time and of the
rights to place a new stock order for a specified period of time. If a person does not respond, we will cancel his or her stock order and return his or her subscription funds, with interest, and cancel any authorization to withdraw funds from
deposit accounts for the purchase of shares of common stock. If we have not received orders to purchase the minimum number of shares offered in the offering by the expiration date or any extension thereof, we may terminate the offering and promptly
refund all funds received for shares of common stock. If the number of shares offered is reduced below the minimum of the offering range, or increased above the adjusted maximum of the offering range, subscribers may be resolicited with the approval
of the Office of Thrift Supervision.
To ensure that each purchaser receives a prospectus at least 48 hours before [expiration
date], the expiration date of the offering, in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, as amended, no prospectus will be mailed any later than five days prior to the expiration date or hand delivered any later than two
days prior to the expiration date. Execution of an order form will confirm receipt of delivery in accordance with Rule 15c2-8. Order forms will be distributed only with a prospectus. Subscription funds will be maintained in a segregated account
at Territorial Savings Bank or at another insured depository institution and will earn interest at our current passbook savings rate from the date of receipt.
We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel any deposit account withdrawal orders and promptly return all funds delivered to us,
with interest at our current passbook savings rate from the date of receipt.
We have the right to reject any order submitted in the
offering by a person who we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent the terms and conditions
of the plan of conversion and reorganization.
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Use of Order Forms
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In order to purchase shares of common stock in the subscription
offering and community offering, you must complete an order form and remit full payment. We will not be required to accept incomplete order forms, unsigned order forms, orders submitted on photocopied or facsimiled order forms. We must receive all
order forms prior to 3:00 p.m., local time, on [expiration date]. We are not required to accept order forms that are not received by that time, are executed defectively or are received without full payment or without appropriate withdrawal
instructions. A postmark prior to [expiration date] will not entitle you to purchase shares of common stock unless we receive the envelope by [expiration date]. We are not required to notify subscribers of incomplete or improperly executed order
forms. We have the right to permit the correction of incomplete or improperly executed order forms or waive immaterial irregularities. We do not represent, however, that we will do so and we have no affirmative duty to notify any prospective
subscriber of any such defects. You may submit your order form and payment by mail using the return envelope provided, by bringing your order form to our Stock Information Center or to any branch office or by overnight delivery to the indicated
address on the order form. Once tendered, an order form cannot be modified or revoked without our consent. We reserve the absolute right, in our sole discretion, to reject orders received in the community offering, in whole or in part, at the time
of receipt or at any time prior to completion of the offering. If you are ordering shares, you must represent that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or
transfer of the shares. Our interpretation of the terms and conditions of the plan of conversion and reorganization and of the acceptability of the order forms will be final, subject to the authority of the Office of Thrift Supervision.
By signing the order form, you will be acknowledging that the common stock is not a deposit or savings account and is not federally insured or
otherwise guaranteed by Territorial Savings Bank or the federal government, and that you received a copy of this prospectus. However, signing the order form will not result in you waiving your rights under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
Payment for Shares
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Payment for all shares of common stock will be required to
accompany all completed order forms for the purchase to be valid. Payment for shares may be made by:
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personal check, bank check or money order, payable to Territorial Bancorp Inc.; or
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authorization of withdrawal from Territorial Savings Bank deposit accounts designated on the order form.
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Appropriate means for designating withdrawals from deposit accounts at Territorial Savings Bank are provided in the order forms. The funds designated
must be available in the account(s) at the time the order form is received. A hold will be placed on these funds, making them unavailable to the depositor. Funds authorized for withdrawal will continue to earn interest within the account at the
contract rate until the offering is completed, at which time the designated withdrawal will be made. Interest penalties for early withdrawal applicable to certificate accounts will not apply to withdrawals authorized for the purchase of shares of
common stock; however, if a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty and the remaining balance will be
transferred to a savings account and earn interest at our current passbook savings rate subsequent to the withdrawal. In the case of payments made by check or money order, these funds must be available in the account(s) and will be immediately
cashed and placed in a segregated account at Territorial Savings Bank and/or another insured depository institution and will earn interest at our current passbook savings rate from the date payment is received until the offering is completed or
terminated.
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You may not use a check drawn on a Territorial Savings Bank line of credit, and we will not accept
third-party checks (a check written by someone other than you) payable to you and endorsed over to Territorial Bancorp Inc. If you request that we place a hold on your checking account for the subscription amount, we reserve the right to interpret
that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account. Once we receive your executed order form, it may not be modified,
amended or rescinded without our consent, unless the offering is not completed by the expiration date, in which event purchasers may be given the opportunity to increase, decrease or rescind their orders for a specified period of time.
If you are interested in using your individual retirement account funds to purchase shares of common stock, you must do so through a self-directed
individual retirement account such as a brokerage firm individual retirement account. By regulation, Territorial Savings Bank’s individual retirement accounts are not self-directed, so they cannot be invested in shares of our common stock.
Therefore, if you wish to use your funds that are currently in a Territorial Savings Bank individual retirement account, you may not designate on the order form that you wish funds to be withdrawn from the account for the purchase of common stock.
The funds you wish to use for the purchase of common stock will have to be transferred to a brokerage account. It may take several weeks to transfer your Territorial Savings Bank individual retirement account to an independent trustee, so please
allow yourself sufficient time to take this action. There will be no early withdrawal or Internal Revenue Service interest penalties for these transfers. Depositors interested in using funds in an individual retirement account or any other
retirement account to purchase shares of common stock should contact our Stock Information Center as soon as possible, preferably at least two weeks prior to the end of the offering period, because processing such transactions takes additional time,
and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds.
We will have the right, in our sole discretion, to permit institutional investors to submit irrevocable orders together with the legally binding
commitment for payment and to thereafter pay for the shares of common stock for which they subscribe in the syndicated community offering at any time prior to the completion of the offering. This payment may be made by wire transfer.
Our employee stock ownership plan will not be required to pay for any shares purchased in the offering until consummation of the offering, provided there
is a loan commitment from an unrelated financial institution or Territorial Bancorp Inc. to lend to the employee stock ownership plan the necessary amount to fund the purchase.
Regulations prohibit Territorial Savings Bank from knowingly lending funds or extending credit to any persons to purchase shares of common stock in the
offering.
Delivery of Stock Certificates
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Certificates representing shares of common stock issued in the offering and
Territorial Savings Bank checks representing any applicable refund and/or interest paid on subscriptions made by check or money order will be mailed to the persons entitled thereto at the certificate registration address noted on the order form, as
soon as practicable following consummation of the offering and receipt of all necessary regulatory approvals. Any certificates returned as undeliverable will be held by the transfer agent until claimed by persons legally entitled thereto or
otherwise disposed of in accordance with applicable law.
Until certificates for the shares of common stock are available and delivered to purchasers, purchasers may not be able to sell the shares of common stock that they ordered, even though the
common stock will have begun trading.
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Other Restrictions
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Notwithstanding any other provision of the plan of conversion
and reorganization, no person is entitled to purchase any shares of common stock to the extent the purchase would be illegal under any federal or state law or regulation, including state “blue sky” regulations, or would violate regulations
or policies of the Financial Industry Regulatory Authority, particularly those regarding free riding and withholding. We may ask for an acceptable legal opinion from any purchaser as to the legality of his or her purchase and we may refuse to honor
any purchase order if an opinion is not timely furnished. In addition, we are not required to offer shares of common stock to any person who resides in a foreign country.
Restrictions on Transfer of Subscription Rights and Shares
Office of Thrift Supervision
regulations prohibit any person with subscription rights, including the Eligible Account Holders, Supplemental Eligible Account Holders and Other Members, from transferring or entering into any agreement or understanding to transfer the legal or
beneficial ownership of the subscription rights issued under the plan of conversion and reorganization or the shares of common stock to be issued upon their exercise. These rights may be exercised only by the person to whom they are granted and only
for his or her account. Each person exercising subscription rights will be required to certify that he or she is purchasing shares solely for his or her own account and that he or she has no agreement or understanding regarding the sale or transfer
of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock to be issued upon their exercise prior to completion of
the offering.
We intend to pursue any and all legal and equitable remedies in the event we become aware of the transfer of
subscription rights, and we will not honor orders that we believe involve the transfer of subscription rights.
Stock Information Center
If you have any questions regarding the offering, please call or visit our Stock Information Center, toll free, at [stock info #],
Monday through Friday between 8:30 a.m. and 4:00 p.m., local time, or visit the Stock Information Center located at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii. The Stock Information Center will be closed weekends and bank holidays.
Liquidation Rights
In the unlikely
event of a complete liquidation of Territorial Savings Bank prior to the conversion, all claims of creditors of Territorial Savings Bank, including those of depositors of Territorial Savings Bank (to the extent of their deposit balances), would be
paid first. Then, if there were any assets of Territorial Savings Bank remaining, members of Territorial Savings Bank would receive those remaining assets, pro rata, based upon the deposit balances in their deposit account in Territorial Savings
Bank immediately prior to liquidation. In the unlikely event that Territorial Savings Bank were to liquidate after the conversion, all claims of creditors, including those of depositors, would be paid first, followed by distribution of the
“liquidation account” to certain depositors, with any assets remaining thereafter distributed to Territorial Bancorp Inc. as the holder of Territorial Savings Bank capital stock. Pursuant to the rules and regulations of the Office of
Thrift Supervision, a post-conversion merger, consolidation, sale of bulk assets or similar combination or transaction with another insured savings institution would not be considered a liquidation and, in these types of transactions, the
liquidation account would be assumed by the surviving institution.
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The plan of conversion and reorganization provides for the establishment, upon the completion of the
conversion, of a special “liquidation account” for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to the total equity of Territorial Mutual Holding Company as of the date of its latest
balance sheet contained in this prospectus.
The purpose of the liquidation account is to provide Eligible Account Holders and Supplemental
Eligible Account Holders who maintain their deposit accounts with Territorial Savings Bank after the conversion with a liquidation interest in the unlikely event of the complete liquidation of Territorial Savings Bank after the conversion. Each
Eligible Account Holder and Supplemental Eligible Account Holder that continues to maintain his or her deposit account at Territorial Savings Bank, would be entitled, on a complete liquidation of Territorial Savings Bank after the conversion, to an
interest in the liquidation account prior to any payment to the stockholders of Territorial Bancorp Inc. Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial interest in the liquidation account for each deposit
account, including savings accounts, transaction accounts such as negotiable order of withdrawal accounts, money market deposit accounts, and certificates of deposit, with a balance of $50 or more held in Territorial Savings Bank on
September 30, 2007 and December 31, 2008, respectively. Each Eligible Account Holder and Supplemental Eligible Account Holder would have a pro rata interest in the total liquidation account for each such deposit account, based on the
proportion that the balance of each such deposit account on September 30, 2007 and December 31, 2008, respectively, bears to the balance of all deposit accounts in Territorial Savings Bank on such dates.
If, however, on any December 31 annual closing date commencing on or after the effective date of the conversion, the amount in any such deposit
account is less than the amount in the deposit account on September 30, 2007 and December 31, 2008, as applicable, or any other annual closing date, then the interest in the liquidation account relating to such deposit account would be
reduced from time to time by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase
in the related deposit account. Payment pursuant to liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders would be separate and apart from the payment of any insured deposit accounts to such depositor. Any assets
remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied would be distributed to Territorial Bancorp Inc., as the sole stockholder of Territorial Savings Bank.
Material Income Tax Consequences
Consummation of the
conversion is subject to the prior receipt of an opinion of counsel or tax advisor with respect to federal and state income taxation that the conversion will not be a taxable transaction to Territorial Mutual Holding Company, Territorial Savings
Group, Inc., Territorial Savings Bank, Territorial Bancorp Inc., Eligible Account Holders, Supplemental Eligible Account Holders and Other Members. Unlike private letter rulings, opinions of counsel or tax advisors are not binding on the Internal
Revenue Service or any state taxing authority, and such authorities may disagree with such opinions. In the event of such disagreement, there can be no assurance that Territorial Mutual Holding Company, Territorial Savings Group, Inc, Territorial
Savings Bank or Territorial Bancorp Inc. would prevail in a judicial proceeding.
Territorial Mutual Holding Company, Territorial Savings
Group, Inc, Territorial Savings Bank and Territorial Bancorp Inc. have received an opinion of counsel, Luse Gorman Pomerenk & Schick, P.C., regarding all of the material federal income tax consequences of the conversion, which includes the
following:
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The conversion of Territorial Savings Group, Inc. to a federally chartered interim stock savings bank will qualify as a tax-free reorganization within the meaning of
Section 368(a)(1)(F) of the Internal Revenue Code, and the merger of Territorial Savings Group, Inc. with and into Territorial Savings Bank qualifies as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code.
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Neither Territorial Savings Group, Inc., Territorial Savings Bank, nor Territorial Mutual Holding Company will recognize any gain or loss upon the transfer of assets of Territorial
Savings Group, Inc. to Territorial Savings Bank in exchange for shares of common stock of Territorial Savings Bank, which will be constructively received by Territorial Mutual Holding Company. (Sections 361 and 1032(a) of the Internal Revenue Code).
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The basis of the assets of Territorial Savings Group, Inc. and the holding period of such assets to be received by Territorial Savings Bank will be the same as the basis and holding
period in such assets in the hands of Territorial Bancorp Inc. immediately before the exchange. (Sections 362(b) and 1223(2) of the Internal Revenue Code).
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The conversion of Territorial Mutual Holding Company to a federally chartered interim stock savings bank will qualify as a tax-free reorganization within the meaning of
Section 368(a)(1)(F) of the Internal Revenue Code and the merger of Territorial Mutual Holding Company with and into Territorial Savings Bank qualifies as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Internal
Revenue Code.
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The exchange of Eligible Account Holders’ and Supplemental Account Holders’ interests in Territorial Mutual Holding Company for interests in a liquidation account
established in Territorial Savings Bank will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Federal Income Tax Regulations.
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None of Territorial Mutual Holding Company, Territorial Savings Bank, nor Eligible Account Holders, Supplemental Eligible Account Holders or Other Members, will recognize any gain
or loss on the transfer of the assets of Territorial Mutual Holding Company to Territorial Savings Bank in exchange for an interest in a liquidation account established in Territorial Savings Bank for the benefit of Eligible Account Holders and
Supplemental Eligible Account holders who remain depositors of Territorial Savings Bank and nontransferable subscription rights to purchase shares of Territorial Bancorp Inc. common stock.
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It is more likely than not that the nontransferable subscription rights have no value, based on the fact that these rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only to purchase the common stock at a price equal to its estimated fair market value, which will be the same price as the subscription price for the shares of common stock
in the offering. Accordingly, no gain or loss will be recognized by Eligible Account Holders, Supplemental Eligible Account Holders or Other Members upon distribution to them of nontransferable subscription rights to purchase shares of Territorial
Bancorp Inc. common stock, provided that the amount to be paid for Territorial Bancorp Inc. common stock is equal to the fair market value of Territorial Bancorp Inc. common stock.
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The basis of the shares of Territorial Bancorp Inc. common stock purchased in the offering will be the purchase price. The holding period of the Territorial Bancorp Inc. common
stock purchased pursuant to the exercise of nontransferable subscription rights will commence on the date on which the right to acquire such stock was exercised.
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No gain or loss will be recognized by Territorial Bancorp Inc. on the receipt of money in exchange for shares of Territorial Bancorp Inc. common stock sold in the offering.
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In the view of FinPro, Inc. (which is acting as independent appraiser of the value of the shares of Territorial Bancorp Inc.
common stock in connection with the conversion), which view is not binding on the Internal Revenue Service, the subscription rights do not have any value for the reasons set forth above. If the subscription rights granted to Eligible Account
Holders, Supplemental Eligible Account Holders and Other Members are deemed to have an ascertainable value, receipt of these rights could result in taxable gain to those Eligible Account Holders, Supplemental Eligible Account Holders and Other
Members who exercise the subscription rights in an amount equal to their value, and Territorial Bancorp Inc. could recognize gain on a distribution. Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are encouraged to
consult with their own tax advisors as to the tax consequences in the event that subscription rights are deemed to have an ascertainable value.
The Internal Revenue Service has announced that it will not issue private letter rulings with respect to the issue of whether nontransferable rights have value. Unlike private letter rulings, an opinion of counsel or the view of an
independent appraiser is not binding on the Internal Revenue Service and the Internal Revenue Service could disagree with the conclusions reached therein. Depending on the conclusion or conclusions with which the Internal Revenue Service disagrees,
the Internal Revenue Service may take the position that the transaction is taxable to any one or more of Territorial Mutual Holding Company, Territorial Savings Group, Inc., Territorial Savings Bank, the members of Territorial Mutual Holding
Company, Territorial Bancorp Inc. and the Eligible Account Holders, Supplemental Eligible Account Holders and Other Members who exercise their subscription rights. In the event of a disagreement, there can be no assurance that Territorial Mutual
Holding Company, Territorial Savings Group, Inc., Territorial Bancorp Inc. or Territorial Savings Bank would prevail in a judicial or administrative proceeding.
The federal tax opinion has been filed with the Securities and Exchange Commission as an exhibit to Territorial Bancorp Inc.’s registration statement. Advice regarding the Hawaii state income tax consequences
consistent with the federal tax opinion has been issued by KPMG LLP, tax advisors to Territorial Mutual Holding Company, Territorial Savings Group, Inc., Territorial Savings Bank and Territorial Bancorp Inc.
Restrictions on Purchase or Transfer of Our Shares after Conversion
The shares being acquired by the directors, executive officers and their associates are being acquired for investment purposes, and not with a view towards resale. All shares of common stock purchased in the offering
by a director or an executive officer of Territorial Savings Bank generally may not be sold for a period of one year following the closing of the conversion, except in the event of the death of the director or executive officer. Each certificate for
restricted shares will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of any certificate or record ownership of the shares other than as provided
above is a violation of the restriction. Any shares of common stock issued at a later date as a stock dividend, stock split or otherwise with respect to the restricted stock will be similarly restricted. The directors and executive officers of
Territorial Bancorp Inc. also will be restricted by the insider trading rules promulgated pursuant to the Securities Exchange Act of 1934.
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Purchases of shares of our common stock by any of our directors, executive officers and their associates,
during the three-year period following the closing of the conversion may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Office of Thrift Supervision. This
restriction does not apply, however, to negotiated transactions involving more than 1% of our outstanding common stock, to purchases of our common stock to fund stock options by one or more stock-based benefit plans or to any of our tax-qualified
employee stock benefit plans or nontax-qualified employee stock benefit plans, including any stock-based benefit plans.
Office of Thrift
Supervision regulations prohibit Territorial Bancorp Inc. from repurchasing its shares of common stock during the first year following conversion unless compelling business reasons exist for such repurchases. After one year, the Office of Thrift
Supervision does not impose any repurchase restrictions.
RESTRICTIONS ON ACQUISITION OF TERRITORIAL BANCORP
INC.
Although the Board of Directors of Territorial Bancorp Inc. is not aware of any effort that might be made to obtain control of
Territorial Bancorp Inc. after the conversion, the Board of Directors believes that it is appropriate to include certain provisions as part of Territorial Bancorp Inc.’s articles of incorporation to protect the interests of Territorial Bancorp
Inc. and its stockholders from takeovers which our Board of Directors might conclude are not in the best interests of Territorial Savings Bank, Territorial Bancorp Inc. or Territorial Bancorp Inc.’s stockholders.
The following discussion is a general summary of the material provisions of Territorial Bancorp Inc.’s articles of incorporation and bylaws,
Territorial Savings Bank’s charter and bylaws, Maryland corporate law and certain other regulatory provisions that may be deemed to have an “anti-takeover” effect. The following description of certain of these provisions is
necessarily general and, with respect to provisions contained in Territorial Bancorp Inc.’s articles of incorporation and bylaws and Territorial Savings Bank’s stock charter and bylaws, reference should be made in each case to the document
in question, each of which is part of Territorial Savings Bank’s application for conversion with the Office of Thrift Supervision and Territorial Bancorp Inc.’s registration statement filed with the Securities and Exchange Commission. See
“Where You Can Find Additional Information.”
Territorial Bancorp Inc.’s Articles of Incorporation and Bylaws
Although the Board of Directors of Territorial Bancorp Inc. is not aware of any effort that might be made to obtain control of Territorial Bancorp Inc.
after the conversion, the Board of Directors believes that it is appropriate to include certain provisions as part of Territorial Bancorp Inc.’s articles of incorporation to protect the interests of Territorial Bancorp Inc. and its stockholders
from takeovers which our Board of Directors might conclude are not in the best interests of Territorial Savings Bank, Territorial Bancorp Inc. or Territorial Bancorp Inc.’s stockholders.
The following discussion is a general summary of the material provisions of Territorial Bancorp Inc.’s articles of incorporation and bylaws,
Territorial Savings Bank’s charter and bylaws, Maryland corporate law and certain other regulatory provisions that may be deemed to have an “anti-takeover” effect. The following description of certain of these provisions is
necessarily general and, with respect to provisions contained in Territorial Bancorp Inc.’s articles of incorporation and bylaws and Territorial
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Savings Bank’s stock charter and bylaws, reference should be made in each case to the document in question, each of which is part of Territorial Savings
Bank’s application for conversion with the Office of Thrift Supervision and Territorial Bancorp Inc.’s registration statement filed with the Securities and Exchange Commission. See “Where You Can Find Additional Information.”
Territorial Bancorp Inc.’s Articles of Incorporation and Bylaws
Territorial Bancorp Inc.’s articles of incorporation and bylaws contain a number of provisions relating to corporate governance and rights of stockholders that might discourage future takeover attempts. As a
result, stockholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of the Board of Directors or management of Territorial Bancorp Inc. more
difficult.
Directors
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The Board of Directors will be divided into three classes. The members of each class will be
elected for a term of three years and only one class of directors will be elected annually. Thus, it would take at least two annual elections to replace a majority of our directors. Further, the bylaws impose notice and information requirements in
connection with the nomination by stockholders of candidates for election to the Board of Directors or the proposal by stockholders of business to be acted upon at an annual meeting of stockholders. Such notice and information requirements are
applicable to all stockholder business proposals and nominations, and are in addition to any requirements under the federal securities laws.
Evaluation of Offers.
The articles of incorporation of Territorial Bancorp Inc. provide that its Board of Directors, when evaluating a transaction that would or may involve a change in control of Territorial Bancorp Inc.
(whether by purchases of its securities, merger, consolidation, share exchange, dissolution, liquidation, sale of all or substantially all of its assets, proxy solicitation or otherwise), may, in connection with the exercise of its business judgment
in determining what is in the best interests of Territorial Bancorp Inc. and its stockholders and in making any recommendation to the stockholders, give due consideration to all relevant factors, including, but not limited to:
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the economic effect, both immediate and long-term, upon Territorial Bancorp Inc.’s stockholders, including stockholders, if any, who do not participate in the
transaction;
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•
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the social and economic effect on the present and future employees, creditors and customers of, and others dealing with, Territorial Bancorp Inc. and its
subsidiaries and on the communities in which Territorial Bancorp Inc. and its subsidiaries operate or are located;
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•
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whether the proposal is acceptable based on the historical, current or projected future operating results or financial condition of Territorial Bancorp Inc.;
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•
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whether a more favorable price could be obtained for Territorial Bancorp Inc.’s stock or other securities in the future;
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•
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the reputation and business practices of the other entity to be involved in the transaction and its management and affiliates as they would affect the employees of
Territorial Bancorp Inc. and its subsidiaries;
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145
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•
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the future value of the stock or any other securities of Territorial Bancorp Inc. or the other entity to be involved in the proposed transaction;
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•
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any antitrust or other legal and regulatory issues that are raised by the proposal;
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•
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the business and historical, current or expected future financial condition or operating results of the other entity to be involved in the transaction, including,
but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the proposed transaction, and other likely financial obligations of the other entity to be involved in the proposed
transaction; and
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•
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the ability of Territorial Bancorp Inc. to fulfill its objectives as a financial institution holding company and on the ability of its subsidiary financial
institution(s) to fulfill the objectives of a federally insured financial institution under applicable statutes and regulations.
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If the Board of Directors determines that any proposed transaction should be rejected, it may take any lawful action to defeat such transaction.
Restrictions on Call of Special Meetings
.
The bylaws provide that, unless approved by unaffiliated directors, special meetings of stockholders can be called by only the President, a majority of
the total number of directors that Territorial Bancorp, Inc. would have if there were no vacancies on the Board of Directors (the “whole board”), or the Secretary upon the written request of stockholders entitled to cast at least a
majority of all votes entitled to vote at the meeting.
Prohibition of Cumulative Voting
.
The articles of
incorporation prohibit cumulative voting for the election of directors.
Limitation of Voting Rights
.
The articles of
incorporation provide that in no event will any person who beneficially owns more than 10% of the then-outstanding shares of common stock, be entitled or permitted to vote any of the shares of common stock held in excess of the 10% limit; provided
that such 10% limit shall not apply if a majority of the unaffiliated directors approve the acquisition of shares in excess of the 10% limit prior to such acquisition.
Restrictions on Removing Directors from Office
.
The articles of incorporation provide that directors may be removed only for cause, and only by the affirmative vote of the holders of at least 80%
of the voting power of all of our then-outstanding capital stock entitled to vote generally in the election of directors (after giving effect to the limitation on voting rights discussed above in “—Limitation of Voting Rights”),
voting together as a single class.
Authorized but Unissued Shares
. After the conversion, Territorial Bancorp Inc. will have
authorized but unissued shares of common and preferred stock. See “Description of Capital Stock.” The articles of incorporation authorize 50,000,000 shares of serial preferred stock. Territorial Bancorp Inc. is authorized to issue
preferred stock from time to time in one or more series subject to applicable provisions of law, and the board of directors is authorized to fix the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends,
qualifications and terms and conditions of redemption of such shares. In addition, the articles of incorporation provide that a majority of the whole board may, without action by the stockholders, amend the articles of incorporation to increase or
decrease the aggregate number of shares of stock of any class or series that Territorial Bancorp Inc. has the authority to issue. In the event of a proposed merger, tender offer or other attempt to gain control of
146
Territorial Bancorp Inc. that the board of directors does not approve, it would be possible for the board of directors to authorize the issuance of a series
of preferred stock with rights and preferences that would impede the completion of the transaction. An effect of the possible issuance of preferred stock therefore may be to deter a future attempt to gain control of Territorial Bancorp Inc. The
board of directors has no present plan or understanding to issue any preferred stock.
Amendments to Articles of Incorporation and
Bylaws.
Except as provided under “—Authorized but Unissued Shares,” above, regarding the amendment of the articles of incorporation by the Board of Directors to increase or decrease the number of shares authorized for
issuance, or as otherwise allowed by law, any amendment to the articles of incorporation must be approved by our Board of Directors and also by a majority of the outstanding shares of our voting stock; provided, however, that approval by at least
80% of the outstanding voting stock is generally required to amend the following provisions:
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(i)
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The limitation on voting rights of persons who directly or indirectly beneficially own more than 10% of the outstanding shares of common stock;
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(ii)
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The division of the board of directors into three staggered classes;
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(iii)
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The ability of the board of directors to fill vacancies on the board;
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(iv)
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The requirement that at least 80% of stockholders must vote to remove directors, and can only remove directors for cause;
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(v)
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The ability of the board of directors to amend and repeal the bylaws;
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(vi)
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The ability of the board of directors to evaluate a variety of factors in evaluating offers to purchase or otherwise acquire Territorial Bancorp Inc.;
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(vii)
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The authority of the board of directors to provide for the issuance of preferred stock;
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(viii)
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The validity and effectiveness of any action lawfully authorized by the affirmative vote of the holders of a majority of the total number of outstanding shares of common stock;
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(ix)
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The number of stockholders constituting a quorum or required for stockholder consent;
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(x)
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The indemnification of current and former directors and officers, as well as employees and other agents, by Territorial Bancorp Inc.; and
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(xi)
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The limitation of liability of officers and directors to Territorial Bancorp Inc. for money damages.
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(xii)
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The provision of the articles of incorporation requiring approval of at least 80% of the outstanding voting stock to amend the provisions of the articles of incorporation provided
in (i) through (xi) of this list.
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The articles of incorporation also provide that the bylaws may be amended by the
affirmative vote of a majority of our directors or by the stockholders by the affirmative vote of at least 80% of the total votes eligible to be voted at a duly constituted meeting of stockholders. Any amendment of this supermajority requirement for
amendment of the bylaws would also require the approval of 80% of the outstanding voting stock.
147
Maryland Corporate Law
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date
on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, statutory share exchange or, in circumstances specified in the statute, certain transfers of assets, certain stock
issuances and transfers, liquidation plans and reclassifications involving interested stockholders and their affiliates or issuance or reclassification of equity securities. Maryland law defines an interested stockholder as: (i) any person who
beneficially owns 10% or more of the voting power of a corporation’s voting stock after the date on which the corporation had 100 or more beneficial owners of its stock; or (ii) an affiliate or associate of the corporation at any time
after the date on which the corporation had 100 or more beneficial owners of its stock who, within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of
the corporation. A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a
transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by
the board of directors of the corporation and approved by the affirmative vote of at least: (i) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (ii) two-thirds of the votes
entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the
interested stockholder. These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same
form as previously paid by the interested stockholder for its shares.
Conversion Regulations
Office of Thrift Supervision regulations prohibit any person from making an offer, announcing an intent to make an offer or participating in any other
arrangement to purchase stock or acquiring stock or subscription rights in a converting institution or its holding company from another person prior to completion of its conversion. Further, without the prior written approval of the Office of Thrift
Supervision, no person may make an offer or announcement of an offer to purchase shares or actually acquire shares of a converted institution or its holding company for a period of three years from the date of the completion of the conversion if,
upon the completion of such offer, announcement or acquisition, the person would become the beneficial owner of more than 10% of the outstanding stock of the institution or its holding company. The Office of Thrift Supervision has defined
“person” to include any individual, group acting in concert, corporation, partnership, association, joint stock company, trust, unincorporated organization or similar company, a syndicate or any other group formed for the purpose of
acquiring, holding or disposing of securities of an insured institution. However, offers made exclusively to a bank or its holding company, or an underwriter or member of a selling group acting on the converting institution’s or its holding
company’s behalf for resale to the general public are excepted. The regulation also provides civil penalties for willful violation or assistance in any such violation of the regulation by any person connected with the management of the
converting institution or its holding company or who controls more than 10% of the outstanding shares or voting rights of a converted institution or its holding company.
148
Change in Control Regulations
Under the Change in Bank Control Act, no person may acquire control of an insured federal savings bank or its parent holding company unless the Office of Thrift Supervision has been given 60 days’ prior written
notice and has not issued a notice disapproving the proposed acquisition. In addition, Office of Thrift Supervision regulations provide that no company may acquire control of a savings bank without the prior approval of the Office of Thrift
Supervision. Any company that acquires such control becomes a “savings and loan holding company” subject to registration, examination and regulation by the Office of Thrift Supervision.
Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the Office of Thrift Supervision that the acquirer has the power to direct, or directly or indirectly to exercise a controlling
influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings bank’s voting stock, if the acquirer is also subject to any one of eight “control factors,” constitutes a rebuttable
determination of control under the regulations. Such control factors include the acquirer being one of the two largest stockholders. The determination of control may be rebutted by submission to the Office of Thrift Supervision, prior to the
acquisition of stock or the occurrence of any other circumstances giving rise to such determination, of a statement setting forth facts and circumstances which would support a finding that no control relationship will exist and containing certain
undertakings. The regulations provide that persons or companies that acquire beneficial ownership exceeding 10% or more of any class of a savings bank’s stock who do not intend to participate in or seek to exercise control over a savings
bank’s management or policies may qualify for a safe harbor by filing with the Office of Thrift Supervision a certification form that states, among other things, that the holder is not in control of such institution, is not subject to a
rebuttable determination of control and will take no action which would result in a determination or rebuttable determination of control without prior notice to or approval of the Office of Thrift Supervision, as applicable. There are also
rebuttable presumptions in the regulations concerning whether a group “acting in concert” exists, including presumed action in concert among members of an “immediate family.”
The Office of Thrift Supervision may prohibit an acquisition of control if it finds, among other things, that:
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•
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the acquisition would result in a monopoly or substantially lessen competition;
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•
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the financial condition of the acquiring person might jeopardize the financial stability of the institution;
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•
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the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or the public to permit the
acquisition of control by such person; or
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•
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the acquisition would have an adverse effect on the Deposit Insurance Fund.
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149
DESCRIPTION OF CAPITAL STOCK
General
At the effective date, Territorial Bancorp
Inc. will be authorized to issue 100,000,000 shares of common stock, par value of $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share. Territorial Bancorp Inc. currently expects to issue in the offering up to
12,563,750 shares of common stock. Territorial Bancorp Inc. will not issue shares of preferred stock in the conversion. Each share of Territorial Bancorp Inc. common stock will have the same relative rights as, and will be identical in all respects
to, each other share of common stock. Upon payment of the subscription price for the common stock, in accordance with the plan of conversion and reorganization, all of the shares of common stock will be duly authorized, fully paid and nonassessable.
The shares of common stock of Territorial Bancorp Inc. will represent nonwithdrawable capital, will not be an account of an insurable
type, and will not be insured by the Federal Deposit Insurance Corporation or any other government agency.
Common Stock
Dividends
.
Territorial Bancorp Inc. can pay dividends on its common stock if, after giving effect to the distribution, it would be
able to pay its indebtedness as the indebtedness comes due in the usual course of business and its total assets exceed the sum of its liabilities and the amount needed, if Territorial Bancorp Inc. were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of any holders of capital stock who have a preference in the event of dissolution. The holders of common stock of Territorial Bancorp Inc. will be entitled to receive and share
equally in dividends as may be declared by our Board of Directors out of funds legally available therefor. If Territorial Bancorp Inc. issues shares of preferred stock, the holders thereof may have a priority over the holders of the common stock
with respect to dividends.
Voting Rights
.
Upon consummation of the conversion, the holders of common stock of
Territorial Bancorp Inc. will have exclusive voting rights in Territorial Bancorp Inc. They will elect Territorial Bancorp Inc.’s Board of Directors and act on other matters as are required to be presented to them under Maryland law or as are
otherwise presented to them by the Board of Directors. Generally, each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the election of directors. Any person who beneficially owns more
than 10% of the then-outstanding shares of Territorial Bancorp Inc.’s common stock, however, will not be entitled or permitted to vote any shares of common stock held in excess of the 10% limit. If Territorial Bancorp Inc. issues shares of
preferred stock, holders of the preferred stock may also possess voting rights. Certain matters require an 80% stockholder vote.
As a
federal stock savings bank, corporate powers and control of Territorial Savings Bank are vested in its Board of Directors, who elect the officers of Territorial Savings Bank and who fill any vacancies on the Board of Directors. Voting rights of
Territorial Savings Bank are vested exclusively in the owners of the shares of capital stock of Territorial Savings Bank, which will be Territorial Bancorp Inc., and voted at the direction of Territorial Bancorp Inc.’s Board of Directors.
Consequently, the holders of the common stock of Territorial Bancorp Inc. will not have direct control of Territorial Savings Bank.
Liquidation
.
In the event of any liquidation, dissolution or winding up of Territorial Savings Bank, Territorial Bancorp Inc., as the holder of 100% of Territorial Savings Bank’s capital stock, would
150
be entitled to receive all assets of Territorial Savings Bank available for distribution, after payment or provision for payment of all debts and liabilities
of Territorial Savings Bank, including all deposit accounts and accrued interest thereon, and after distribution of the balance in the liquidation account to Eligible Account Holders and Supplemental Eligible Account Holders. In the event of
liquidation, dissolution or winding up of Territorial Bancorp Inc., the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of Territorial Bancorp Inc.
available for distribution. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.
Preemptive Rights
.
Holders of the common stock of Territorial Bancorp Inc. will not be entitled to preemptive rights with respect to
any shares that may be issued, unless such preemptive rights are approved by the Board of Directors. The common stock is not subject to redemption.
Preferred Stock
None of the shares of Territorial Bancorp Inc.’s authorized preferred stock will be issued as part of
the offering or the conversion. Preferred stock may be issued with preferences and designations as our Board of Directors may from time to time determine. Our Board of Directors may, without stockholder approval, issue shares of preferred stock with
voting, dividend, liquidation and conversion rights that could dilute the voting strength of the holders of the common stock and may assist management in impeding an unfriendly takeover or attempted change in control.
TRANSFER AGENT
The transfer agent and registrar for Territorial Bancorp Inc.’s common stock is
.
EXPERTS
The consolidated financial statements of Territorial Mutual Holding Company and subsidiaries as of December 31, 2007 and 2006, and for each of the years in the three-year period ended December 31, 2007, have
been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The
audit report refers to Territorial Mutual Holding Company adopting Statement of Financial Accounting Standards No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132(R),” effective December 31, 2006.
FinPro, Inc. has consented to the publication herein of the
summary of its report to Territorial Bancorp Inc. setting forth its opinion as to the estimated pro forma market value of the shares of common stock upon completion of the conversion and offering and its letter with respect to subscription rights.
LEGAL MATTERS
Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., counsel to Territorial Bancorp Inc. and Territorial Savings Bank, will issue to Territorial Bancorp Inc. its opinions regarding the legality of the
common stock and the federal income tax consequences of the conversion. Luse Gorman Pomerenk & Schick, P.C. has consented to the references in this prospectus to its opinions. KPMG LLP will issue to Territorial Mutual Holding Company,
Territorial Savings Group, Inc., Territorial Bancorp Inc. and Territorial Savings Bank its opinion regarding the state income tax consequences of the conversion. KPMG LLP has consented to the reference in this prospectus to its opinion. Certain
legal matters will be passed upon for Keefe, Bruyette and Woods, Inc. by Kilpatrick Stockton LLP, Washington, D.C.
151
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Territorial Bancorp Inc. has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 with respect to
the shares of common stock offered hereby. As permitted by the rules and regulations of the Securities and Exchange Commission, this prospectus does not contain all the information set forth in the registration statement. Such information, including
the appraisal report which is an exhibit to the registration statement, can be examined without charge at the public reference facilities of the Securities and Exchange Commission located at 100 F Street, N.E., Washington, D.C. 20549, and copies of
such material can be obtained from the Securities and Exchange Commission at prescribed rates. The Securities and Exchange Commission telephone number is 1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains a web site
(http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission, including Territorial Bancorp Inc. The statements
contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions of the material terms of, and should be read in conjunction with, such contract
or document.
Territorial Savings Bank has filed with the Office of Thrift Supervision an Application on Form AC with respect to the
conversion. This prospectus omits certain information contained in the application. The application may be examined at the principal office of the Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552, and at the West Regional
Office of the Office of Thrift Supervision, located at Pacific Plaza, 2001 Junipero Serra Boulevard, Suite 650, Daly City, California 94014-3897. Our Plan of conversion and reorganization is available, upon request, at each of our branch offices.
In connection with the offering, Territorial Bancorp Inc. will register its common stock under Section 12(b) of the Securities
Exchange Act of 1934 and, upon such registration, Territorial Bancorp Inc. and the holders of its common stock will become subject to the proxy solicitation rules, reporting requirements and restrictions on common stock purchases and sales by
directors, officers and greater than 10% stockholders, the annual and periodic reporting and certain other requirements of the Securities Exchange Act of 1934. Under the plan of conversion and reorganization, Territorial Bancorp Inc. has undertaken
that it will not terminate such registration for a period of at least three years following the offering.
152
I
NDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
TERRITORIAL MUTUAL HOLDING COMPANY
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Report of Independent Registered Public Accounting Firm
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F-2
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Consolidated Balance Sheets at September 30, 2008 (Unaudited) and December 31, 2007 and
2006
|
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F-3
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Consolidated Statements of Income for the nine months ended September
30, 2008 and 2007 (Unaudited) and the years ended December 31, 2007, 2006 and 2005
|
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F-4
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|
|
|
|
Consolidated Statements of Equity and Comprehensive Income for the nine months ended September
30, 2008 (Unaudited) and the years ended December 31, 2007, 2006 and 2005
|
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F-5
|
|
|
|
|
Consolidated Statements of Cash Flows for the nine months ended September
30, 2008 and 2007 (Unaudited) and the years ended December 31, 2007, 2006 and 2005
|
|
F-6
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|
|
|
|
Notes to Consolidated Financial Statements
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|
F-8
|
***
Separate financial statements for Territorial Bancorp Inc. have not been included in this prospectus because Territorial Bancorp Inc. has not engaged in any significant activities, has no significant assets, and has no contingent
liabilities, revenue or expenses.
All financial statement schedules have been omitted as the required information either is not applicable or is included
in the financial statements or related notes.
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors
Territorial Mutual Holding Company:
We have audited the accompanying consolidated balance sheets of Territorial Mutual Holding Company and subsidiaries (the Company) as of December 31, 2007 and 2006,
and the related consolidated statements of income, equity and comprehensive income, and cash flows for each of the years in the three-year period then ended. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in
accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly, in all material respects, the financial position of Territorial Mutual Holding Company and subsidiaries as of December 31, 2007 and 2006, and the results of their operations
and their cash flows for each of the years in the three-year period then ended in conformity with U.S. generally accepted accounting principles.
As
disclosed in note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment
of FASB Statements No. 87, 88, 106, and 132(R
), effective December 31, 2006.
/s/ KPMG LLP
Honolulu, Hawaii
November 12, 2008
F-2
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Balance
Sheets
September 30, 2008 and December 31, 2007 and 2006
(Dollars in thousands)
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|
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|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
|
December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Cash (note 14)
|
|
$
|
10,148
|
|
|
19,755
|
|
|
88,512
|
|
|
Investment securities held to maturity, at amortized cost (fair value of $506,889 (unaudited) at September 30, 2008, $529,307 at
December 31, 2007 and $602,459 at December 31, 2006 (notes 3 and 9)
|
|
|
521,834
|
|
|
538,025
|
|
|
621,339
|
|
|
Federal Home Loan Bank stock, at cost (note 9)
|
|
|
12,348
|
|
|
12,348
|
|
|
12,348
|
|
|
Loans receivable, net (notes 4, 5 and 8)
|
|
|
622,170
|
|
|
554,795
|
|
|
546,201
|
|
|
Accrued interest receivable (note 6)
|
|
|
4,698
|
|
|
4,574
|
|
|
4,866
|
|
|
Premises and equipment, net (note 7)
|
|
|
4,544
|
|
|
4,460
|
|
|
5,080
|
|
|
Bank-owned life insurance
|
|
|
26,851
|
|
|
26,068
|
|
|
20,026
|
|
|
Prepaid expenses and other assets
|
|
|
2,265
|
|
|
1,993
|
|
|
1,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,204,858
|
|
|
1,162,018
|
|
|
1,299,783
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
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|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (note 8)
|
|
$
|
910,252
|
|
|
892,316
|
|
|
981,354
|
|
|
Advances from the Federal Home Loan Bank (note 9)
|
|
|
28,504
|
|
|
72,000
|
|
|
100,000
|
|
|
Securities sold under agreements to repurchase (note 10)
|
|
|
115,200
|
|
|
55,200
|
|
|
60,545
|
|
|
Subordinated debentures (note 12)
|
|
|
24,216
|
|
|
24,199
|
|
|
24,178
|
|
|
Accounts payable and accrued expenses (note 13)
|
|
|
20,510
|
|
|
18,071
|
|
|
39,985
|
|
|
Current and deferred income taxes payable (note 11)
|
|
|
5,265
|
|
|
5,159
|
|
|
4,431
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|
|
Advance payments by borrowers for taxes and insurance
|
|
|
1,854
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|
|
2,594
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|
|
2,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
1,105,801
|
|
|
1,069,539
|
|
|
1,212,954
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings (note 15)
|
|
|
100,227
|
|
|
93,700
|
|
|
87,935
|
|
|
Accumulated other comprehensive loss
|
|
|
(1,170
|
)
|
|
(1,221
|
)
|
|
(1,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
99,057
|
|
|
92,479
|
|
|
86,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
1,204,858
|
|
|
1,162,018
|
|
|
1,299,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-3
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated
Statements of Income
Nine months ended September 30, 2008 and 2007 and
Years ended December 31, 2007, 2006 and 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
Years ended December 31,
|
|
|
|
|
2008
|
|
2007
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Interest and dividend income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment securities
|
|
$
|
19,390
|
|
21,341
|
|
27,908
|
|
|
31,441
|
|
|
32,982
|
|
|
Tax-exempt investment securities
|
|
|
112
|
|
294
|
|
392
|
|
|
393
|
|
|
157
|
|
|
Dividends on Federal Home Loan Bank stock
|
|
|
117
|
|
49
|
|
74
|
|
|
12
|
|
|
15
|
|
|
Loans (note 4)
|
|
|
26,111
|
|
24,210
|
|
32,514
|
|
|
30,006
|
|
|
27,983
|
|
|
Other investments
|
|
|
29
|
|
54
|
|
59
|
|
|
35
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest and dividend income
|
|
|
45,759
|
|
45,948
|
|
60,947
|
|
|
61,887
|
|
|
61,230
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (note 8)
|
|
|
14,250
|
|
18,147
|
|
23,863
|
|
|
21,678
|
|
|
16,832
|
|
|
Advances from the Federal Home Loan Bank (note 9)
|
|
|
440
|
|
2,736
|
|
3,709
|
|
|
3,647
|
|
|
2,675
|
|
|
Securities sold under agreements to repurchase (note 10)
|
|
|
3,324
|
|
1,920
|
|
2,574
|
|
|
1,441
|
|
|
438
|
|
|
Subordinated debentures and other borrowings (note 12)
|
|
|
1,312
|
|
1,667
|
|
2,222
|
|
|
2,070
|
|
|
1,897
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
|
19,326
|
|
24,470
|
|
32,368
|
|
|
28,836
|
|
|
21,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income
|
|
|
26,433
|
|
21,478
|
|
28,579
|
|
|
33,051
|
|
|
39,388
|
|
|
Provision for loan losses (note 5)
|
|
|
69
|
|
21
|
|
25
|
|
|
6
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses
|
|
|
26,364
|
|
21,457
|
|
28,554
|
|
|
33,045
|
|
|
39,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service fees on loan and deposit accounts
|
|
|
2,184
|
|
2,001
|
|
2,729
|
|
|
2,681
|
|
|
2,244
|
|
|
Income on bank-owned life insurance
|
|
|
783
|
|
701
|
|
942
|
|
|
726
|
|
|
713
|
|
|
Gain on sale of investment securities (note 3)
|
|
|
145
|
|
731
|
|
731
|
|
|
30
|
|
|
542
|
|
|
Loss on sale of loans
|
|
|
—
|
|
—
|
|
(1,062
|
)
|
|
(20
|
)
|
|
(11
|
)
|
|
Other
|
|
|
485
|
|
407
|
|
536
|
|
|
596
|
|
|
655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest income
|
|
|
3,597
|
|
3,840
|
|
3,876
|
|
|
4,013
|
|
|
4,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and employee benefits (note 13)
|
|
|
11,363
|
|
10,439
|
|
13,447
|
|
|
15,526
|
|
|
13,653
|
|
|
Occupancy (note 14)
|
|
|
3,191
|
|
2,958
|
|
3,990
|
|
|
3,758
|
|
|
3,313
|
|
|
Equipment (note 14)
|
|
|
2,118
|
|
2,105
|
|
2,858
|
|
|
2,414
|
|
|
2,345
|
|
|
Federal deposit insurance premiums
|
|
|
813
|
|
95
|
|
548
|
|
|
130
|
|
|
141
|
|
|
Other general and administrative expenses
|
|
|
2,392
|
|
2,252
|
|
3,204
|
|
|
3,272
|
|
|
3,214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expense
|
|
|
19,877
|
|
17,849
|
|
24,047
|
|
|
25,100
|
|
|
22,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
10,084
|
|
7,448
|
|
8,383
|
|
|
11,958
|
|
|
20,880
|
|
|
Income taxes (note 11)
|
|
|
3,557
|
|
2,553
|
|
2,615
|
|
|
4,247
|
|
|
7,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,527
|
|
4,895
|
|
5,768
|
|
|
7,711
|
|
|
12,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated
Statements of Equity and Comprehensive Income
Nine months ended September 30, 2008 and
Years ended December 31, 2007, 2006 and 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
earnings
|
|
|
Accumulated
other
comprehensive
income (loss)
|
|
|
Equity
|
|
|
Balances at December 31, 2004
|
|
$
|
67,262
|
|
|
—
|
|
|
67,262
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
12,968
|
|
|
—
|
|
|
12,968
|
|
|
Other comprehensive income (loss) net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of tax benefits of $552 (note 13)
|
|
|
—
|
|
|
(860
|
)
|
|
(860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
12,108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2005
|
|
|
80,227
|
|
|
(860
|
)
|
|
79,367
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
7,711
|
|
|
—
|
|
|
7,711
|
|
|
Other comprehensive income (loss) net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment, net of taxes of $552 (note 13)
|
|
|
—
|
|
|
860
|
|
|
860
|
|
|
Adjustment to initially apply SFAS No. 158, net of tax benefits of $736 (note 13)
|
|
|
—
|
|
|
(1,106
|
)
|
|
(1,106
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
7,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2006
|
|
|
87,935
|
|
|
(1,106
|
)
|
|
86,829
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
5,768
|
|
|
—
|
|
|
5,768
|
|
|
Other comprehensive income (loss) net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
Net losses arising during the period, net of tax benefits of $121
|
|
|
—
|
|
|
(183
|
)
|
|
(183
|
)
|
|
Less: Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost net of taxes of
$45
|
|
|
—
|
|
|
68
|
|
|
68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
5,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared
|
|
|
(3
|
)
|
|
—
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2007
|
|
|
93,700
|
|
|
(1,221
|
)
|
|
92,479
|
|
|
Nine months ended September 30, 2008 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6,527
|
|
|
—
|
|
|
6,527
|
|
|
Other comprehensive income (loss) net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
Retirement benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
Less: Amortization of prior service credit and net losses recognized during the period in net periodic benefit cost net of taxes of
$34
|
|
|
—
|
|
|
51
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
6,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at September 30, 2008
|
|
$
|
100,227
|
|
|
(1,170
|
)
|
|
99,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
Nine months ended September 30, 2008 and 2007 and
Years ended December 31, 2007, 2006 and 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
|
Years ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,527
|
|
|
4,895
|
|
|
5,768
|
|
|
7,711
|
|
|
12,968
|
|
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision (reversal of allowance) for loan losses
|
|
|
69
|
|
|
21
|
|
|
25
|
|
|
6
|
|
|
(15
|
)
|
|
Depreciation and amortization
|
|
|
774
|
|
|
802
|
|
|
1,064
|
|
|
980
|
|
|
832
|
|
|
Deferred income tax (benefit) expense
|
|
|
149
|
|
|
960
|
|
|
235
|
|
|
(376
|
)
|
|
(2,361
|
)
|
|
Amortization of fees, discounts, and premiums
|
|
|
(307
|
)
|
|
(398
|
)
|
|
(482
|
)
|
|
(490
|
)
|
|
(333
|
)
|
|
Origination of loans held for sale
|
|
|
(859
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Proceeds from sales of loans held for sale
|
|
|
504
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Loss on sale of loans, net
|
|
|
—
|
|
|
—
|
|
|
1,062
|
|
|
—
|
|
|
—
|
|
|
Gain on sale of investment securities
|
|
|
(145
|
)
|
|
(731
|
)
|
|
(731
|
)
|
|
(30
|
)
|
|
(542
|
)
|
|
Net loss (gain) on sale of premises and equipment
|
|
|
9
|
|
|
(11
|
)
|
|
7
|
|
|
(12
|
)
|
|
—
|
|
|
Federal Home Loan Bank Stock dividends
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(39
|
)
|
|
Decrease (increase) in accrued interest receivable
|
|
|
(124
|
)
|
|
134
|
|
|
292
|
|
|
(9
|
)
|
|
(338
|
)
|
|
Net increase in bank-owned life insurance
|
|
|
(783
|
)
|
|
(5,801
|
)
|
|
(6,042
|
)
|
|
(726
|
)
|
|
(713
|
)
|
|
Net decrease (increase )in prepaid expenses and other assets
|
|
|
(272
|
)
|
|
245
|
|
|
(582
|
)
|
|
1,414
|
|
|
(145
|
)
|
|
Net increase (decrease) in accounts payable and accrued expenses
|
|
|
2,456
|
|
|
(21,383
|
)
|
|
(21,953
|
)
|
|
21,030
|
|
|
5,734
|
|
|
Net increase (decrease) in federal and state income taxes, net
|
|
|
(9
|
)
|
|
383
|
|
|
417
|
|
|
471
|
|
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
7,989
|
|
|
(20,884
|
)
|
|
(20,920
|
)
|
|
29,969
|
|
|
15,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of investment securities held to maturity
|
|
|
(34,655
|
)
|
|
—
|
|
|
—
|
|
|
(18,091
|
)
|
|
(145,090
|
)
|
|
Purchases of investment securities available for sale
|
|
|
(9,736
|
)
|
|
(14,866
|
)
|
|
(14,866
|
)
|
|
(10,511
|
)
|
|
(138,836
|
)
|
|
Principal repayments on investment securities held to maturity
|
|
|
40,212
|
|
|
50,937
|
|
|
61,508
|
|
|
74,493
|
|
|
119,315
|
|
|
Proceeds from sale of investment securities held to maturity
|
|
|
10,538
|
|
|
22,366
|
|
|
22,366
|
|
|
—
|
|
|
612
|
|
|
Proceeds from sale of investment securities available for sale
|
|
|
9,871
|
|
|
14,904
|
|
|
14,904
|
|
|
10,541
|
|
|
138,765
|
|
|
Purchases of Federal Home Loan Bank stock
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,716
|
)
|
|
Loan originations, net of principal repayments on loans receivable
|
|
|
(66,659
|
)
|
|
(31,916
|
)
|
|
(50,142
|
)
|
|
(37,494
|
)
|
|
(35,314
|
)
|
|
Proceeds from sales of loans held for investment
|
|
|
—
|
|
|
—
|
|
|
41,098
|
|
|
—
|
|
|
—
|
|
|
Purchases of premises and equipment
|
|
|
(876
|
)
|
|
(183
|
)
|
|
(452
|
)
|
|
(1,609
|
)
|
|
(1,774
|
)
|
|
Proceeds from disposals of premises and equipment
|
|
|
9
|
|
|
18
|
|
|
—
|
|
|
38
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(51,296
|
)
|
|
41,260
|
|
|
74,416
|
|
|
17,367
|
|
|
(65,038
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Nine months ended September 30, 2008 and 2007 and
Years ended December 31, 2007, 2006 and 2005
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
|
Years ended December 31,
|
|
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in deposits
|
|
$
|
17,936
|
|
|
(76,981
|
)
|
|
(89,038
|
)
|
|
(34,697
|
)
|
|
(8,785
|
)
|
|
Proceeds from advances from the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
|
|
|
375,595
|
|
|
678,362
|
|
|
928,517
|
|
|
1,066,324
|
|
|
662,449
|
|
|
Repayments of advances from the
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank
|
|
|
(419,091
|
)
|
|
(681,054
|
)
|
|
(956,517
|
)
|
|
(1,066,641
|
)
|
|
(637,132
|
)
|
|
Proceeds from reverse repurchase agreements
|
|
|
205,350
|
|
|
282,970
|
|
|
294,870
|
|
|
483,991
|
|
|
258,083
|
|
|
Repayments of reverse repurchase agreements
|
|
|
(145,350
|
)
|
|
(300,215
|
)
|
|
(300,215
|
)
|
|
(423,446
|
)
|
|
(258,083
|
)
|
|
Proceeds from Federal fund purchases
|
|
|
—
|
|
|
156,461
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Repayments of Federal funds
|
|
|
—
|
|
|
(155,055
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net increase in advance payments by borrowers for taxes and insurance
|
|
|
(740
|
)
|
|
(836
|
)
|
|
133
|
|
|
563
|
|
|
187
|
|
|
Cash dividends paid
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
33,700
|
|
|
(96,348
|
)
|
|
(122,253
|
)
|
|
26,091
|
|
|
16,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(9,607
|
)
|
|
(75,972
|
)
|
|
(68,757
|
)
|
|
73,427
|
|
|
(33,189
|
)
|
|
Cash at beginning of the year
|
|
|
19,755
|
|
|
88,512
|
|
|
88,512
|
|
|
15,085
|
|
|
48,274
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of the period
|
|
$
|
10,148
|
|
|
12,540
|
|
|
19,755
|
|
|
88,512
|
|
|
15,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits and borrowings
|
|
$
|
19,393
|
|
|
24,251
|
|
|
32,367
|
|
|
28,177
|
|
|
21,688
|
|
|
Income taxes
|
|
|
3,485
|
|
|
1,210
|
|
|
1,810
|
|
|
5,317
|
|
|
9,084
|
|
|
Noncash investing activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans exchanged for mortgage-backed securities
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
7,984
|
|
|
—
|
|
See accompanying notes to consolidated financial statements.
F-7
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated
Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is
unaudited)
|
(1)
|
Plan of Mutual Holding Company Reorganization
|
In
September 2002, Territorial Savings and Loan Association formed a mutual holding company, utilizing a three-tier mutual holding company structure. In a series of steps, Territorial Savings and Loan Association converted into a federally
chartered stock savings bank, Territorial Savings Bank (Bank), and formed Territorial Savings Group, Inc. (Group), which owns 100% of the common stock of the Bank, and Territorial Mutual Holding Company (collectively, the Company), a federally
chartered mutual holding company, which owns 100% of the common stock of the Group.
|
(2)
|
Summary of Significant Accounting Policies
|
|
|
(a)
|
Description of Business
|
The Company
provides loan and deposit products and services primarily to individual customers through 24 branches located throughout Hawaii. The Company’s earnings depend primarily on its net interest income, which is the difference between the interest
income earned on interest-earning assets (loans receivable and investments) and the interest expense incurred on interest-bearing liabilities (deposit liabilities and borrowings). Deposits traditionally have been the principal source of the
Bank’s funds for use in lending, meeting liquidity requirements, and making investments. The Company also derives funds from receipt of interest and principal on outstanding loans receivable and investments, borrowings from the Federal Home
Loan Bank (FHLB) of Seattle, securities sold under reverse repurchase agreements, and proceeds from issuances of subordinated debentures.
|
|
(b)
|
Principles of Consolidation
|
The
consolidated financial statements include the accounts and results of operations of the Company and its wholly owned subsidiaries, Territorial Savings Group, Inc., Territorial Savings Bank, Territorial Real Estate Company, Inc., Territorial
Financial Services, Inc., and Territorial Holdings, Inc. Territorial Holdings, Inc. includes the accounts and results of operations of Territorial Realty, Inc. Significant intercompany balances and transactions have been eliminated in consolidation.
The Company has three wholly owned statutory trusts that are considered variable interest entities. In accordance with Financial Accounting
Standards Board Interpretation No. 46(R) (As Amended), the trusts are not consolidated as the Company is not the primary beneficiary.
|
|
(c)
|
Unaudited Interim Financial Information
|
The
accompanying unaudited interim consolidated balance sheet as of September 30, 2008, the consolidated statement of income, equity and comprehensive income, and cash flows for the nine months ended September 30, 2008 and 2007 are unaudited.
In the opinion of the Company’s management, the unaudited interim consolidated financial statements have been prepared on the
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
same basis as the audited consolidated financial statements and includes all normal recurring adjustments necessary for the fair presentation of the
Company’s balance sheet as of September 30, 2008 and their results of operations and their cash flows for the nine months ended September 30, 2008 and 2007. The results for the nine months ended September 30, 2008 are not
necessarily indicative of the results to be expected for the year ended December 31, 2008.
|
|
(d)
|
Investment Securities
|
The Company
classifies and accounts for its investment securities as follows: (1) held-to-maturity debt securities in which the Company has the positive intent and ability to hold to maturity are reported at amortized cost; (2) trading securities that
are purchased for the purpose of selling in the near term are reported at fair value, with unrealized gains and losses included in current earnings; and (3) available-for-sale securities not classified as either held-to-maturity or trading
securities are reported at fair value, with unrealized gains and losses excluded from current earnings and reported as a separate component of equity. At September 30, 2008, and December 31, 2007 and 2006, the Company classified its
investments as held to maturity.
A decline in the market value of any available-for-sale or held-to-maturity security below cost that is
deemed to be other than temporary results in an impairment to reduce the carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other than
temporary, the Company considers whether it has the ability and intent to hold the investment until a market price recovery and considers whether evidence indicating the cost of the investment is recoverable outweighs evidence to the contrary.
Evidence considered in this assessment includes the reasons for the impairment, the severity and duration of the impairment, changes in value subsequent to year-end, forecasted performance of the investee, and the general market condition in the
geographic area or industry the investee operates in.
Gains or losses on the sale of investment securities are computed using the
specific-identification method. The Company amortizes premiums and accretes discounts associated with investment securities using the interest method over the contractual life of the respective investment security. Such amortization and accretion is
included in the interest and dividend income line item in the consolidated statements of income. Dividend and interest income are recognized when earned.
Loans receivable are
stated at the principal amount outstanding, less the allowance for loan losses, loan origination fees and costs, and commitment fees. Interest on loans receivable is accrued as earned. The Company has a policy of placing loans on a nonaccrual basis
when more than 90 days contractually delinquent, or when, in the opinion of management, collection of all or part of the principal balance appears doubtful. Interest, net deferred fees, and discounts on loans classified as
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
nonaccrual are generally recognized on a cash basis. The Company, considering current information and events regarding the borrowers’ ability to repay
their obligations, considers a loan to be impaired when it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the
impairment is measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, if the loan is considered to be collateral dependent, based on the fair value of the collateral. Impairment
losses are included in the allowance for loan losses through a charge to the provision for loan losses. Similarly, interest, net deferred fees, and discounts on impaired loans are recognized on a cash basis. A nonaccrual loan may be restored to an
accrual basis when principal and interest payments are current and full payment of principal and interest is expected.
Loans held for sale are
stated at the lower of aggregate cost or market value.
|
|
(g)
|
Deferred Loan Origination Fees and Unearned Loan Discounts
|
Loan origination and commitment fees and certain direct loan origination costs are being deferred, and the net amount is recognized over the life of the related loan as an adjustment to yield. Net deferred loan fees
are amortized using the interest method over the contractual term of the loan, adjusted for actual prepayments. Net unamortized fees on loans paid in full are recognized as a component of interest income.
Real estate operations,
net, include operating income and expenses, gains and losses on sales of real estate, and provisions for losses resulting from subsequent declines in fair values. The Company obtains appraisals based on recent comparable sales to assist management
in estimating the fair value of real estate owned. Subsequent declines in value are charged to expense through a valuation allowance.
Profits from the sale of real estate are recognized when title has passed, minimum down payment requirements are met, the terms of any notes received are such as to satisfy continuing investment requirements, and the Company is relieved of
any requirements for continued involvement with the properties. If the minimum down payment or the continuing investment are not adequate to meet the criteria specified in Statement of Financial Accounting Standards (SFAS) No. 66,
Accounting for Sales of Real Estate
, the Company will defer income recognition and account for such sales using alternative methods such as installment, deposit, or cost recovery.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
|
|
(i)
|
Allowance for Loan Losses
|
The
Company’s allowance for credit losses is maintained at a level considered adequate to provide for losses that can be estimated based upon specific and general conditions. All loan losses are charged to the allowance for loan losses and all
recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. The allowance for loan losses
consists primarily of two components:
|
|
(1)
|
specific allowances established for impaired loans. The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the estimated
fair value of the loan, or the loan’s observable market price, if any, or the underlying collateral, if the loan is collateral dependent, and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the
loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for loan losses; and
|
|
|
(2)
|
general allowances are established for loan losses on a portfolio basis for loans that do not meet the definition of impaired. The portfolio is grouped into similar risk
characteristics, primarily loan type, loan-to-value, if collateral dependent, and delinquency status. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for
environmental factors. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.
|
Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our
financial results.
|
|
(j)
|
Premises and Equipment
|
Premises and
equipment are stated at cost less accumulated depreciation and amortization. Depreciation is principally computed on the straight-line method over the estimated useful lives of the respective assets. The estimated useful life of buildings and
improvements is 30 years, furniture, fixtures, and equipment is 3 to 10 years, and automobiles is 3 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or estimated useful life of
the asset.
The Company and its
subsidiaries file a consolidated federal income tax return and a consolidated tax return for state franchise and corporate income taxes.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
Deferred tax assets and liabilities are recognized using the asset and liability method of accounting
for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the enactment date.
Effective January 1, 2007, the Company adopted
Financial Accounting Standards Board (FASB) Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109
(FIN 48), and uses a “more-likely than-not” recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The adoption of FIN 48 did not have any impact on the Company’s financial
statements.
|
|
(l)
|
Impairment of Long-Lived Assets
|
In
accordance with SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
, long-lived assets, such as premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If
the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately
presented in the consolidated balance sheets and reported at the lower of the carrying amount or fair value less costs to sell, and are no longer depreciated. The assets and liabilities of a disposed group classified as held-for-sale would be
presented separately in the appropriate asset and liability sections of the consolidated balance sheets.
Pension benefit costs
(returns) are charged (credited) to salaries and employee benefits expense and the corresponding prepaid (accrued) pension cost is recorded in prepaid expenses and other assets or accounts payable and accrued expenses in the consolidated balance
sheets. The Company’s policy is to fund pension costs in amounts that will not be less than the minimum funding requirements of the Employee Retirement Income Security Act of 1974 and will not exceed the maximum tax-deductible amounts. The
Company generally funds at least the net periodic pension cost as calculated using SFAS No. 87,
Employers’ Accounting for Pensions
, during the fiscal year, subject to limits and targeted funded status as determined with the
consulting actuary.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
Effective December 31, 2006, the Company adopted SFAS No. 158,
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132(R)
, and recognized on its balance sheet the funded status of its defined benefit pension plan. See note 13
for the impacts of adoption.
The preparation of the
consolidated financial statements requires management to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amount of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the allowance for loan losses; valuation of certain investment securities and determination
as to whether declines in fair value below amortized cost are other than temporary; valuation allowances for deferred income tax assets; and assets and obligations related to employee benefit plans. With respect to the allowance for loan losses,
management believes the allowance for loan losses is adequate. While management utilizes available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions,
particularly in the State of Hawaii. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require management to recognize
additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination. Accordingly, actual results could differ from those estimates.
|
|
(o)
|
Recently Issued Accounting Pronouncements
|
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157,
Fair Value Measurements
(SFAS 157). This standard defines fair value, establishes a framework for measuring fair value in accounting
principles generally accepted in the United States of America, and expands disclosures about fair value measurements. The pronouncement applies under other accounting standards that require or permit fair value measurements. Accordingly, the
statement does not require any new fair value measurement. The Company adopted the provisions of SFAS 157 on January 1, 2008 and such adoption did not have a material impact on the consolidated financial statements.
In February 2008, the Financial Accounting Standards Board (FASB) amended SFAS 157 through the issuance of FSP FAS No. 157-2,
Effective Date of
FASB Statement No. 157
(FSP FAS 157-2). FSP FAS 157-2 is effective upon issuance and delays the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, for nonfinancial assets and nonfinancial liabilities that are
not recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). As permitted under SFAS 157, the Company plans to adopt the provisions of SFAS 157 for nonfinancial assets and nonfinancial liabilities
that are not recognized or disclosed at fair value in our financial statements on a recurring basis effective January 1, 2009. The Company is evaluating the impact of the adoption of SFAS 157 for nonfinancial assets and nonfinancial liabilities
on the consolidated financial statements.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
In October 2008, the FASB issued FSP FAS No. 157-3,
Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active
(FSP FAS 157-3). FSP FAS 157-3 clarifies the application of SFAS 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FSP FAS 157-3 is effective upon issuance, including prior periods for which financial statements have not been issued. Revisions resulting from a change in the valuation
technique or its application should be accounted for as a change in accounting estimate following the guidance in SFAS 154,
Accounting Changes and Error Corrections
. However, the disclosure provisions in SFAS 154 for a change in accounting
estimate are not required for revisions resulting from a change in valuation technique or its application. The Company adopted the provisions of FSP FAS 157-3 and such adoption did not have a material impact on the consolidated financial
statements for the nine months ended September 30, 2008.
In February 2007, the FASB issued SFAS No. 159,
The Fair Value Option
for Financial Assets and Financial Liabilities—including an amendment of FASB Statement No. 115
(SFAS 159). SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value and
establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company adopted SFAS 159 on January 1, 2008 and such adoption did not have a material impact on the consolidated financial statements.
In November 2007, the SEC issued Staff Accounting Bulletin No. 109,
Written Loan Commitments Recorded at Fair Value through Earnings
(SAB 109). SAB 109 states that the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through
earnings. SAB 109 is effective for loan commitments issued or modified in fiscal quarters beginning after December 15, 2007. The Company adopted SAB 109 on January 1, 2008 and such adoption did not have a material impact on the
consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations
(SFAS 141(R)).
SFAS 141(R) establishes principles and requirements for how the acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest
(minority interest) in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination or a gain from a bargain purchase and determining what information should be disclosed to
enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is to be applied prospectively to business combinations for which the acquisition date is on or after fiscal years
beginning after December 15, 2008. The Company does not expect the adoption of this statement to have a material impact on the consolidated financial statements.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated
Financial Statements—an amendment of ARB No. 51
(SFAS 160). SFAS 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. Specifically, this
statement requires the recognition of a noncontrolling interest (minority interest) as equity in the consolidated financial statements and separate from the parent’s equity. The amount of net income attributable to the noncontrolling interest
will be included in consolidated net income on the face of the income statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation are equity transactions if the parent
retains its controlling financial interest. In addition, this statement requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated. Such gain or loss will be measured using the fair value of the noncontrolling
equity investment on the deconsolidation date. SFAS 160 also includes expanded disclosure requirements regarding the interests of the parent and its noncontrolling interest. SFAS 160 is effective for fiscal years, and interim periods within
those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not expect the adoption of this statement to have a material impact on the consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement
133
(SFAS 161). SFAS 161 enhances required disclosures regarding derivatives and hedging activities, including enhanced disclosures regarding how (a) an entity uses derivative instruments; (b) derivative instruments and related hedged
items are accounted for under SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities
; and (c) derivative instruments and related hedged items affect an entity’s financial position, financial performance, and
cash flows. Specifically, SFAS 161 requires (1) disclosure of the objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation; (2) disclosure of the fair values of derivative instruments
and their gains and losses in a tabular format; (3) disclosure of information about credit-risk-related contingent features; and (4) cross-reference from the derivative footnote to other footnotes in which derivative-related information is
disclosed. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company does not expect the adoption of this statement to have a material impact on the consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162,
The Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the
sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the
United States. SFAS 162 is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411. The Company does not expect the adoption of this
statement to have any impact on the consolidated financial statements.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
In June 2008, the Emerging Issues Task Force (EITF) reached a consensus on EITF No. 08-3,
Accounting by Lessees for Nonrefundable Maintenance Deposits
. (EITF 08-3). EITF 08-3 states that lessees shall account for nonrefundable maintenance deposits as a deposit asset if it is probable that the maintenance activities will occur and
the deposit is realizable. EITF 08-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company does not expect the
adoption of this pronouncement to have any impact on the consolidated financial statements.
|
(3)
|
Investment Securities
|
The amortized cost and fair
values of securities classified as held-to-maturity are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized
cost
|
|
Gross unrealized
|
|
|
Estimated
fair value
|
|
|
|
Gains
|
|
Losses
|
|
|
|
September 30, 2008 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored mortgage-backed securities
|
|
$
|
514,800
|
|
373
|
|
(11,310
|
)
|
|
503,863
|
|
Trust preferred securities
|
|
|
7,034
|
|
—
|
|
(4,008
|
)
|
|
3,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
521,834
|
|
373
|
|
(15,318
|
)
|
|
506,889
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored mortgage-backed securities
|
|
$
|
520,412
|
|
681
|
|
(8,878
|
)
|
|
512,215
|
|
Municipal bonds
|
|
|
10,539
|
|
59
|
|
(6
|
)
|
|
10,592
|
|
Trust preferred securities
|
|
|
7,074
|
|
—
|
|
(574
|
)
|
|
6,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
538,025
|
|
740
|
|
(9,458
|
)
|
|
529,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
Held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored mortgage-backed securities
|
|
$
|
603,691
|
|
1,426
|
|
(20,268
|
)
|
|
584,849
|
|
Municipal bonds
|
|
|
10,548
|
|
2
|
|
(61
|
)
|
|
10,489
|
|
Trust preferred securities
|
|
|
7,100
|
|
21
|
|
—
|
|
|
7,121
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
621,339
|
|
1,449
|
|
(20,329
|
)
|
|
602,459
|
|
|
|
|
|
|
|
|
|
|
|
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
The amortized cost and estimated fair value of investment securities at September 30, 2008 and
December 31, 2007 are shown below. Incorporated in the maturity schedule are mortgage-backed and trust preferred securities, which are allocated using the contractual maturity as a basis. Expected maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2008
|
|
December 31, 2007
|
|
(Dollars in thousands)
|
|
Amortized
cost
|
|
Estimated
fair value
|
|
Amortized
cost
|
|
Estimated
fair value
|
|
|
|
(unaudited)
|
|
|
|
|
|
Due after 5 years through 10 years
|
|
$
|
29,284
|
|
29,010
|
|
14,762
|
|
14,779
|
|
Due after 10 years
|
|
|
492,550
|
|
477,879
|
|
523,263
|
|
514,528
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
521,834
|
|
506,889
|
|
538,025
|
|
529,307
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains and losses and the proceeds from sales of securities available for sale are as
follows for the periods ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
December 31,
|
|
(Dollars in thousands)
|
|
2008
|
|
2007
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Proceeds from sales
|
|
$
|
9,871
|
|
14,904
|
|
14,904
|
|
10,541
|
|
138,765
|
|
Gross gains
|
|
|
145
|
|
38
|
|
38
|
|
30
|
|
542
|
|
Gross losses
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
In 2008, the Bank received proceeds of $10.5 million from the sale of it investment in
municipal bonds, resulting in gross realized gains and losses of $81,303 and $80,242, respectively. Approximately $5.5 million of these securities experienced a credit downgrade. The remaining securities were sold because of concerns about a
potential downgrade of the bond’s insurers. In 2007, the Company completed a repositioning of its investment securities portfolio for interest rate management purposes. In connection with the repositioning, the Company received proceeds of
$22.4 million from the sale of held-to-maturity debt securities, resulting in gross realized gains and losses of $1.0 million and $0.3 million, respectively. There were no sales of held-to-maturity debt securities in 2006.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
Investment securities with carrying values of $258.9 million, $178.8 million and
$118.4 million at September 30, 2008, and December 31, 2007 and 2006, respectively, were pledged to secure public deposits and reverse repurchase agreements. Provided below is a summary of investment securities, which were in an
unrealized loss position at September 30, 2008, and December 31, 2007 and 2006. The Company has the ability to hold these securities until such time as the value recovers or the securities mature.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
Description of securities
|
|
Fair
value
|
|
Unrealized
losses
|
|
Fair value
|
|
Unrealized
losses
|
|
Number of
Securities
|
|
Fair value
|
|
Unrealized
losses
|
|
|
|
(Dollars in thousands)
|
|
September 30, 2008 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
17,157
|
|
239
|
|
454,993
|
|
11,071
|
|
107
|
|
472,150
|
|
11,310
|
|
Trust preferred securities
|
|
|
—
|
|
—
|
|
3,026
|
|
4,008
|
|
2
|
|
3,026
|
|
4,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,157
|
|
239
|
|
458,019
|
|
15,079
|
|
109
|
|
475,176
|
|
15,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
—
|
|
—
|
|
456,033
|
|
8,878
|
|
90
|
|
456,033
|
|
8,878
|
|
Municipal bonds
|
|
|
—
|
|
—
|
|
2,306
|
|
6
|
|
3
|
|
2,306
|
|
6
|
|
Trust preferred securities
|
|
|
6,500
|
|
574
|
|
—
|
|
—
|
|
2
|
|
6,500
|
|
574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,500
|
|
574
|
|
458,339
|
|
8,884
|
|
95
|
|
464,839
|
|
9,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities
|
|
$
|
7,097
|
|
290
|
|
540,974
|
|
19,978
|
|
141
|
|
548,071
|
|
20,268
|
|
Municipal bonds
|
|
|
—
|
|
—
|
|
9,547
|
|
61
|
|
18
|
|
9,547
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
7,097
|
|
290
|
|
550,521
|
|
20,039
|
|
159
|
|
557,618
|
|
20,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-Backed Securities.
The unrealized losses on the Company’s investment
in mortgage-backed securities were caused by increases in current market interest rates. All of the mortgage-backed securities are guaranteed by U.S. government-sponsored enterprises. Since the decline in market value is attributable to changes
in interest rates and not credit quality, and the Company has the intent and ability to hold these investments to maturity, the Company does not consider these investments to be other-than-temporarily impaired as of September 30, 2008,
December 31, 2007 and 2006.
Municipal Bonds.
The Company does not own any municipal bonds as of September 30, 2008.
The Company’s investment in municipal bonds was sold in 2008 because $5.5 million of these securities had experienced a credit downgrade and the possibility of a potential downgrade of the insurers on the remaining bonds.
At December 31, 2007 and 2006, the unrealized losses on the Company’s investment in municipal bonds were caused by increases in current market
interest rates. All of the municipal bonds are rated AA or better by S&P and/or Moody’s and insured. The Company expects full repayment at maturity and the Company has the ability and intent to hold these investments to maturity. Therefore,
the Company does not consider these investments to be other-than-temporarily impaired as of December 31, 2007 and 2006.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
Trust Preferred Securities.
At September 30, 2008, the Company owned trust
preferred securities with a book value of $7.1 million.
The Company continues to receive its full interest payment on its trust
preferred securities and they have not been downgraded. The cash flows indicate that the trust preferred securities are performing in accordance with their original contractual terms. The Company has the ability and intent to hold these securities
to maturity and does not consider these investments to be other-than-temporarily impaired as of September 30, 2008, December 31, 2007 or 2006.
The components of loans
receivable are as follows at the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
|
December 31,
|
|
|
(Dollars in thousands)
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
First mortgages:
|
|
|
|
|
|
|
|
|
|
|
|
One to four family residential
|
|
$
|
569,861
|
|
|
506,410
|
|
|
516,554
|
|
|
Multi-family residential
|
|
|
3,711
|
|
|
4,488
|
|
|
4,983
|
|
|
Construction, commercial, and other
|
|
|
20,908
|
|
|
17,041
|
|
|
14,784
|
|
|
Home equity loans and lines of credit
|
|
|
29,749
|
|
|
26,828
|
|
|
12,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate loans
|
|
|
624,229
|
|
|
554,767
|
|
|
549,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other loans:
|
|
|
|
|
|
|
|
|
|
|
|
Loans on deposit accounts
|
|
|
1,144
|
|
|
1,356
|
|
|
1,382
|
|
|
Consumer and other loans
|
|
|
4,245
|
|
|
5,223
|
|
|
3,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other loans
|
|
|
5,389
|
|
|
6,579
|
|
|
4,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
Net unearned fees and discounts
|
|
|
(4,978
|
)
|
|
(4,375
|
)
|
|
(4,415
|
)
|
|
Undisbursed loan funds
|
|
|
(1,720
|
)
|
|
(1,408
|
)
|
|
(2,530
|
)
|
|
Allowance for loan losses (note 5)
|
|
|
(750
|
)
|
|
(768
|
)
|
|
(768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,448
|
)
|
|
(6,551
|
)
|
|
(7,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
622,170
|
|
|
554,795
|
|
|
546,201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no loans classified as impaired in accordance with the requirements of
SFAS Nos. 114 and 118 as of September 30, 2008, and December 31, 2007 and 2006.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
The Company had one nonaccrual loan for $3,721 as of September 30, 2008, three nonaccrual loans
for $0.1 million as of December 31, 2007 and three nonaccrual loans totaling $0.6 million as of December 31, 2006. The Company did not collect or recognize any interest income on nonaccrual loans. The Company would have
recognized additional interest income of $19 for the nine months ended September 30, 2008 and $10,568 and $22,215 throughout 2007 and 2006, respectively, had the loans been accruing interest.
The majority of loans receivable are collateralized by real estate located in the State of Hawaii. Loan-to-value ratios generally do not exceed 80% at the
time of origination.
The Company serviced loans for others of $64.7 million, $71.0 million and $34.6 million at
September 30, 2008, and December 31, 2007 and 2006, respectively.
In the normal course of business, the Company has made loans to
certain directors and executive officers under terms, which management believes are consistent with the Company’s general lending policies. Loans to directors and executive officers amounted to $1.6 million, $1.6 million and
$0.7 million at September 30, 2008, and December 31, 2007 and 2006, respectively.
|
(5)
|
Allowance for Loan Losses
|
The activity in the
allowance for loan losses on loans receivable for the periods indicated follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
|
Years ended
December 31,
|
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of year
|
|
$
|
768
|
|
|
768
|
|
|
768
|
|
|
770
|
|
|
750
|
|
|
Provision (reversal of allowance)
|
|
|
69
|
|
|
21
|
|
|
25
|
|
|
6
|
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
837
|
|
|
789
|
|
|
793
|
|
|
776
|
|
|
735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs
|
|
|
(90
|
)
|
|
(23
|
)
|
|
(27
|
)
|
|
(10
|
)
|
|
(10
|
)
|
|
Recoveries
|
|
|
3
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
|
|
(87
|
)
|
|
(21
|
)
|
|
(25
|
)
|
|
(8
|
)
|
|
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
750
|
|
|
768
|
|
|
768
|
|
|
768
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
|
(6)
|
Accrued Interest Receivable
|
The components of
accrued interest receivable at September 30, 2008, and December 31, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
December 31,
|
|
(Dollars in thousands)
|
|
|
2007
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
Investment securities
|
|
$
|
2,134
|
|
2,280
|
|
2,665
|
|
Loans receivable
|
|
|
2,564
|
|
2,291
|
|
2,181
|
|
Interest-bearing deposits
|
|
|
—
|
|
3
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,698
|
|
4,574
|
|
4,866
|
|
|
|
|
|
|
|
|
|
|
(7)
|
Premises and Equipment
|
Premises and equipment for
the periods indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
|
December 31,
|
|
|
(Dollars in thousands)
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
585
|
|
|
585
|
|
|
585
|
|
|
Buildings and improvements
|
|
|
575
|
|
|
573
|
|
|
569
|
|
|
Leasehold improvements
|
|
|
7,826
|
|
|
7,787
|
|
|
7,749
|
|
|
Furniture, fixtures, and equipment
|
|
|
4,004
|
|
|
3,751
|
|
|
5,735
|
|
|
Automobiles
|
|
|
148
|
|
|
168
|
|
|
210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,138
|
|
|
12,864
|
|
|
14,848
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
(9,234
|
)
|
|
(8,580
|
)
|
|
(9,768
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,904
|
|
|
4,284
|
|
|
5,080
|
|
|
|
|
|
|
|
Construction in progress
|
|
|
640
|
|
|
176
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,544
|
|
|
4,460
|
|
|
5,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
Deposit accounts by type are summarized
with their respective weighted average interest rates as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
|
December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
Rate
|
|
|
Amount
|
|
Rate
|
|
|
Amount
|
|
Rate
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts
|
|
$
|
385,355
|
|
1.50
|
%
|
|
$
|
378,918
|
|
1.47
|
%
|
|
$
|
447,640
|
|
1.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3-month
|
|
|
8,469
|
|
1.92
|
|
|
|
22,495
|
|
4.06
|
|
|
|
2,098
|
|
2.72
|
|
|
6-month
|
|
|
108,642
|
|
2.47
|
|
|
|
114,376
|
|
3.90
|
|
|
|
165,349
|
|
4.43
|
|
|
9-month
|
|
|
26,288
|
|
2.64
|
|
|
|
9,071
|
|
4.29
|
|
|
|
—
|
|
—
|
|
|
1-year
|
|
|
121,990
|
|
3.23
|
|
|
|
133,988
|
|
4.17
|
|
|
|
182,366
|
|
4.23
|
|
|
2-year
|
|
|
10,925
|
|
3.45
|
|
|
|
5,798
|
|
4.13
|
|
|
|
10,357
|
|
3.63
|
|
|
3-year
|
|
|
3,139
|
|
3.62
|
|
|
|
4,266
|
|
3.49
|
|
|
|
5,794
|
|
3.26
|
|
|
4-year
|
|
|
570
|
|
3.70
|
|
|
|
458
|
|
3.66
|
|
|
|
556
|
|
3.52
|
|
|
5-year and above
|
|
|
11,269
|
|
3.54
|
|
|
|
9,702
|
|
3.48
|
|
|
|
11,429
|
|
3.48
|
|
|
Jumbo
|
|
|
120,475
|
|
2.45
|
|
|
|
97,886
|
|
4.22
|
|
|
|
40,337
|
|
4.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
411,767
|
|
|
|
|
|
398,040
|
|
|
|
|
|
418,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market
|
|
|
91,791
|
|
0.05
|
|
|
|
93,188
|
|
0.06
|
|
|
|
91,907
|
|
0.10
|
|
|
Checking and Super NOW
|
|
|
21,339
|
|
0.05
|
|
|
|
22,170
|
|
0.05
|
|
|
|
23,521
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
910,252
|
|
1.89
|
|
|
$
|
892,316
|
|
2.45
|
|
|
$
|
981,354
|
|
2.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The maturity of certificate of deposit accounts is as follows:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
September 30,
2008
|
|
December 31,
2007
|
|
|
|
(unaudited)
|
|
|
|
Maturing in:
|
|
|
|
|
|
|
2008
|
|
$
|
208,119
|
|
387,424
|
|
2009
|
|
|
185,725
|
|
5,729
|
|
2010
|
|
|
11,957
|
|
2,950
|
|
2011
|
|
|
2,320
|
|
1,461
|
|
2012 and thereafter
|
|
|
3,646
|
|
476
|
|
|
|
|
|
|
|
|
|
|
$
|
411,767
|
|
398,040
|
|
|
|
|
|
|
|
Certificates of deposit with balances greater than or equal to $100,000 totaled
$188.4 million, $172.8 million and $155.4 million at September 30, 2008, December 31, 2007 and 2006, respectively. Accounts in the Bank are insured by the Federal Deposit Insurance Corporation, generally up to a maximum of
$100,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. However, pursuant to its statutory authority, the Federal Deposit Insurance Corporation increased the deposit insurance available on
deposit accounts to $250,000 effective until December 31, 2009.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
Interest expense by type of deposit, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
Years ended December 31,
|
|
(Dollars in thousands)
|
|
2008
|
|
2007
|
|
2007
|
|
2006
|
|
2005
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Savings
|
|
$
|
4,483
|
|
4,224
|
|
5,546
|
|
8,088
|
|
14,071
|
|
Certificates of deposit and money market
|
|
|
9,723
|
|
13,868
|
|
18,247
|
|
13,488
|
|
2,658
|
|
Checking and Super NOW
|
|
|
44
|
|
55
|
|
70
|
|
102
|
|
103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14,250
|
|
18,147
|
|
23,863
|
|
21,678
|
|
16,832
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2008, December 31, 2007 and 2006, overdrawn deposit accounts totaled
$0.1 million, $0.2 million and $0.1 million, respectively, and have been reclassified as loans on the consolidated balance sheets.
|
(9)
|
Advances from the Federal Home Loan Bank
|
The FHLB
advances are secured by a blanket pledge on the Bank’s assets. At September 30, 2008 and December 31, 2007 and 2006, the Company had available additional unused FHLB advances of approximately $272.5 million, $218.3 million
and $225.4 million.
Advances outstanding for the periods indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30, 2008
|
|
|
Years ended December 31,
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(Dollars in thousands)
|
|
Amount
|
|
Weighted
average
rate
|
|
|
Amount
|
|
Weighted
average
rate
|
|
|
Amount
|
|
Weighted
average
rate
|
|
|
Amount
|
|
Weighted
average
rate
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due within 1 year
|
|
$
|
28,504
|
|
1.49
|
%
|
|
$
|
72,000
|
|
4.62
|
%
|
|
$
|
100,000
|
|
5.33
|
%
|
|
$
|
100,317
|
|
3.29
|
%
|
The Company, as a member of the FHLB system, is required to obtain and hold shares of capital
stock of the FHLB in an amount equal to the greater of 0.50% of mortgage loans and mortgage-backed securities or $500. At September 30, 2008 and December 31, 2007, the Company met such requirement.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
|
(10)
|
Securities Sold under Agreements to Repurchase
|
Securities sold under agreements to repurchase are treated as financings and the obligations to repurchase the identical securities sold are reflected as a liability with the dollar amount of securities underlying the agreements remaining
in the asset accounts. Securities sold under agreements to repurchase at September 30, 2008 and December 31, 2007 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
|
December 31,
2007
|
|
|
(Dollars in thousands)
|
|
Repurchase
liability
|
|
Weighted
average
rate
|
|
|
Repurchase
liability
|
|
Weighted
average
rate
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
Maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within 1 year
|
|
$
|
—
|
|
—
|
%
|
|
$
|
—
|
|
—
|
%
|
|
Over 1 year to 2 years
|
|
|
25,000
|
|
3.13
|
|
|
|
—
|
|
—
|
|
|
Over 2 years to 3 years
|
|
|
32,000
|
|
3.11
|
|
|
|
—
|
|
—
|
|
|
Over 3 years to 4 years
|
|
|
40,200
|
|
4.72
|
|
|
|
11,900
|
|
4.67
|
|
|
Over 4 years to 5 years
|
|
|
18,000
|
|
4.87
|
|
|
|
25,300
|
|
4.93
|
|
|
Over 5 years
|
|
|
—
|
|
—
|
|
|
|
18,000
|
|
4.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
115,200
|
|
3.95
|
%
|
|
$
|
55,200
|
|
4.85
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In June 2006, the FASB issued
FIN 48, which prescribes a “more-likely than-not” recognition threshold and measurement attribute (the largest amount of benefit that is greater than 50% likely of being realized upon ultimate resolution with tax authorities) for the
financial statement recognition and measurement of an income tax position taken or expected to be taken in a tax return. The Company adopted FIN 48 effective January 1, 2007.
In 2007, the Company did not incur any interest or penalties on income taxes. The Company will record interest on income tax penalties, if any, when they
are incurred in other expense.
As of December 31, 2007 and September 30, 2008, the Company has not recognized a FIN 48
liability in the balance sheet. Management concluded that a FIN 48 liability is not expected to be recorded within the next 12 months.
Tax years 2003 to 2006 currently remain subject to examination by the Internal Revenue Service and 2002 to 2006 by the Department of Taxation of the State of Hawaii.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
Allocation of federal and state income taxes between current and deferred provisions is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
December 31,
|
|
|
(Dollars in thousands)
|
|
2008
|
|
2007
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,116
|
|
1,399
|
|
1,969
|
|
|
4,464
|
|
|
9,066
|
|
|
State
|
|
|
292
|
|
194
|
|
411
|
|
|
159
|
|
|
1,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,408
|
|
1,593
|
|
2,380
|
|
|
4,623
|
|
|
10,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
112
|
|
899
|
|
384
|
|
|
(568
|
)
|
|
(1,944
|
)
|
|
State
|
|
|
37
|
|
61
|
|
(149
|
)
|
|
192
|
|
|
(417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149
|
|
960
|
|
235
|
|
|
(376
|
)
|
|
(2,361
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,557
|
|
2,553
|
|
2,615
|
|
|
4,247
|
|
|
7,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The federal statutory corporate tax rate for the nine months ended September 30, 2008 and
2007, and for the years ended December 31, 2007 and 2006 was 34% and for the year ended December 31, 2005 was 35%. A reconciliation of the tax provision based on the statutory corporate rate on pretax income and the provision for taxes as
shown in the accompanying consolidated statements of income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
|
December 31,
|
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense at statutory rate
|
|
$
|
3,429
|
|
|
2,533
|
|
|
2,850
|
|
|
4,066
|
|
|
7,308
|
|
|
Income tax effect of :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt interest
|
|
|
(38
|
)
|
|
(100
|
)
|
|
(133
|
)
|
|
(134
|
)
|
|
(55
|
)
|
|
Other tax-exempt income
|
|
|
(266
|
)
|
|
(238
|
)
|
|
(320
|
)
|
|
(247
|
)
|
|
(249
|
)
|
|
State income taxes, net of federal income tax benefits
|
|
|
217
|
|
|
168
|
|
|
173
|
|
|
232
|
|
|
521
|
|
|
Other
|
|
|
215
|
|
|
190
|
|
|
45
|
|
|
330
|
|
|
387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
3,557
|
|
|
2,553
|
|
|
2,615
|
|
|
4,247
|
|
|
7,912
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
35.27
|
%
|
|
34.28
|
%
|
|
31.19
|
%
|
|
35.52
|
%
|
|
37.89
|
%
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
The components of income taxes payable are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
December 31,
|
|
|
(Dollars in thousands)
|
|
|
2007
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
Current taxes payable (receivable):
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
189
|
|
184
|
|
(351
|
)
|
|
State
|
|
|
522
|
|
536
|
|
654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
711
|
|
720
|
|
303
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes payable:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
3,900
|
|
3,822
|
|
3,361
|
|
|
State
|
|
|
654
|
|
617
|
|
767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,554
|
|
4,439
|
|
4,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,265
|
|
5,159
|
|
4,431
|
|
|
|
|
|
|
|
|
|
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred
tax assets and deferred tax liabilities at September 30, 2008 and December 31, 2007 and 2006 are presented below.
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
December 31,
|
|
(Dollars in thousands)
|
|
|
2007
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Premises and equipment
|
|
$
|
999
|
|
894
|
|
779
|
|
Hawaii franchise tax
|
|
|
250
|
|
214
|
|
261
|
|
Unfunded pension liability
|
|
|
778
|
|
812
|
|
736
|
|
Allowance for loan losses
|
|
|
300
|
|
307
|
|
307
|
|
Real property tax
|
|
|
3
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,330
|
|
2,227
|
|
2,083
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Net deferred loan fees
|
|
|
3,688
|
|
3,525
|
|
3,329
|
|
FHLB stock dividends
|
|
|
2,722
|
|
2,680
|
|
2,657
|
|
Prepaid expense
|
|
|
315
|
|
275
|
|
225
|
|
Premiums on loans sold
|
|
|
159
|
|
186
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,884
|
|
6,666
|
|
6,211
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
4,554
|
|
4,439
|
|
4,128
|
|
|
|
|
|
|
|
|
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
In assessing the realizability of deferred tax assets, management considers whether it is more likely
than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for
future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences. The amount of the deferred tax assets
considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced. There was no valuation allowance for deferred tax assets as of September 30, 2008 and December 31, 2007 and 2006.
|
(12)
|
Subordinated Debentures
|
In September 2002,
the Company created a wholly owned trust subsidiary, Territorial Savings Statutory Trust I (Trust I). Trust I issued $14.0 million in trust preferred securities (preferred securities). The proceeds of the issuance were invested
by Trust I in the Company’s convertible junior subordinated debentures (debentures). The preferred securities and debentures accrue and pay quarterly cash distributions equal to the three-month LIBOR plus 3.40% (coupon rate). Prior to
September 26, 2007, the coupon rate could not exceed 11.90%. The preferred securities and debentures mature on September 26, 2032. The preferred securities can be called at the Company’s or Trust’s option. At September 30,
2008 and December 31, 2007, the coupon rates were 6.88% and 8.26%, respectively.
In June 2003, the Company created a wholly owned
trust subsidiary, Territorial Savings Statutory Trust II (Trust II). Trust II issued $5.0 million in trust preferred securities. The proceeds of the issuance were invested by Trust II in the Company’s convertible junior
subordinated debentures. The preferred securities and debentures accrue and pay quarterly cash distributions equal to the three-month LIBOR plus 3.10%. Prior to June 26, 2008, the coupon rate could not exceed 11.75%. The preferred securities
and debentures mature on June 26, 2033. The preferred securities can be called at the Company’s or Trust’s option. At September 30, 2008 and December 31, 2007, the coupon rates were 6.58% and 7.96%, respectively.
In December 2003, the Company created a wholly owned trust subsidiary, Territorial Savings Statutory Trust III (Trust III).
Trust III issued $5.0 million in trust preferred securities. The proceeds of the issuance were invested by Trust III in the Company’s convertible junior subordinated debentures. The preferred securities and debentures accrue and
pay quarterly cash distributions equal to the three-month LIBOR plus 2.95%. Prior to December 17, 2008, the coupon rate cannot exceed 11.75%. The preferred securities and debentures mature on December 17, 2033. The preferred securities can
be called at the Company’s or Trust’s option at the end of five years. At September 30, 2008 and December 31, 2007, the coupon rates were 5.77% and 7.94%, respectively.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
|
(13)
|
Employee Benefit Plans
|
The Company has a
noncontributory defined benefit pension plan that covers substantially all employees with at least one year of service. The benefits are based on years of service and the employees’ compensation during the service period. The Company’s
policy is to accrue the actuarially determined pension costs and to fund pension costs within regulatory guidelines. The Company reviews its assumptions on an annual basis and makes modifications to the assumptions based on current rates and trends
when it is appropriate to do so. The effect of modifications to those assumptions is recorded in accumulated other comprehensive income (AOCI) beginning in 2006 and amortized to net periodic benefit cost over future periods using the corridor
method. The Company believes that the assumptions utilized in recording its obligations under the plans are reasonable based on its experience and market conditions.
In addition, the Company sponsors a Supplemental Employee Retirement Plan (SERP), a noncontributory supplemental retirement benefit plan which covers certain current and former employees of the Company for amounts in
addition to those provided under the defined pension plan.
Effective December 31, 2006, the Company adopted the recognition and
disclosure provisions of SFAS No. 158. SFAS No. 158 requires companies to recognize the funded status of defined benefit pension and other postretirement plans as a net asset or liability and to recognize changes in that funded status in
the year in which the changes occur through other comprehensive income to the extent those changes are not included in the net periodic benefit cost. The funded status reported on the consolidated statement of condition as of December 31, 2006
under SFAS No. 158 was measured as the difference between the fair value of plan assets and the projected benefit obligation. The adoption of SFAS No. 158 did not impact the Company’s compliance with debt covenants or its cash
position.
The incremental effect of applying SFAS No. 158 on individual line items in the Company’s consolidated balance sheet as
of December 31, 2006 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Before
application of
SFAS No. 158
|
|
Adjustments
|
|
|
After
application of
SFAS No. 158
|
|
|
Assets
|
|
$
|
1,301,012
|
|
(1,229
|
)
|
|
1,299,783
|
|
|
Liability for pension benefits
|
|
|
4,264
|
|
612
|
|
|
4,876
|
|
|
Deferred income taxes
|
|
|
1,587
|
|
(491
|
)
|
|
1,096
|
|
|
Total liabilities
|
|
|
1,213,078
|
|
(124
|
)
|
|
1,212,954
|
|
|
Accumulated other comprehensive income, net of tax
|
|
|
—
|
|
(1,106
|
)
|
|
(1,106
|
)
|
|
Total equity
|
|
|
87,935
|
|
(1,106
|
)
|
|
86,829
|
|
The recognition provisions of SFAS No. 158 had no affect on the statements of income for the
periods presented.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
The following table sets forth the status of the Pension Plan and SERP at the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
SERP
|
|
|
|
|
December 31,
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Accumulated benefit obligation at end of year
|
|
$
|
8,866
|
|
|
7,786
|
|
|
4,960
|
|
|
4,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in projected benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
8,726
|
|
|
8,046
|
|
|
4,264
|
|
|
3,029
|
|
|
Service cost
|
|
|
515
|
|
|
532
|
|
|
405
|
|
|
1,002
|
|
|
Interest cost
|
|
|
520
|
|
|
468
|
|
|
297
|
|
|
233
|
|
|
Actuarial (gain) loss
|
|
|
383
|
|
|
(178
|
)
|
|
—
|
|
|
—
|
|
|
Benefits paid
|
|
|
(219
|
)
|
|
(155
|
)
|
|
(6
|
)
|
|
—
|
|
|
Amendments
|
|
|
—
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation at end of year
|
|
|
9,925
|
|
|
8,726
|
|
|
4,960
|
|
|
4,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
|
8,114
|
|
|
6,811
|
|
|
—
|
|
|
—
|
|
|
Actual return on plan assets
|
|
|
719
|
|
|
758
|
|
|
—
|
|
|
—
|
|
|
Employer contributions
|
|
|
400
|
|
|
700
|
|
|
6
|
|
|
—
|
|
|
Benefits paid
|
|
|
(219
|
)
|
|
(155
|
)
|
|
(6
|
)
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
|
9,014
|
|
|
8,114
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(911
|
)
|
|
(612
|
)
|
|
(4,960
|
)
|
|
(4,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
(911
|
)
|
|
(612
|
)
|
|
(4,960
|
)
|
|
(4,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability
|
|
$
|
(911
|
)
|
|
(612
|
)
|
|
(4,960
|
)
|
|
(4,264
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
2,014
|
|
|
1,822
|
|
|
—
|
|
|
—
|
|
|
Prior service cost
|
|
|
19
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss, before tax
|
|
$
|
2,033
|
|
|
1,842
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
The following table sets forth the changes recognized in accumulated other comprehensive loss at the
dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
|
|
Year ended
December 31,
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
Accumulated other comprehensive loss at the beginning of year, before tax
|
|
$
|
1,842
|
|
|
1,412
|
|
|
Actuarial net loss arising during the period
|
|
|
304
|
|
|
—
|
|
|
Amortizations (recognized in net periodic benefit cost):
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
|
(112
|
)
|
|
—
|
|
|
Prior service cost
|
|
|
(1
|
)
|
|
—
|
|
|
Minimum pension liability
|
|
|
—
|
|
|
(1,412
|
)
|
|
Initial application of SFAS No. 158
|
|
|
—
|
|
|
1,842
|
|
|
|
|
|
|
|
|
|
|
|
Total recognized in other comprehensive income
|
|
|
191
|
|
|
430
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss at end of year, before tax
|
|
$
|
2,033
|
|
|
1,842
|
|
|
|
|
|
|
|
|
|
|
For the fiscal years ended December 31, 2007, 2006 and 2005, the following weighted average
assumptions were used to determined benefit obligations at the end of the fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
SERP
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Assumptions used to determine the fiscal year-end benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.00
|
%
|
|
6.00
|
%
|
|
5.75
|
%
|
|
6.50
|
%
|
|
6.50
|
%
|
|
6.50
|
%
|
|
Rate of compensation increase
|
|
4.00
|
|
|
3.00
|
|
|
3.00
|
|
|
5.00
|
|
|
5.00
|
|
|
5.00
|
|
The Company does not expect any plan assets to be returned to the Company during calendar year
2008.
The dates used to determine retirement measurements for the Plan were December 31 of 2007, 2006 and 2005.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
The defined benefit retirement plan assets primarily consist of equity and debt securities. The
Company’s asset allocations at December 31, 2007 and 2006, by asset category, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Equity securities
|
|
61.00
|
%
|
|
63.00
|
%
|
|
65.00
|
%
|
|
Bonds
|
|
19.00
|
|
|
22.00
|
|
|
25.00
|
|
|
Cash
|
|
20.00
|
|
|
15.00
|
|
|
10.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
100.00
|
%
|
|
100.00
|
%
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s investment strategy for the defined benefit retirement plan is to maximize the
long-term rate of return on plan assets while maintaining an acceptable level of risk. The investment policy establishes a target allocation for each asset class that is reviewed periodically and rebalanced when considered appropriate. Target
allocations are 50% domestic equity securities, 15% international equity securities, and 35% bonds.
Estimated future benefit payments
reflecting expected future service at December 31, 2007 are as follows:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Pension
benefits
|
|
SERP
|
|
2008
|
|
$
|
275
|
|
17
|
|
2009
|
|
|
296
|
|
17
|
|
2010
|
|
|
389
|
|
374
|
|
2011
|
|
|
482
|
|
646
|
|
2012
|
|
|
532
|
|
646
|
|
2013 – 2017
|
|
|
3,268
|
|
3,297
|
|
|
|
|
|
|
|
|
|
|
$
|
5,242
|
|
4,997
|
|
|
|
|
|
|
|
For the fiscal years ended December 31, 2007, 2006 and 2005, the following weighted average
assumptions were used to determine net periodic benefit cost for the fiscal years shown:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
SERP
|
|
|
|
|
Year ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Assumptions used to determine the net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
6.00
|
%
|
|
5.75
|
%
|
|
6.25
|
%
|
|
6.50
|
%
|
|
6.50
|
%
|
|
6.50
|
%
|
|
Expected return on plan assets
|
|
8.00
|
|
|
8.00
|
|
|
8.00
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Rate of compensation increase
|
|
3.00
|
|
|
3.00
|
|
|
3.00
|
|
|
5.00
|
|
|
5.00
|
|
|
5.00
|
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
The components of net periodic benefit cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
SERP
|
|
|
|
Year ended December 31,
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
2006
|
|
2005
|
|
Net periodic benefit cost for the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
515
|
|
|
532
|
|
|
403
|
|
|
405
|
|
1,002
|
|
939
|
|
Interest cost
|
|
|
520
|
|
|
468
|
|
|
417
|
|
|
297
|
|
233
|
|
158
|
|
Expected return on plan assets
|
|
|
(640
|
)
|
|
(537
|
)
|
|
(467
|
)
|
|
—
|
|
—
|
|
—
|
|
Amortization of prior service cost
|
|
|
2
|
|
|
1
|
|
|
1
|
|
|
—
|
|
—
|
|
—
|
|
Recognized actuarial loss
|
|
|
111
|
|
|
199
|
|
|
131
|
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
508
|
|
|
663
|
|
|
485
|
|
|
702
|
|
1,235
|
|
1,097
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension benefits
|
|
|
SERP
|
|
|
|
Nine months ended September 30,
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
2007
|
|
|
|
(unaudited)
|
|
Net periodic benefit cost for the year:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
447
|
|
|
386
|
|
|
337
|
|
304
|
|
Interest cost
|
|
|
441
|
|
|
390
|
|
|
259
|
|
223
|
|
Expected return on plan assets
|
|
|
(529
|
)
|
|
(480
|
)
|
|
—
|
|
—
|
|
Amortization of prior service cost
|
|
|
2
|
|
|
1
|
|
|
—
|
|
—
|
|
Recognized actuarial loss
|
|
|
82
|
|
|
83
|
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost
|
|
$
|
443
|
|
|
380
|
|
|
596
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated prior service cost and net actuarial loss that will be amortized from AOCI into net
periodic pension benefit cost in 2008 are $1,483 and $113,502, respectively.
On November 4, 2008, the Board of Directors approved
changes to the Company’s defined benefit pension plan. Effective December 31, 2008, there will be no further accrual of benefits for any participants, and benefits will not increase with any additional years of service. Employees already
enrolled in the Plan as of December 31, 2008 will be 100% vested if they have at least five years of service. For employees with less than five years of service, vesting would occur at the employee’s five-year anniversary date. The impact
of the defined benefit pension plan curtailment is not expected to be material to the Company’s financial condition or results of operations for the year ending December 31, 2008.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
The Company also has a 401(k) defined contribution plan and profit sharing plan covering all
employees after one year of service. The 401(k) plan provides for employer matching contributions, as determined by the Company, based on a percentage of employees’ contributions subject to a maximum amount defined in the plan agreement. The
Company’s 401(k) matching contributions, based on 15% of employees’ contributions for 2007, 2006 and 2005, amounted to $0.1 million, $0.1 million and $0.1 million, respectively. The Company contributes an amount determined
by the board of directors to the profit sharing plan. No contributions were made to the profit sharing plan for the nine months ended September 30, 2008 or in 2007, 2006 and 2005.
Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any terms or conditions established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee.
Since commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on an individual basis. The Company’s policy
is to require suitable collateral, primarily real estate, to be provided by customers prior to disbursement of approved loans. At September 30, 2008, and December 31, 2007 and 2006, the Company had loan commitments aggregating
$9.2 million, $13.2 million and $8.5 million, respectively, primarily consisting of fixed-rate residential first mortgage loans.
The Company leases a
majority of its premises under operating leases expiring on various dates through 2016. Total rental expense comprised of minimum rentals for 2007, 2006 and 2005 was approximately $2.0 million, $1.9 million and $1.7 million,
respectively.
At December 31, 2007, future minimum rental commitments under all noncancelable operating leases are as follows:
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
2008
|
|
$
|
1,968
|
|
2009
|
|
|
1,880
|
|
2010
|
|
|
1,625
|
|
2011
|
|
|
1,607
|
|
2012
|
|
|
1,258
|
|
Thereafter
|
|
|
1,638
|
|
|
|
|
|
|
|
|
$
|
9,976
|
|
|
|
|
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
Certain leases are renegotiable during the period of the lease. The majority of lease agreements
relate to real estate and generally provide that the Company pay taxes, maintenance, insurance, and certain other operating expenses applicable to the leased premises.
In addition, the Company leases to a tenant certain property that it owns. Future minimum rental income for this noncancelable lease is as follows:
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
2008
|
|
$
|
80
|
|
2009
|
|
|
80
|
|
2010
|
|
|
80
|
|
2011
|
|
|
80
|
|
2012
|
|
|
80
|
|
Thereafter
|
|
|
1,520
|
|
|
|
|
|
|
|
|
$
|
1,920
|
|
|
|
|
|
Rental income comprised of minimum rentals for 2007 and 2006 was approximately $80,000 per year.
The Company is
required by the Federal Reserve Bank to maintain reserves based on the amount of deposits held. The amount held as a reserve at September 30, 2008, and December 31, 2007 and 2006 was $4.7 million, $4.9 million and
$5.1 million, respectively.
|
(15)
|
Regulatory Capital and Supervision
|
|
|
(a)
|
Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA)
|
Under the provisions of FIRREA, the Bank is required to meet a minimum 4% leverage (core) capital ratio, a minimum regulatory tangible capital equal to 1.5% of adjusted total assets, an 8% risk-based capital ratio,
and a 4% tier 1 risk-based capital ratio.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
At September 30, 2008, and December 31, 2007 and 2006, the Bank’s core, tangible,
risk-based, and tier 1 risk-based capital exceeded the minimum required regulatory capital ratios as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Required
|
|
|
Actual
|
|
|
Excess over
requirement
|
|
(Dollars in thousands)
|
|
Amount
|
|
Percentage
|
|
|
Amount
|
|
Percentage
|
|
|
|
September 30, 2008 (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core (Tier 1) capital
|
|
$
|
48,149
|
|
4.00
|
%
|
|
$
|
120,397
|
|
10.00
|
%
|
|
$
|
72,248
|
|
Tangible capital
|
|
|
18,056
|
|
1.50
|
|
|
|
120,397
|
|
10.00
|
|
|
|
102,341
|
|
Risk-based capital
|
|
|
38,595
|
|
8.00
|
|
|
|
121,147
|
|
25.11
|
|
|
|
82,552
|
|
Tier 1 Risk-based capital
|
|
|
19,298
|
|
4.00
|
|
|
|
120,397
|
|
24.96
|
|
|
|
101,099
|
|
|
|
|
|
|
|
|
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core (Tier 1) capital
|
|
$
|
46,460
|
|
4.00
|
%
|
|
$
|
114,195
|
|
9.83
|
%
|
|
$
|
67,735
|
|
Tangible capital
|
|
|
17,423
|
|
1.50
|
|
|
|
114,195
|
|
9.83
|
|
|
|
96,772
|
|
Risk-based capital
|
|
|
36,297
|
|
8.00
|
|
|
|
114,945
|
|
25.33
|
|
|
|
78,648
|
|
Tier 1 Risk-based capital
|
|
|
18,149
|
|
4.00
|
|
|
|
114,195
|
|
25.17
|
|
|
|
96,046
|
|
|
|
|
|
|
|
|
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core (Tier 1) capital
|
|
$
|
52,023
|
|
4.00
|
%
|
|
$
|
109,250
|
|
8.39
|
%
|
|
$
|
57,227
|
|
Tangible capital
|
|
|
19,509
|
|
1.50
|
|
|
|
109,250
|
|
8.39
|
|
|
|
89,741
|
|
Risk-based capital
|
|
|
37,328
|
|
8.00
|
|
|
|
110,000
|
|
23.57
|
|
|
|
72,672
|
|
Tier 1 Risk-based capital
|
|
|
18,664
|
|
4.00
|
|
|
|
109,250
|
|
23.41
|
|
|
|
90,586
|
The following is a reconciliation of Bank equity to regulatory capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
|
December 31,
|
|
|
(Dollars in thousands)
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Bank equity
|
|
$
|
119,415
|
|
|
113,238
|
|
|
108,419
|
|
|
Intangible assets
|
|
|
(201
|
)
|
|
(277
|
)
|
|
(288
|
)
|
|
Minority interest
|
|
|
13
|
|
|
13
|
|
|
13
|
|
|
Accumulated other comprehensive loss
|
|
|
1,170
|
|
|
1,221
|
|
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core and tangible capital
|
|
|
120,397
|
|
|
114,195
|
|
|
109,250
|
|
|
|
|
|
|
|
Allowance for loan losses – general
|
|
|
750
|
|
|
750
|
|
|
750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory risk-based capital – computed
|
|
$
|
121,147
|
|
|
114,945
|
|
|
110,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
|
|
(b)
|
Federal Deposit Insurance Corporation Improvement Act (FDICIA)
|
FDICIA was signed into law and regulations implementing the Prompt Corrective Action provisions of FDICIA became effective on December 19, 1992. In addition to the Prompt Corrective Action requirements, FDICIA
includes significant changes to the legal and regulatory environment for insured depository institutions, including reductions in insurance coverage for certain kinds of deposits; increased supervision by the federal regulatory agencies; increased
reporting requirements for insured institutions; and new regulations concerning internal controls, accounting, and operations.
The Prompt
Corrective Action provisions define specific capital categories based on an institution’s capital ratios. However, the regulators may impose higher minimum capital standards on individual institutions or may downgrade an institution from one
capital category to a lower category because of safety and soundness concerns. Failure to meet minimum capital requirements can initiate certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Company’s consolidated financial statements.
The Prompt Corrective Action provisions impose certain
restrictions on institutions that are under-capitalized. The restrictions imposed become increasingly more severe as an institution’s capital category declines from “under-capitalized” to “critically under-capitalized.”
At September 30, 2008, and December 31, 2007 and 2006, the Bank’s core, tangible, Tier 1/risk-based, and total
risk-based ratios exceeded the minimum capital thresholds for a “well-capitalized” institution. There are no conditions or events that management believes has changed the institution’s category under the capital guidelines.
The Bank is required to notify the Office of Thrift Supervision when dividends are paid to the parent company.
The Company is involved in various
claims and legal actions arising out of the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated balance sheets.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
|
(17)
|
Fair Value of Financial Instruments
|
SFAS No. 107,
Disclosures about Fair Value of Financial Instruments
, requires that the Company disclose estimated fair values for its financial instruments. Fair value estimates are made at a specific point in time, based
on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial
instrument. Because a limited or no market exists for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions
could significantly affect the estimates.
Effective January 1, 2008, we partially adopted the provisions of SFAS 157. The
statement defines fair value, establishes a consistent framework for measuring fair value and expands disclosure requirements for fair value measurements.
Under SFAS 157, we group our financial assets and liabilities at fair value into three levels based on the markets in which the financial assets and liabilities are traded and the reliability of the assumptions
used to determine fair value as follows:
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|
•
|
|
Level 1 – Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities traded in active markets. A quoted price in an active
market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.
|
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|
•
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|
Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
|
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•
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|
Level 3 – Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions
reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of discounted cash flow models and similar techniques that requires the use of significant judgment or
estimation.
|
Under SFAS 157, we base our fair values on the price that we would expect to receive if an asset were
sold or pay to transfer a liability in an orderly transaction between market participants at the measurement date. As required under SFAS 157, we maximize the use of observable inputs and minimize the use of unobservable inputs when developing
fair value measurements.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
We use fair value measurements to determine fair value disclosures. We have no assets or liabilities
measured at fair value on a recurring basis. From time to time, we may be required to record other financial assets at fair value on a nonrecurring basis such as loans held for sale, impaired loans, and mortgage servicing rights. These nonrecurring
fair value adjustments typically involve application of the lower of cost or fair value accounting or write-downs of individual assets.
We
had no assets measured at fair value on a nonrecurring basis that were recorded at fair value on our balance sheet at September 30, 2008.
Cash, Accrued Interest Receivable, Accounts Payable and Accrued Expenses, Current Income Taxes Payable, and Advance Payments by Borrowers for Taxes and Insurance.
The carrying amount approximates fair value because of the
short maturity of these instruments.
Investment Securities and FHLB Stock.
The fair value of investment securities is based
on quoted market prices or dealer quotes. Since there are no observable market-based Level 1 and Level 2 inputs for trust preferred securities, the fair value of these securities was estimated using unobservable Level 3 inputs. The
Company obtained an estimate of fair value of the trust preferred securities from a pricing service and by discounting projected cash flows using a risk-adjusted discount rate in accordance with FSP FAS 157-3. The fair value of the trust
preferred securities for disclosure purposes was estimated by considering the reasonableness of the range of fair value estimates provided by the pricing service and the discounted cash projections. FHLB stock, which is redeemable for cash at par
value, is reported at its par value.
Loans.
For certain homogeneous categories of loans, such as some conventional real
estate loans and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics and estimated servicing. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.
Deposits.
The fair value of checking and Super NOW savings accounts, passbook accounts, and certain money market deposits is the amount
payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated by discounting future cash flows using the rates currently offered for deposits of similar remaining maturities.
Advances from the FHLB, Securities Sold under Agreements to Repurchase, and Subordinated Debentures.
Fair value is estimated by discounting
future cash flows using the rates currently offered to the Company for debt of similar remaining maturities.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
The estimated fair values of the Company’s financial instruments are as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2008
|
|
December 31,
|
|
|
|
|
|
2007
|
|
2006
|
|
|
(Dollars in thousands)
|
|
Carrying
amount
|
|
Estimated
fair value
|
|
Carrying
amount
|
|
Estimated
fair value
|
|
Carrying
amount
|
|
|
Estimated
fair value
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
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Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
10,148
|
|
10,148
|
|
19,755
|
|
19,755
|
|
88,512
|
|
|
88,512
|
|
|
Investment securities held to maturity
|
|
|
521,834
|
|
506,889
|
|
538,025
|
|
529,307
|
|
621,339
|
|
|
602,459
|
|
|
FHLB stock
|
|
|
12,348
|
|
12,348
|
|
12,348
|
|
12,348
|
|
12,348
|
|
|
12,348
|
|
|
Loans receivable, net
|
|
|
622,170
|
|
618,873
|
|
554,795
|
|
555,271
|
|
546,201
|
|
|
540,821
|
|
|
Accrued interest receivable
|
|
|
4,698
|
|
4,698
|
|
4,574
|
|
4,574
|
|
4,866
|
|
|
4,866
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
910,252
|
|
910,252
|
|
892,316
|
|
892,714
|
|
981,354
|
|
|
981,354
|
|
|
Advances from the FHLB
|
|
|
28,504
|
|
28,499
|
|
72,000
|
|
72,000
|
|
100,000
|
|
|
100,000
|
|
|
Securities sold under agreements to repurchase
|
|
|
115,200
|
|
117,341
|
|
55,200
|
|
56,934
|
|
60,545
|
|
|
60,580
|
|
|
Subordinated debentures
|
|
|
24,216
|
|
13,601
|
|
24,199
|
|
24,665
|
|
24,178
|
|
|
28,768
|
|
|
Accounts payable and accrued expenses
|
|
|
20,510
|
|
20,510
|
|
18,071
|
|
18,071
|
|
39,373
|
|
|
39,373
|
|
|
Current income taxes (receivable) payable
|
|
|
711
|
|
711
|
|
636
|
|
636
|
|
(215
|
)
|
|
(215
|
)
|
|
Advance payments by borrowers for taxes and insurance
|
|
|
1,854
|
|
1,854
|
|
2,594
|
|
2,594
|
|
2,461
|
|
|
2,461
|
|
At September 30, 2008, and December 31, 2007 and 2006, neither the commitment fees
received on commitments to extend credit nor the fair value thereof was significant to the consolidated financial statements of the Company.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
Presented below are the
condensed balance sheets, statements of income, and statements of cash flows for Territorial Mutual Holding Company.
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|
|
Condensed Balance Sheets
|
|
|
|
|
|
|
|
September 30,
2008
|
|
December 31,
|
|
(Dollars in thousands)
|
|
|
2007
|
|
2006
|
|
|
|
(unaudited)
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
2,649
|
|
148
|
|
176
|
|
Investment in Territorial Savings Group, Inc.
|
|
|
96,383
|
|
90,189
|
|
85,418
|
|
Prepaid expenses and other assets
|
|
|
234
|
|
2,142
|
|
1,235
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
99,266
|
|
92,479
|
|
86,829
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other liabilities
|
|
$
|
209
|
|
—
|
|
—
|
|
Equity
|
|
|
99,057
|
|
92,479
|
|
86,829
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
$
|
99,266
|
|
92,479
|
|
86,829
|
|
|
|
|
|
|
|
|
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Income
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
|
Year ended December 31,
|
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other general and administrative expenses
|
|
$
|
36
|
|
|
23
|
|
|
29
|
|
|
25
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other expenses
|
|
|
36
|
|
|
23
|
|
|
29
|
|
|
25
|
|
|
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes and equity in undistributed earnings in subsidiaries
|
|
|
(36
|
)
|
|
(23
|
)
|
|
(29
|
)
|
|
(25
|
)
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
(420
|
)
|
|
(698
|
)
|
|
(908
|
)
|
|
(170
|
)
|
|
(651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in undistributed earnings of subsidiaries
|
|
|
384
|
|
|
675
|
|
|
879
|
|
|
145
|
|
|
634
|
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of Territorial Savings Group, Inc.
|
|
|
6,143
|
|
|
4,220
|
|
|
4,889
|
|
|
7,566
|
|
|
12,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,527
|
|
|
4,895
|
|
|
5,768
|
|
|
7,711
|
|
|
12,968
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Statements of Cash Flows
|
|
|
|
|
|
|
|
|
Nine months ended
September 30,
|
|
|
Year ended December 31,
|
|
|
(Dollars in thousands)
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,527
|
|
|
4,895
|
|
|
5,768
|
|
|
7,711
|
|
|
12,968
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed earnings of Territorial Savings Group, Inc.
|
|
|
(6,143
|
)
|
|
(4,220
|
)
|
|
(4,889
|
)
|
|
(7,566
|
)
|
|
(12,334
|
)
|
|
Net decrease (increase) in prepaid expenses and other assets
|
|
|
1,908
|
|
|
(700
|
)
|
|
(907
|
)
|
|
(171
|
)
|
|
(650
|
)
|
|
Net increase in other liabilities
|
|
|
209
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
2,501
|
|
|
(25
|
)
|
|
(28
|
)
|
|
(26
|
)
|
|
(16
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
2,501
|
|
|
(25
|
)
|
|
(28
|
)
|
|
(26
|
)
|
|
(16
|
)
|
|
Cash at beginning of the year
|
|
|
148
|
|
|
176
|
|
|
176
|
|
|
202
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of the year
|
|
$
|
2,649
|
|
|
151
|
|
|
148
|
|
|
176
|
|
|
202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Plan of Recognition and Conversion
|
On
November 4, 2008 the Board of Directors of the Company approved a plan of conversion and reorganization under which the Company would convert from a mutual holding company to a stock holding company. The conversion to a stock holding company is
subject to approval of the depositors and borrowers of the Bank and the Office of Thrift Supervision (OTS) and includes the filing of a registration statement with the U.S. Securities and Exchange Commission. If such approvals are obtained, the
Company and the Group will cease to exist as separate legal entities and a stock holding company, Territorial Bancorp Inc. (of which the Bank will become a wholly-owned subsidiary) will issue and sell shares of capital stock to eligible depositors
and borrowers of the Bank and the public.
TERRITORIAL MUTUAL HOLDING COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and 2005
(Information as of September 30, 2008 and for the nine months ended
September 30, 2008 and 2007 is unaudited)
The cost of conversion and issuing the capital stock will be deferred and deducted from the proceeds
of the offering. In the event the conversion and offering is not completed, any deferred costs will be charged to operations. Through September 30, 2008, the Company had incurred approximately $0.2 million in conversion costs which are
included in prepaid expenses and other assets on the balance sheet.
F-43
You should rely only on the information contained in this document or that to which we have referred you. No person
has been authorized to give any information or to make any representation other than as contained in this prospectus and, if given or made, such other information or representation must not be relied upon as having been authorized by Territorial
Bancorp Inc. or Territorial Savings Bank. This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation is not
authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this prospectus nor any sale
hereunder shall under any circumstances create any implication that there has been no change in the affairs of Territorial Bancorp Inc. or Territorial Savings Bank since any of the dates as of which information is furnished herein or since the date
hereof.
TERRITORIAL BANCORP INC.
(Proposed Holding Company for
Territorial Savings Bank)
Up to 10,925,000 Shares of
Common
Stock
Par value $0.01 per share
(Subject to Increase to up to 12,563,750 Shares)
PROSPECTUS
K
EEFE
, B
RUYETTE
& W
OODS
[prospectus date]
Until [expiration date] or 25 days after commencement of the syndicated community offering, if any, whichever is later, all dealers effecting transactions in the
registered securities, whether or not participating in this distribution, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver the prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
|
Item 13.
|
Other Expenses of Issuance and Distribution
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount(1)
|
|
*
|
|
Registrant’s Legal Fees and Expenses
|
|
$
|
625,000
|
|
*
|
|
Registrant’s Accounting Fees and Expenses
|
|
|
650,000
|
|
*
|
|
Conversion Agent and Data Processing Fees
|
|
|
110,000
|
|
*
|
|
Marketing Agent Fees(1)
|
|
|
1,106,000
|
|
*
|
|
Marketing Agent Expenses (Including Legal Fees and Expenses)
|
|
|
125,000
|
|
*
|
|
Appraisal Fees and Expenses
|
|
|
95,000
|
|
*
|
|
Printing, Postage, Mailing and EDGAR Fees
|
|
|
300,000
|
|
*
|
|
Filing Fees (OTS, Nasdaq, FINRA and SEC)
|
|
|
130,000
|
|
*
|
|
Business Plan Fees and Expenses
|
|
|
52,500
|
|
*
|
|
Other
|
|
|
87,500
|
|
|
|
|
|
|
|
|
*
|
|
Total
|
|
$
|
3,281,000
|
|
|
|
|
|
|
|
|
(1)
|
Territorial Bancorp Inc. has retained Keefe, Bruyette & Woods, Inc. to assist in the sale of common stock on a best efforts basis in the offerings. Fees are estimated at
the adjusted maximum of the offering range.
|
|
Item 14.
|
Indemnification of Directors and Officers
|
Articles
10 and 11 of the Articles of Incorporation of Territorial Bancorp Inc. (the “Corporation”) set forth circumstances under which directors, officers, employees and agents of the Corporation may be insured or indemnified against liability
which they incur in their capacities as such:
ARTICLE 10. Indemnification, etc. of Directors and Officers.
A. Indemnification.
The Corporation shall indemnify (1) its current and former directors and officers, whether serving the Corporation or
at its request any other entity, to the fullest extent required or permitted by the MGCL now or hereafter in force, including the advancement of expenses under the procedures and to the fullest extent permitted by law, and (2) other employees
and agents to such extent as shall be authorized by the Board of Directors and permitted by law; provided, however, that, except as provided in Section B of this Article 10 with respect to proceedings to enforce rights to indemnification, the
Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation.
B. Procedure.
If a claim under Section A of this Article 10 is not paid in full by the Corporation within sixty (60) days after a
written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall
also be entitled to be reimbursed the expense of prosecuting or defending such suit. It shall be a defense to any action for advancement of expenses that the Corporation has not received both (i) an undertaking as required by law to repay such
advances in the event it shall ultimately be determined that the standard of conduct has not been met and (ii) a written affirmation by the indemnitee of his good faith belief that the standard of conduct necessary for indemnification by the
Corporation has been met. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and
(ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable
standard for indemnification set forth in the MGCL. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that
indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable
II-1
standard of conduct set forth in the MGCL, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or
its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a
defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the
burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article 10 or otherwise shall be on the Corporation.
C. Non-Exclusivity.
The rights to indemnification and to the advancement of expenses conferred in this Article 10 shall not be exclusive of
any other right that any Person may have or hereafter acquire under any statute, these Articles, the Corporation’s Bylaws, any agreement, any vote of stockholders or the Board of Directors, or otherwise.
D. Insurance.
The Corporation may maintain insurance, at its expense, to insure itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such Person against such expense, liability or loss
under the MGCL.
E. Miscellaneous.
The Corporation shall not be liable for any payment under this Article 10 in connection with
a claim made by any indemnitee to the extent such indemnitee has otherwise actually received payment under any insurance policy, agreement, or otherwise, of the amounts otherwise indemnifiable hereunder. The rights to indemnification and to the
advancement of expenses conferred in Sections A and B of this Article 10 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the
indemnitee’s heirs, executors and administrators.
Any repeal or modification of this Article 10 shall not in any way diminish
any rights to indemnification or advancement of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to events occurring, or claims made, while this Article 10 is in force.
ARTICLE 11. Limitation of Liability.
An officer or director of the Corporation, as such, shall not be liable to the Corporation or its
stockholders for money damages, except (A) to the extent that it is proved that the Person actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services
actually received; or (B) to the extent that a judgment or other final adjudication adverse to the Person is entered in a proceeding based on a finding in the proceeding that the Person’s action, or failure to act, was the result of active
and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding; or (C) to the extent otherwise provided by the MGCL. If the MGCL is amended to further eliminate or limit the personal liability of officers and
directors, then the liability of officers and directors of the Corporation shall be eliminated or limited to the fullest extent permitted by the MGCL, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such
repeal or modification.
|
Item 15.
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Recent Sales of Unregistered Securities
|
Not
Applicable.
II-2
|
Item 16.
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Exhibits and Financial Statement Schedules:
|
The
exhibits and financial statement schedules filed as part of this registration statement are as follows:
|
|
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|
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1.1
|
|
Engagement Letter between Territorial Mutual Holding Company and Keefe, Bruyette & Woods, Inc.
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|
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|
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1.2
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Form of Agency Agreement between Territorial Mutual Holding Company, Territorial Savings Group, Inc., Territorial Savings Bank and Territorial Bancorp Inc., and Keefe, Bruyette & Woods, Inc.
|
|
|
|
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2
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Plan of Conversion and Reorganization
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|
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3.1
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Articles of Incorporation of Territorial Bancorp Inc.
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3.2
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Bylaws of Territorial Bancorp Inc.
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4
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Form of Common Stock Certificate of Territorial Bancorp Inc.
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5
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Opinion of Luse Gorman Pomerenk & Schick, P.C. regarding legality of securities being registered
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8
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Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick, P.C.
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|
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|
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10.1
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Proposed Employment Agreement between Territorial Bancorp Inc. and Allan S. Kitagawa
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|
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10.2
|
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Employment Agreement between Territorial Savings Bank and Allan S. Kitagawa
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|
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10.3
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Proposed Employment Agreement between Territorial Bancorp Inc. and Vernon Hirata
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|
|
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10.4
|
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Employment Agreement between Territorial Savings Bank and Vernon Hirata
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|
|
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10.5
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Proposed Employment Agreement between Territorial Bancorp Inc. and Ralph Y. Nakatsuka
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|
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10.6
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Employment Agreement between Territorial Savings Bank and Ralph Y. Nakatsuka
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|
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10.7
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|
Supplemental Executive Retirement Agreement between Territorial Savings Bank and Allan S. Kitagawa
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|
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10.8
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|
Supplemental Executive Retirement Agreement between Territorial Savings Bank and Vernon Hirata
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|
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10.9
|
|
Supplemental Executive Retirement Agreement between Territorial Savings Bank and Ralph Y. Nakatsuka
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|
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10.10
|
|
Executive Deferred Incentive Agreement between Territorial Savings Bank and Allan S. Kitagawa
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|
|
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10.11
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Executive Deferred Incentive Agreement between Territorial Savings Bank and Vernon Hirata
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|
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10.12
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Territorial Savings Bank Employee Stock Ownership Plan
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|
|
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10.13
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|
Territorial Savings Bank Non-Qualified Supplemental Employee Stock Ownership Plan
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|
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10.14
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Territorial Savings Bank Executive Incentive Compensation Plan
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|
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10.15
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First Amendment to Territorial Savings Bank Executive Incentive Compensation Plan
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|
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10.16
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Territorial Savings Bank Separation Pay Plan and Summary Plan Description
|
|
|
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21
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Subsidiaries of Registrant
|
|
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|
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23.1
|
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Consent of Luse Gorman Pomerenk & Schick, P.C. (contained in Opinions included as Exhibits 5 and 8)
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|
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23.2
|
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Consent of KPMG LLP
|
|
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23.3
|
|
Consent of FinPro, Inc.
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|
|
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24
|
|
Power of Attorney (set forth on signature page)
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|
|
|
|
99.1
|
|
Appraisal Agreement between Territorial Savings Bank and FinPro, Inc.
|
|
|
|
|
99.2
|
|
Letter of FinPro, Inc. with respect to Subscription Rights
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|
|
|
|
99.3
|
|
Appraisal Report of FinPro, Inc.*
|
|
|
|
|
99.4
|
|
Marketing Materials
|
|
|
|
|
99.5
|
|
Stock Order and Certification Form
|
|
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|
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99.6
|
|
Business Plan Agreement with RP Financial, LC.
|
|
|
|
|
99.7
|
|
Conversion Agent Agreement between Keefe, Bruyette & Woods, Inc. and Territorial Mutual Holding Company
|
|
*
|
Supporting financial schedules filed in paper format only pursuant to Rule 202 of Regulation S-T. Available for inspection during business hours at the principal offices of the SEC
in Washington, D.C.
|
|
|
(b)
|
Financial Statement Schedules
|
No financial
statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes.
II-3
The undersigned Registrant hereby
undertakes:
(1) To file, during any period in which it offers or sales are being made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the
effective registration statement;
(iii) To include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to such information in the registration statement.
(2) That, for
the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of the offering.
(4) Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final adjudication of such issue.
(5) That, for the purpose of
determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
(6) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(7) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-4
The undersigned registrant undertakes that in a primary offering of securities of the undersigned
registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter);
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by
the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing
material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
II-5
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Honolulu,
State of Hawaii on November 14, 2008.
|
|
|
|
|
TERRITORIAL BANCORP INC.
|
|
|
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|
By:
|
|
/s/ Allan S. Kitagawa
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Allan S. Kitagawa
|
|
|
|
Chairman of the Board, President and Chief
Executive
Officer
|
|
|
|
(Duly Authorized Representative)
|
POWER OF ATTORNEY
We, the undersigned directors and officers of Territorial Bancorp Inc. (the “Company”) hereby severally constitute and appoint Allan S.
Kitagawa as our true and lawful attorney and agent, to do any and all things in our names in the capacities indicated below which said Allan S. Kitagawa may deem necessary or advisable to enable the Company to comply with the Securities Act of 1933,
and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 relating to the offering of the Company’s common stock, including specifically, but not limited to,
power and authority to sign for us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby approve, ratify and confirm all that said Allan S.
Kitagawa shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the dates indicated.
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Signatures
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Title
|
|
Date
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/s/ Allan S. Kitagawa
Allan S. Kitagawa
|
|
|
|
Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer)
|
|
November 14, 2008
|
|
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|
|
/s/ Melvin M. Miyamoto
Melvin M. Miyamoto
|
|
|
|
Senior Vice President and Treasurer (Principal Financial and Accounting Officer)
|
|
November 14, 2008
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|
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/s/ Kirk W. Caldwell
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Director
|
|
November 14, 2008
|
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Kirk W. Caldwell
|
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/s/ Howard Y. Ikeda
Howard Y. Ikeda
|
|
|
|
Director
|
|
November 14, 2008
|
|
|
|
|
|
|
/s/ David S. Murakami
David S. Murakami
|
|
|
|
Director
|
|
November 14, 2008
|
|
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/s/ Richard I. Murakami
Richard I. Murakami
|
|
|
|
Director
|
|
November 14, 2008
|
|
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|
|
|
|
/s/ Harold H. Ohama
Harold H. Ohama
|
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Director
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November 14, 2008
|
As filed with the Securities and Exchange Commission on November 14, 2008
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-1
Territorial Bancorp Inc.
Honolulu, Hawaii
EXHIBIT INDEX
|
|
|
|
|
1.1
|
|
Engagement Letter between Territorial Mutual Holding Company and Keefe, Bruyette & Woods, Inc.
|
|
|
|
|
1.2
|
|
Form of Agency Agreement between Territorial Mutual Holding Company, Territorial Savings Group, Inc., Territorial Savings Bank and Territorial Bancorp Inc., and Keefe, Bruyette & Woods, Inc.
|
|
|
|
|
2
|
|
Plan of Conversion and Reorganization
|
|
|
|
|
3.1
|
|
Articles of Incorporation of Territorial Bancorp Inc.
|
|
|
|
|
3.2
|
|
Bylaws of Territorial Bancorp Inc.
|
|
|
|
|
4
|
|
Form of Common Stock Certificate of Territorial Bancorp Inc.
|
|
|
|
|
5
|
|
Opinion of Luse Gorman Pomerenk & Schick, P.C. regarding legality of securities being registered
|
|
|
|
|
8
|
|
Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick, P.C.
|
|
|
|
|
10.1
|
|
Proposed Employment Agreement between Territorial Bancorp Inc. and Allan S. Kitagawa
|
|
|
|
|
10.2
|
|
Employment Agreement between Territorial Savings Bank and Allan S. Kitagawa
|
|
|
|
|
10.3
|
|
Proposed Employment Agreement between Territorial Bancorp Inc. and Vernon Hirata
|
|
|
|
|
10.4
|
|
Employment Agreement between Territorial Savings Bank and Vernon Hirata
|
|
|
|
|
10.5
|
|
Proposed Employment Agreement between Territorial Bancorp Inc. and Ralph Y. Nakatsuka
|
|
|
|
|
10.6
|
|
Employment Agreement between Territorial Savings Bank and Ralph Y. Nakatsuka
|
|
|
|
|
10.7
|
|
Supplemental Executive Retirement Agreement between Territorial Savings Bank and Allan S. Kitagawa
|
|
|
|
|
10.8
|
|
Supplemental Executive Retirement Agreement between Territorial Savings Bank and Vernon Hirata
|
|
|
|
|
10.9
|
|
Supplemental Executive Retirement Agreement between Territorial Savings Bank and Ralph Y. Nakatsuka
|
|
|
|
|
10.10
|
|
Executive Deferred Incentive Agreement between Territorial Savings Bank and Allan S. Kitagawa
|
|
|
|
|
10.11
|
|
Executive Deferred Incentive Agreement between Territorial Savings Bank and Vernon Hirata
|
|
|
|
|
10.12
|
|
Territorial Savings Bank Employee Stock Ownership Plan
|
|
|
|
|
10.13
|
|
Territorial Savings Bank Non-Qualified Supplemental Employee Stock Ownership Plan
|
|
|
|
|
10.14
|
|
Territorial Savings Bank Executive Incentive Compensation Plan
|
|
|
|
|
10.15
|
|
First Amendment to Territorial Savings Bank Executive Incentive Compensation Plan
|
|
|
|
|
10.16
|
|
Territorial Savings Bank Separation Pay Plan and Summary Plan Description
|
|
|
|
|
21
|
|
Subsidiaries of Registrant
|
|
|
|
|
23.1
|
|
Consent of Luse Gorman Pomerenk & Schick, P.C. (contained in Opinions included as Exhibits 5 and 8)
|
|
|
|
|
23.2
|
|
Consent of KPMG LLP
|
|
|
|
|
23.3
|
|
Consent of FinPro, Inc.
|
|
|
|
|
24
|
|
Power of Attorney (set forth on signature page)
|
|
|
|
|
99.1
|
|
Appraisal Agreement between Territorial Savings Bank and FinPro, Inc.
|
|
|
|
|
99.2
|
|
Letter of FinPro, Inc. with respect to Subscription Rights
|
|
|
|
|
99.3
|
|
Appraisal Report of FinPro, Inc.*
|
|
|
|
|
99.4
|
|
Marketing Materials
|
|
|
|
|
99.5
|
|
Stock Order and Certification Form
|
|
|
|
|
99.6
|
|
Business Plan Agreement with RP Financial, LC.
|
|
|
|
|
99.7
|
|
Conversion Agent Agreement between Keefe, Bruyette & Woods, Inc. and Territorial Mutual Holding Company
|
|
*
|
Supporting financial schedules filed in paper format only pursuant to Rule 202 of Regulation S-T. Available for inspection during business hours at the principal offices of the SEC
in Washington, D.C.
|
Exhibit 1.1
September 5, 2008
Mr. Allan S. Kitagawa
Chairman and Chief Executive Officer
Territorial Savings Bank
1132 Bishop Street, Suite 2200
Honolulu, HI 96813
Dear Mr. Kitagawa:
This letter confirms the engagement of Keefe, Bruyette & Woods, Inc. (“KBW”) to act as the exclusive financial advisor to Territorial Savings Bank (the “Bank”) in connection with the
Bank’s proposed conversion from the mutual to stock form of organization pursuant to the Bank’s Plan of Conversion (the “Conversion”), including the offer and sale of certain shares of the common stock (the “Common
Stock”) of a holding company (the “Holding Company”) to be formed by the Bank to eligible persons in a Subscription Offering, with any remaining shares offered to the general public in a Community Offering (the Subscription Offering
the Community Offering and any Syndicated Community Offering are collectively referred to herein as the “Offerings”). In addition, KBW will act as Conversion Agent in connection with the Offerings pursuant to the terms of a separate
agreement between the Bank and KBW. The Bank and the Holding Company are collectively referred to herein as the “Company” This letter sets forth the terms and conditions of our engagement.
|
1.
|
Advisory/Offering Services
|
As the Company’s financial
advisor
,
KBW will provide financial and logistical advice to the Company and will assist the Company’s management, legal counsel, accountants and other advisors in connection with the Conversion and related issues. We anticipate our
services will include the following, each as may be necessary and as the Company may reasonably request:
|
|
1.
|
Provide advice on the financial and securities market implications of the Plan of Conversion and any related corporate documents, including the Company’s Business Plan;
|
|
|
2.
|
Assist in structuring the Offerings, including developing and assisting in implementing a marketing strategy for the Offerings;
|
|
|
3.
|
Reviewing all offering documents, including the Prospectus, stock order forms, letters, brochures and other related offering materials (it being understood that preparation and
filing of such documents will be the responsibility of the Company and its counsel);
|
|
|
4.
|
Assisting the Company in preparing for and scheduling meetings with potential investors and broker-dealers, as necessary;
|
|
|
5.
|
Assist the Company in analyzing proposals from outside vendors retained in connection with the Offerings, including printers, transfer agents and appraisal firms;
|
|
|
6.
|
Assist the Company in the drafting and distribution of press releases as required or appropriate in connection with the Offerings;
|
Mr. Allan S. Kitagawa
September 5, 2008
Page
2
of 6
|
|
7.
|
Meet with the Board of Directors and/or management of the Company to discuss any of the above services; and
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|
|
8.
|
such other financial advisory and investment banking services in connection with the Offerings as may be agreed upon by KBW and the Company.
|
The Company acknowledges and agrees that
KBW’s obligation to perform the services contemplated by this agreement shall be subject to the satisfactory completion of such investigations and inquiries relating to the Company, and its directors, officers, agents and employees, as KBW and
their counsel in their sole discretion my deem appropriate under the circumstances. The Company agrees it will make available to KBW all relevant information, whether or not publicly available, which KBW reasonably requests, and will permit KBW to
discuss with the board of directors and management the operations and prospects of the Company. KBW will treat all material non-public information as confidential. The Company recognizes and confirms that KBW (a) will use and rely on such
information in performing the services contemplated by this agreement without having independently verified the same, and (b) does not assume responsibility for the accuracy or completeness of the information or to conduct any independent
verification or any appraisal or physical inspection of properties or assets. KBW will assume that all financial forecasts have been reasonably prepared and reflect the best then currently available estimates and judgments of the Company’s
management as to the expected future financial performance of the Company.
The Company will cause appropriate Offering
documents to be filed with all regulatory agencies including the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”, formerly the NASD), the appropriate federal and/or state bank
regulatory agencies. In addition, the Company and KBW agree that the Company’s counsel shall serve as counsel with respect to blue sky matters in connection with the Offerings, and that the Company shall cause such counsel to prepare a Blue Sky
Memorandum related to the Offerings including KBW’s participation therein and shall furnish KBW a copy thereof addressed to KBW or upon which counsel shall state KBW may rely.
For the services hereunder, the Company shall pay the
following fees to KBW at closing unless stated otherwise:
|
|
(a)
|
Management Fee:
A Management Fee of $50,000 payable in four consecutive monthly installments of $12,500 commencing with the first month following the execution of this
engagement letter. Such fees shall be deemed to have been earned when due. Should the Offering be terminated for any reason not attributable to the action or inaction of KBW, KBW shall have earned and be entitled to be paid fees accruing through the
stage at which point the termination occurred.
|
|
|
(b)
|
Success Fee:
A Success Fee of 1.00% shall be paid based on the aggregate Purchase Price
|
Mr. Allan S. Kitagawa
September 5, 2008
Page
3
of 6
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of Common Stock sold in the Subscription Offering excluding shares purchased by the Company’s officers, directors, or employees (or members of their
immediate family) plus any ESOP, tax-qualified or stock based compensation plans (except IRA’s) or similar plan created by the Company for some or all of their directors or employees, or any charitable foundation established by the Company (or
any shares contributed to such a foundation). The Management Fee described in 4(a) will be credited against any Success Fee paid pursuant to this paragraph.
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(c)
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Syndicated Community Offering:
If any shares of the Company’s stock remain available after the Subscription Offering and Direct Community Offering, at the request of the
Company, KBW will seek to form a syndicate of registered broker-dealers to assist in the sale of such common stock on a best efforts basis, subject to the terms and conditions set forth in a selected dealers agreement to be entered into between the
Company and KBW. KBW will endeavor to distribute the common stock among dealers in a fashion which best meets the distribution objectives of the Company and the Plan. KBW will be paid a fee not to exceed 5.5% of the aggregate Purchase Price of the
shares of common stock sold in the Syndicated Community Offering. From this fee, KBW will pass onto selected broker-dealers, who assist in the syndicated community, an amount competitive with gross underwriting discounts charged at such time for
comparable amounts of stock sold at a comparable price per share in a similar market environment. Fees with respect to purchases affected with the assistance of a broker/dealer other than KBW shall be transmitted by KBW to such broker/dealer. (The
decision to utilize selected broker-dealers will be made by the Company upon consultation with KBW.)
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The Company will bear those expenses of the proposed
Offering customarily borne by issuers, including, without limitation, regulatory filing fees, SEC, “Blue Sky,” and FINRA filing and registration fees; the fees of the Company’s accountants, attorneys, appraiser, transfer agent and
registrar, printing, mailing and marketing and syndicate expenses associated with the Offering; the fees set forth in Section 4; and fees for “Blue Sky” legal work. If KBW incurs expenses on behalf of Company, the Company will
reimburse KBW for such expenses.
KBW shall be reimbursed for its reasonable out-of-pocket expenses related to the Offering, including costs of travel,
meals and lodging, photocopying, telephone, facsimile, and couriers. KBW will be reimbursed for fees and expenses of its counsel not to exceed $75,000. These expenses assume no unusual circumstances or delays, or a re-solicitation in connection with
the Offerings. KBW and the Company acknowledge that such expense cap may be increased by mutual consent, including in the event of a material delay in the Offering which would require an update of the financial information in tabular form to reflect
a period later than that set forth in the original filing of the offering document. The provisions of this paragraph are not intended to apply to or in any way impair or limit the indemnification provisions contained herein.
Mr. Allan S. Kitagawa
September 5, 2008
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The Company acknowledges that all opinions and advice
(written or oral) given by KBW to the Company in connection with KBW’s engagement are intended solely for the benefit and use of the senior management and directors of the Company for the purposes of their evaluation of the proposed Offerings.
Unless otherwise expressly stated in an opinion letter issued by KBW or otherwise expressly agreed, no one other than such persons is authorized to rely upon this engagement of KBW or any statements or conduct by KBW. The Company agrees that no such
opinion or advice shall be used, reproduced, disseminated, quoted or referred to at any time, in any manner, or for any purpose, nor shall any public references to KBW be made by the Company or any of its representatives without the prior written
consent of KBW.
The Company acknowledges and agrees that KBW has been retained to act solely as financial advisor to the Company and not
as an advisor to or agent of any other person, and the Company’s engagement of KBW is not intended to confer rights upon any person not a party to this Agreement (including shareholders, employees or creditors of the Company) as against KBW or
its affiliates, or their respective directors, officers, employees or agents. In such capacity, KBW shall act as an independent contractor, and any duties arising out of its engagement shall be owed solely to the Company. It is understood that
KBW’s responsibility to the Company is solely contractual in nature and KBW does not owe the Company, or any other party, any fiduciary duty as a result of this Agreement.
This letter agreement shall inure to the benefit of the
parties hereto and their respective successors, and the obligations and liabilities assumed hereunder by the parties hereto shall be binding upon their respective successors; provided, however, that this letter agreement shall not be assignable by
KBW.
KBW acknowledges that a portion of the Information
may contain confidential and proprietary business information concerning the Company. KBW agrees that, Except as contemplated in connection with the performance of its services under this agreement, as authorized by the Company or as required by
law, regulation or legal process, KBW agrees that it will treat as confidential all material, non-public information relating to the Company obtained in connection with its engagement hereunder (the “Confidential Information); provided,
however, that KBW may disclose such Confidential Information to its agents and advisors who are assisting or advising KBW in performing its services hereunder and who have agreed to be bound by the terms and conditions of this paragraph. As used in
this paragraph, the term “Confidential Information” shall not include information which (a) is or becomes generally available to the public other than as a result of a disclosure by KBW, (b) was available to KBW on a
non-confidential basis prior to its disclosure to KBW by the Company, or (c) becomes available to KBW on a non-confidential basis from a person other than the Company who is not otherwise known to KBW to be bound not to disclose such
information pursuant to a contractual, legal or fiduciary obligation.
The Company hereby acknowledges and agrees that the presentation materials and
financial models used by KBW in performing its services hereunder have been developed by and are proprietary to KBW. The Company agrees that it will not reproduce or distribute all or any portion of such models or presentations without the prior
consent from KBW in writing.
Mr. Allan S. Kitagawa
September 5, 2008
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As KBW will be acting on behalf of the Company in
connection with the Offerings, the Company agrees to indemnify and hold harmless KBW and its affiliates, the respective partners, directors, officers, employees and agents of KBW and its affiliates and each other person, if any, controlling KBW or
any of its affiliates and each of their successors and assigns (KBW and each such person being an “Indemnified Party”) to the fullest extent permitted by law, from and against any and all losses, claims, damages and liabilities, joint or
several, to which such Indemnified Party may become subject under applicable federal or state law, or otherwise related to or arising out of the Offerings or the engagement of KBW pursuant to, or the performance by KBW of the services contemplated
by, this letter, and will reimburse any Indemnified Party for all expenses (including reasonable legal fees and expenses) as they are incurred, including expenses incurred in connection with the investigation, preparing for or defending any such
action or claim whether or not in connection with pending or threatened litigation, or any action or proceeding arising therefrom, whether or not KBW is a party; provided, however, that the Company will not be liable in any such case to the extent
that any such loss, claim, damage, liability or expense (a) arises out of or is based upon any untrue statement of a material fact or the omission of a material fact required to be stated therein or necessary to make not misleading any
statements contained in any final prospectus, or any amendment or supplement thereto, made in reliance on and in conformity with written information furnished to the Company by KBW expressly for use therein or (b) to the extent that any loss,
claim, damage, liability or expense is found in a final judgment by a court of competent jurisdiction to have resulted primarily from KBW’s gross negligence, willful misconduct or bad faith of KBW.
If the indemnification provided for in the foregoing paragraph is judicially determined to be unavailable (other than in accordance with the terms
hereof) to any person otherwise entitled to indemnity in respect of any losses, claims, damages or liabilities referred to herein, then, in lieu of indemnifying such person hereunder, the Company shall contribute to the amount paid or payable by
such person as a result of such losses, claims, damages or liabilities (and expenses relating thereto) (i) in such proportion as is appropriate to reflect the relative benefits to the Company, on the one hand, and KBW, on the other hand, of the
engagement provided for in this Agreement or (ii) if the allocation provided for in clause (i) above is not available, in such proportion as is appropriate to reflect not only the relative benefits referred to in such clause (i) but
also the relative fault of each of the Company and KBW, as well as any other relevant equitable considerations;
provided
,
however
, in no event shall KBW’s aggregate contribution to the amount paid or payable exceed the aggregate
amount of fees actually received by KBW under this Agreement. For the purposes of this Agreement, the relative benefits to the Company and to KBW of the engagement under this Agreement shall be deemed to be in the same proportion as (a) the
total value paid or contemplated to be paid or received or contemplated to be received by the Company in the Conversion and the Offerings that are the subject of the engagement hereunder, whether or not consummated, bears to (b) the fees paid
or to be paid to KBW under this Agreement.
This letter agreement reflects KBW’s
present intention of proceeding to work with the Company on its proposed Offerings. No legal and binding obligation is created on the part of the Company or KBW with respect to the subject matter hereof, except as to (i) the agreement to
maintain the confidentiality of
Mr. Allan S. Kitagawa
September 5, 2008
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Confidential Information set forth in Section 9, (ii) the payment of certain fees as set forth in Section 4, (iii) the payment of
expenses as set forth in Section 6, (iv) the limitations set forth in Section 7, (v) the indemnification and contribution provisions set forth in Section 10 and (iv) those terms set forth in a mutually agreed upon
Agency Agreement between KBW and the Company to be executed prior to commencement of the Offerings, all of which shall constitute the binding obligations of the parties hereto and which shall survive the termination of this letter agreement or the
completion of the services furnished hereunder and shall remain operative and in full force and effect.
KBW’s execution of such Agency Agreement
shall also be subject to (a) KBW’s satisfaction with Due Diligence Review, (b) preparation of offering materials that are satisfactory to KBW, (c) compliance with all relevant legal and regulatory requirements to the reasonable
satisfaction of KBW and its counsel, (d) agreement that the price established by the independent appraiser is reasonable, and (e) market conditions at the time of the proposed Offering.
This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and can be altered only by written consent signed by the
parties. This Agreement shall be construed and enforced in accordance with the laws of the State of New York, without regard to the conflicts of laws principles thereof.
If the foregoing correctly sets forth our mutual understanding, please so indicate by signing and returning the original copy of this letter to the undersigned.
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Very truly yours,
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KEEFE, BRUYETTE & WOODS, INC.
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By:
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/s/ Patricia A. McJoynt
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Patricia A. McJoynt
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Managing Director
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TERRITORIAL SAVNGS BANK
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By:
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/s/ Allan S. Kitagawa
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Date:
10/10/08
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Allan S. Kitagawa
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Chairman and Chief Executive Officer
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Exhibit 1.2
TERRITORIAL BANCORP, INC.
up to 10,925,000 Shares
(subject to increase up to 12,563,750 shares)
COMMON SHARES
($.01 Par Value)
Subscription Price $10.00
Per Share
AGENCY AGREEMENT
, 2009
Keefe, Bruyette & Woods, Inc.
211 Bradenton
Drive
Dublin, Ohio 43017-5034
Ladies and Gentlemen:
Territorial Bancorp, Inc., a Maryland corporation (the “Company”), Territorial Mutual Holding Company, a federally chartered
mutual holding company (the “MHC”), Territorial Savings Group, Inc., a federal corporation (“Territorial Savings Group”), and Territorial Savings Bank, a federal savings bank located in Honolulu, Hawaii (the “Bank”)
(references to the “Bank” include the Bank in mutual or stock form as indicated by the context), the deposit accounts of which are insured by the Federal Deposit Insurance Corporation (“FDIC”), hereby confirm their agreement with
Keefe, Bruyette & Woods, Inc. (the “Agent”) as follows:
Section 1. The Offering.
The Bank, in accordance
with its plan of conversion and reorganization adopted by its Board of Directors (the “Plan”), intends to convert from the mutual holding company form of organization to the stock holding company form of organization (the
“Conversion”). In connection with the Conversion, the Bank will become a wholly owned subsidiary of the Company, and the corporate existence of the MHC and Territorial Savings Group will cease. The Conversion will be accomplished pursuant
to federal law and the rules and regulations of the Office of Thrift Supervision (the “OTS”). Pursuant to the Plan, the Company will offer and sell up to 10,925,000 shares (subject to increase up to 12,563,750 shares) of its common stock,
$.01 par value per share (the “Shares” or “Common Shares”), in a subscription offering (the “Subscription Offering”) to (1) depositors of the Bank with Qualifying Deposits (as defined in the Plan) as of
September 30, 2007 (“Eligible Account Holders”), (2) the Bank’s tax-qualified employee benefit plans, including the employee stock ownership plan established by the Bank (the “ESOP”), (3) depositors of the
Bank with Qualifying Deposits as of December 31, 2008 (“Supplemental Eligible Account Holders”), and (4) other depositor members of the Bank as defined in the Plan. Subject to the prior subscription rights of the above-listed
parties, the Company may offer for sale in a community offering (the “Community Offering” and when referred to together with or subsequent to the Subscription Offering, the “Subscription and Community Offering”) the Shares not
subscribed for in the Subscription Offering to members of the general public to whom a copy of the Prospectus (as hereinafter
defined) is delivered with a preference given first to natural persons residing in the State of Hawaii. It is anticipated that shares not subscribed for in
the Subscription and Community Offering may be offered to certain members of the general public on a best efforts basis through a selected dealers agreement (the “Syndicated Community Offering”) (the Subscription Offering, Community
Offering and Syndicated Community Offering are collectively referred to as the “Offering”). It is acknowledged that the purchase of Shares in the Offering is subject to the maximum and minimum purchase limitations as described in the Plan
and that the Company may reject, in whole or in part, any orders received in the Community Offering or Syndicated Community Offering.
In
September 2002, the Bank’s mutual predecessor reorganized into the mutual holding company form of organization by forming the MHC. The MHC currently owns 100% of the outstanding shares of Territorial Savings Group. The MHC is a mutual holding
company that has no stockholders and is controlled by its members. Territorial Savings Group currently owns 100% of the outstanding shares of common stock of the Bank. Territorial Savings Group has not issued shares of its stock to the public.
Pursuant to the terms of the Plan, upon completion of the Conversion and the Offering, the MHC and Territorial Savings Group will cease to exist and the Bank will be a wholly owned subsidiary of the Company.
The Company has filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form S-1 (File
No. 333- ) (the “Registration Statement”), containing a prospectus relating to the Offering, for the registration of the Shares under the
Securities Act of 1933 (the “1933 Act”), and has filed such amendments thereof and such amended prospectuses as may have been required to the date hereof. The term “Registration Statement” shall include any documents incorporated
by reference therein and all financial schedules and exhibits thereto, as amended, including post-effective amendments. The prospectus, as amended, on file with the Commission at the time the Registration Statement initially became effective is
hereinafter called the “Prospectus,” except that if any prospectus is filed by the Company pursuant to Rule 424(b) or (c) of the rules and regulations of the Commission under the 1933 Act (the “1933 Act Regulations”)
differing from the prospectus on file at the time the Registration Statement initially became effective, the term “Prospectus” shall refer to the prospectus filed pursuant to Rule 424(b) or (c) from and after the time said prospectus
is filed with the Commission.
In accordance with Title 12, Part 563b of the Code of Federal Regulations (the “Conversion
Regulations”), the Bank has filed with the OTS an Application For Conversion on Form AC (the “Form AC”), including the Prospectus and the Conversion Valuation Appraisal Report prepared by FinPro, Inc. (the “Appraisal”), and
has filed such amendments thereto as may have been required by the OTS. The Form AC has been approved by the OTS and the related Prospectus has been authorized for use by the OTS. In addition, the Company has filed with the OTS an Application
H-(e)l-S (the “Holding Company Application”) to become a savings and loan holding company under the Home Owners’ Loan Act, as amended (“HOLA”) and the regulations promulgated thereunder (the “Control Act
Regulations”).
Section 2. Retention of Agent; Compensation; Sale and Delivery of the Shares.
Subject to the terms and
conditions herein set forth, the Company and the Bank hereby appoint the Agent as their exclusive financial advisor and marketing agent (i) to utilize its best efforts to
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solicit subscriptions for Common Shares and to advise and assist the Company and the Bank with respect to the Company’s sale of the Shares in the
Offering and (ii) to participate in the Offering in the areas of market making and in syndicate formation (if necessary).
On the
basis of the representations, warranties, and agreements herein contained, but subject to the terms and conditions herein set forth, the Agent accepts such appointment and agrees to consult with and advise the Company and the Bank as to the matters
set forth in the letter agreement, dated September 5, 2008, between the Bank and the Agent (a copy of which is attached hereto as
Exhibit A
). It is acknowledged by the Company and the Bank that the Agent shall not be required to purchase
any Shares or be obligated to take any action which is inconsistent with all applicable laws, regulations, decisions or orders.
The
obligations of the Agent pursuant to this Agreement shall terminate upon termination of the Offering, but in no event later than 45 days after the completion of the Subscription Offering (the “End Date”). All fees or expenses due to the
Agent but unpaid will be payable to the Agent in next day funds at the earlier of the Closing Date (as hereinafter defined) or the End Date. In the event the Offering is extended beyond the End Date, the Company and the Agent may agree to renew this
Agreement under mutually acceptable terms.
In the event the Company is unable to sell a minimum of 8,075,000 Shares within the period
herein provided, this Agreement shall terminate and the Company shall refund to any persons who have subscribed for any of the Shares the full amount which it may have received from them plus accrued interest, as set forth in the Prospectus; and
none of the parties to this Agreement shall have any obligation to the other parties hereunder, except as set forth in this Section 2 and in Sections 6, 8 and 9 hereof. In the event the Offering is terminated for any reason not attributable to
the action or inaction of the Agent, the Agent shall be paid the fees due to the date of such termination pursuant to subparagraphs (a) and (d) below.
The Agent shall receive the following compensation for its services hereunder:
(a) A management fee of
$50,000 payable in four consecutive monthly installments of $12,500 commencing in October 2008, all of which has been paid as of the date hereof. This fee shall be due as it is earned and shall be non-refundable.
(b) A success fee upon completion of the Offering of 1.00% of the aggregate purchase price of the Common Shares sold in the Subscription Offering and
Community Offering excluding shares purchased by the Bank’s officers, directors, or employees (or members of their immediate family), any tax-qualified (including the ESOP) or stock-based compensation plans (except IRAs for the benefit of
persons other than officers, directors or employees of the Bank or members of their immediate families) or similar plan created by the Bank for some or all of its directors or employees. The management fee will be credited against the success fee.
(c) If any of the Common Shares remain available after the Subscription Offering and Community Offering, at the request of the Company, the
Agent will seek to form a syndicate of registered broker-dealers (“Selected Dealers”) to assist in the sale of such Common Shares on a best efforts basis, subject to the terms and conditions set forth in
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the selected dealers agreement. The Agent will endeavor to distribute the Common Shares among the Selected Dealers in a fashion which best meets the
distribution objectives of the Bank and the Plan. The Agent will be paid a fee not to exceed 5.5% of the aggregate Purchase Price of the Shares sold by the Selected Dealers. The Agent will pass onto the Selected Dealers who assist in the Syndicated
Community Offering an amount competitive with gross underwriting discounts charged at such time for comparable amounts of stock sold at a comparable price per share in a similar market environment. Fees with respect to purchases effected with the
assistance of Selected Dealers other than the Agent shall be transmitted by the Agent to such Selected Dealers. The decision to utilize Selected Dealers will be made by the Company upon consultation with the Agent. In the event, with respect to any
stock purchases, fees are paid pursuant to this subparagraph 2(c), such fees shall be in lieu of, and not in addition to, payment pursuant to paragraph 2(b).
(d) The Company and the Bank shall reimburse the Agent for reasonable out-of-pocket expenses, including costs of travel, meals and lodging, photocopying, telephone, facsimile and couriers. The Company and the Bank
will reimburse the Agent for the fees and expenses of the Agent’s counsel which will not exceed $75,000 (which do not include legal fees, if any, to complete the qualification of the Common Shares under the various state securities “Blue
Sky” laws). The Company will bear the expenses of the Offering customarily borne by issuers including, without limitation, regulatory filing fees, SEC, Blue Sky and Financial Institution Regulatory Authority (“FINRA”) filing and
registration fees; the fees of the Company’s accountants, attorneys, appraiser, transfer agent and registrar, printing, mailing and marketing expenses associated with the reorganization; and the fees set forth under this Section 2.
Conversion Agent Services
. The Agent shall also receive a fee of $100,000 for certain conversion agent services set forth in the
letter agreement, dated September 5, 2008, between the Bank and the Agent (a copy of which is attached hereto as
Exhibit B
), $10,000 of which has already been paid to the Agent and is nonrefundable and the balance of which shall be
payable to the Agent upon completion of the Offering.
Section 3. Sale and Delivery of Shares.
If all conditions precedent to
the consummation of the Conversion, including without limitation, the sale of all Shares required by the Plan to be sold, are satisfied, the Company agrees to issue, or have issued, the Shares sold in the Offering and to release for delivery
certificates for such Shares on the Closing Date against payment to the Company by any means authorized by the Plan; provided, however, that no funds shall be released to the Company until the conditions specified in Section 7 hereof shall have
been complied with to the reasonable satisfaction of the Agent or its counsel. The release of Shares against payment therefor shall be made on a date and at a place acceptable to the Company, the Bank and the Agent as set forth in Section 13.
Certificates for shares shall be delivered directly to the purchasers in accordance with their directions. The date upon which the Company shall release or deliver the Shares sold in the Offering, in accordance with the terms herein, is called the
“Closing Date.”
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Section 4. Representations and Warranties of the Company and the Bank.
The Company, the MHC,
Territorial Savings Group and the Bank jointly and severally represent and warrant to and agree with the Agent as follows:
(a) The
Registration Statement, which was prepared by the Company and the Bank and filed with the Commission, has been declared effective by the Commission, no stop order has been issued with respect thereto and no proceedings therefor have been initiated
or, to the knowledge of the Company or the Bank, threatened by the Commission. At the time the Registration Statement, including the Prospectus contained therein (including any amendment or supplement), became effective, at the Applicable Time (as
defined in Section 4(c) hereof) and at the Closing Date, the Registration Statement complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and the Registration Statement, including
the Prospectus contained therein (including any amendment or supplement thereto), and any information regarding the Company contained in Sales Information (as such term is defined in Section 8 hereof) authorized by the Company for use in
connection with the Offering, did not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were
made, not misleading, and at the time any Rule 424(b) or (c) Prospectus is filed with the Commission and at the Closing Date referred to in Section 2 hereof, the Prospectus (including any amendment or supplement thereto) and any
information regarding the Company contained in Sales Information (as such term is defined in Section 8 hereof) authorized by the Company for use in connection with the Offering will contain all statements that are required to be stated therein
in accordance with the 1933 Act and the 1933 Act Regulations and will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the representations and warranties in this Section 4(a) shall not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Company
by the Agent or its counsel expressly regarding the Agent for use in the Prospectus in the first sentence of the second paragraph under the caption “The Conversion; Plan of Distribution—Marketing and Distribution; Compensation,”
provided, however, that nothing has come to the attention of the Company or the Bank that would lead them to believe that the information under such caption contained an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading.
(b) Neither the Company nor the Bank has directly or indirectly distributed or otherwise used and will not directly or indirectly distribute or otherwise use any prospectus, any “free writing prospectus” (as defined in Rule 405 of
the 1933 Act Regulations) or other offering material (including, without limitation, content on the Company’s website that may be deemed to be a prospectus, free writing prospectus or other offering material) in connection with the offering and
sale of the Shares other than any Permitted Free Writing Prospectus or the Prospectus or other materials permitted by the 1933 Act and the 1933 Act Regulations distributed by the Company and reviewed
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and approved in advance for distribution by the Agent. The Company has not, directly or indirectly, prepared or used and will not directly or indirectly,
prepare or use, any Permitted Free Writing Prospectus except in compliance with the filing and other requirements of Rules 164 and 433 of the 1933 Act Regulations; assuming that such Permitted Free Writing Prospectus is so sent or given after the
Registration Statement was filed with the Commission (and after such Permitted Free Writing Prospectus was, if required pursuant to Rule 433(d) under the Act, filed with the Commission), the sending or giving, by the Agent, of any Permitted Free
Writing Prospectus will satisfy the provisions of Rules 164 and 433 (without reliance on subsections (b), (c) and (d) for Rule 164); and the Company is not an “ineligible issuer” (as defined in Rule 405 of the 1933 Act
Regulations) as of the eligibility determination date for purposes of Rules 164 and 433 of the 1933 Act Regulations with respect to the offering of the Shares or otherwise precluded under Rule 164 from using free writing prospectuses in connection
with the offering of the Shares.
(c) As of the Applicable Time (as defined below), neither (i) the Issuer-Represented General Free
Writing Prospectus(es) issued at or prior to the Applicable Time and the Statutory Prospectus, all considered together (collectively, the “General Disclosure Package”), nor (ii) any individual Issuer-Represented Limited-Use Free
Writing Prospectus, when considered together with the General Disclosure Package, included any untrue statement of a material fact or omitted to state any material fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The preceding sentence does not apply to statements in or omissions from any Prospectus included in the Registration Statement relating to the offered Shares or any Issuer-Represented Free
Writing Prospectus based upon and in conformity with written information furnished to the Company by the Agent specifically for use therein. As used in this paragraph and elsewhere in this Agreement:
1. “Applicable Time” means each and every date when a potential purchaser submitted a subscription or otherwise committed to purchase Shares.
2. “Statutory Prospectus,” as of any time, means the Prospectus relating to the offered Shares that is included in the
Registration Statement relating to the offered Shares immediately prior to the Applicable Time, including any document incorporated by reference therein.
3. “Issuer-Represented Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433(h) of the 1933 Act Regulations, relating to the offered Shares in the form filed
or required or, if not required to be filed, in the form retained in the Company’s records pursuant to Rule 433(g) under the 1933 Act Regulations. The term does not include any writing exempted from the definition of prospectus pursuant to
clause (a) of Section 2(a)(10) of the 1933 Act, without regard to Rule 172 or Rule 173 of the 1933 Act Regulations.
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4. “Issuer-Represented General Free Writing Prospectus” means any Issuer-Represented Free
Writing Prospectus that is intended for general distribution to prospective investors.
5. “Issuer-Represented Limited-Use Free Writing
Prospectus” means any Issuer-Represented Free Writing Prospectus that is not an Issuer-Represented General Free Writing Prospectus. The term Issuer-Represented Limited-Use Free Writing Prospectus also includes any “bona fide electronic
road show,” as defined in Rule 433 of the 1933 Act Regulations, that is made available without restriction pursuant to Rule 433(d)(8)(ii) of the 1933 Act Regulations or otherwise, even though not required to be filed with the
Commission.
6. “Permitted Free Writing Prospectus” means any free writing prospectus as defined in Rule 405 of the 1933 Act
Regulations that is consented to by the Company, the Bank and the Agent.
(d) Each Issuer-Represented Free Writing Prospectus, as of its
date of first use and at all subsequent times through the completion of the Offering and sale of the offered Shares or until any earlier date that the Company notified or notifies the Agent (as described in the next sentence), did not, does not and
will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement, including any document incorporated by reference therein that has not been superseded or modified. If at any
time following the date of first use of an Issuer-Represented Free Writing Prospectus there occurred or occurs an event or development as a result of which such Issuer-Represented Free Writing Prospectus conflicted or would conflict with the
information contained in the Registration Statement relating to the offered Shares or included or would include an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements
therein, in the light of the circumstances prevailing at that subsequent time, not misleading, the Company has notified or will notify promptly the Agent so that any use of such Issuer-Represented Free-Writing Prospectus may cease until it is
amended or supplemented and the Company has promptly amended or will promptly amend or supplement such Issuer-Represented Free Writing Prospectus to eliminate or correct such conflict, untrue statement or omission. The foregoing two sentences do not
apply to statements in or omissions from any Issuer-Represented Free Writing Prospectus based upon and in conformity with written information furnished to the Company by the Agent specifically for use therein.
(e) The Form AC, which was prepared by the Company, the MHC, Territorial Savings Group and the Bank and filed with the OTS, has been approved by the OTS
and the related Prospectus and proxy statement to be delivered to members of the Bank have been authorized for use by the OTS. No order has been issued by the OTS preventing or suspending the use of the Prospectus or the proxy statement, and no
action by or before the OTS to revoke any approval, authorization or order of effectiveness related to the Offering is pending or, to the best knowledge of the Company, threatened. At the time of the approval of the Form AC, including the Prospectus
(including any amendment or
7
supplement thereto) by the OTS and at all times subsequent thereto until the Closing Date, the Form AC, including the Prospectus (including any amendment or
supplement thereto), complies in all material respects with the Conversion Regulations, except to the extent waived or otherwise approved by the OTS. The Form AC, including the Prospectus (including any amendment or supplement thereto), does not
include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however,
that the representations and warranties in this Section 4(e) shall not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Company by the Agent or its counsel expressly regarding
the Agent for use in the Prospectus contained in the Form AC under the caption “The Conversion; Plan of Distribution—Marketing and Distribution; Compensation,” and provided further, however, that nothing has come to the attention of
the Company or the Bank that would lead them to believe that the information under such caption contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not misleading.
(f) The Company has filed the Holding Company
Application with the OTS and has published notice of such filing and the Holding Company Application is accurate and complete in all material respects. The Company has received written notice from the OTS of its approval of the acquisition of the
Bank, such approval remains in full force and effect and no order has been issued by the OTS suspending or revoking such approval and no proceedings therefor have been initiated or, to the knowledge of the Company or the Bank, threatened by the OTS.
At the date of such approval, the Holding Company Application complied in all material respects with the applicable provisions of HOLA and the regulations promulgated thereunder.
(g) The Company and the Bank have filed the Prospectus and any supplemental sales literature with the Commission and the OTS. The Prospectus and all
supplemental sales literature, as of the date the Registration Statement became effective and on the Closing Date referred to in Section 2, complied and will comply in all material respects with the applicable requirements of the 1933 Act
Regulations and, at or prior to the time of their first use, will have received all required authorizations of the OTS and Commission for use in final form. No approval of any other regulatory or supervisory or other public authority is required in
connection with the distribution of the Prospectus and any supplemental sales literature that has not been obtained and a copy of which has been delivered to the Agent. The Company and the Bank have not distributed any offering material in
connection with the Offering except for the Prospectus and any supplemental sales material that has been filed with the Registration Statement and the Form AC and authorized for use by the Commission and the OTS. The information contained in the
supplemental sales material filed as an exhibit to both the Registration Statement and the Form AC does not conflict in any material respects with information contained in the Registration Statement and the Prospectus.
8
(h) The Plan has been adopted by the Boards of Directors of the Company, the MHC, Territorial Savings
Group and the Bank and, at the Closing Date, will have been approved by the members of the Bank and the MHC as the sole stockholder of Territorial Savings Group, and the offer and sale of the Shares will have been conducted in all material respects
in accordance with the Plan, the Conversion Regulations except to the extent waived or otherwise approved by the OTS, and all other applicable laws, regulations, decisions and orders, including all terms, conditions, requirements and provisions
precedent to the Offering imposed upon the Company and the Bank by the OTS, the Commission, or any other regulatory authority and in the manner described in the Prospectus. To the best knowledge of the Company, the MHC, Territorial Savings Group and
the Bank, no person has sought to obtain review of the final action of the OTS in approving the Conversion pursuant to the HOLA.
(i) The
Bank has been duly organized and validly existing as a federally-chartered savings bank in stock form and upon completion of the Conversion will continue to be a duly organized and validly existing federally-chartered savings bank in stock form, in
both instances duly authorized to conduct its business and own its property as described in the Registration Statement and the Prospectus; the Bank has obtained all licenses, permits and other governmental authorizations currently required for the
conduct of its business, except those that individually or in the aggregate would not have a material adverse effect on the conduct of the business, financial condition, results of operations, affairs or prospects of the Company, the MHC,
Territorial Savings Group and the Bank, taken as a whole (a “Material Adverse Effect”); all such licenses, permits and governmental authorizations are in full force and effect, and the Bank is in compliance with all material laws, rules,
regulations and orders applicable to the operation of its business, except where failure to be in compliance would not have a Material Adverse Effect; the Bank is duly qualified as a foreign corporation to transact business and is in good standing
in each jurisdiction in which its ownership of property or leasing of property or the conduct of its business requires such qualification, unless the failure to be so qualified in one or more of such jurisdictions would not have a Material Adverse
Effect. The Bank does not own equity securities or any equity interest in any other business enterprise except as described in the Prospectus or as would not be material to the operations of the Company, the MHC, Territorial Savings Group and the
Bank, taken as a whole. The authorized capital stock of the Bank consists of shares of common stock, par value
$ per share (the “Bank Common Stock”), and shares of preferred stock, par value
$ per share (the “Bank Preferred Stock”), of which shares of Bank Common Stock and no shares
of Bank Preferred Stock are issued and outstanding as of the date hereof; no additional shares of Bank Common Stock and no shares of Bank Preferred Stock will be issued prior to the Closing (defined below); the issued and outstanding shares of Bank
Common Stock have been duly authorized and validly issued and are fully paid and nonassessable and have been issued in compliance with all federal and state securities laws; the MHC owns
shares of Bank Common Stock beneficially and of record free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; the terms and provisions
of the Bank Common Stock conform to all statements thereto contained in the Prospectus. At the Closing, (i) all of the outstanding capital stock of the Bank will be duly authorized, validly issued and fully paid and non-assessable and owned
directly by the Company
9
free and clear of any security interest, mortgage, pledge, lien, encumbrances or legal or equitable claim and (ii) the Company will have no direct
subsidiaries other than the Bank and no indirect subsidiaries other than Territorial Savings Statutory Trust I, Territorial Savings Statutory Trust II, Territorial Savings Statutory Trust III, Territorial Financial Services, Inc., Territorial
Holdings, Inc. and Territorial Realty, Inc. (the “Subsidiaries”). The Conversion will be effected in all material respects in accordance with all applicable statutes, regulations, decisions and orders; and, except with respect to the
filing of certain post-sale, post-Conversion reports, and documents in compliance with the 1933 Act Regulations, the Conversion Regulations or letters of approval, at the Closing Date, all terms, conditions, requirements and provisions with respect
to the Conversion imposed by the Commission and the OTS if any, will have been complied with by the Company, the MHC, Territorial Savings Group and the Bank in all material respects or appropriate waivers will have been obtained and all applicable
notice and waiting periods will have been satisfied, waived or elapsed.
(j) The Company is duly organized, validly existing and in good
standing as a corporation under the laws of the State of Maryland with full corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Registration Statement and the Prospectus, and the
Company is, and at the Closing Date will be, qualified to do business as a foreign corporation in each jurisdiction in which the conduct of its business requires such qualification, except where the failure to so qualify would not have a Material
Adverse Effect. The Company has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business except those that individually or in the aggregate would not have a Material Adverse Effect; all
such licenses, permits and governmental authorizations are in full force and effect, and the Company is in all material respects complying therewith and with all laws, rules, regulations and orders applicable to the operation of its business. There
are no outstanding warrants or options to purchase any securities of the Company.
(k) The MHC is duly organized, validly existing and in
good standing as a mutual holding company organized under the laws of the United States of America with full corporate power and authority to own and operate its properties and to conduct its business as described in the Registration Statement and
the Prospectus and, at the Closing Date, the corporate existence of the MHC will cease to exist. The MHC has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business except those that
individually or in the aggregate would not have a Material Adverse Effect; all such licenses, permits and governmental authorizations are in full force and effect, and the MHC is in all material respects complying therewith and with all laws, rules,
regulations and orders applicable to the operation of its business.
(l) Territorial Savings Group is duly organized, validly existing and
in good standing as a stock holding company organized under the laws of the United States of America with full corporate power and authority to own and operate its properties and to conduct its business as described in the Registration Statement and
the Prospectus and, at the Closing Date, the corporate existence of Territorial Savings Group will cease to exist.
10
Territorial Savings Group has obtained all licenses, permits and other governmental authorizations currently required for the conduct of its business except
those that individually or in the aggregate would not have a Material Adverse Effect; all such licenses, permits and governmental authorizations are in full force and effect, and Territorial Savings Group is in all material respects complying
therewith and with all laws, rules, regulations and orders applicable to the operation of its business.
(m) Except as described in the
Prospectus there are no contractual encumbrances or restrictions or requirements or material legal restrictions or requirements required to be described therein, on the ability of the Company, the MHC, Territorial Savings Group or the Bank,
(A) to pay dividends or make any other distributions on its capital stock or to pay any indebtedness owed to another party, (B) to make any loans or advances to, or investments in, another party or (C) to transfer any of its property
or assets to another party. Except as described in the Prospectus, there are no restrictions, encumbrances or requirements affecting the payment of dividends or the making of any other distributions on any of the capital stock of the Company.
(n) The Bank and the Subsidiaries have properly administered all accounts for which they act as a fiduciary, including but not limited to
accounts for which they serve as a trustee, agent, custodian, personal representative, guardian, conservator or investment advisor, in accordance with the terms of the governing documents and applicable state and federal law and regulation, except
where the failure to be in compliance would not have a Material Adverse Effect. Neither the Bank, the Subsidiaries, nor any of their respective directors, officers or employees has committed any material breach of trust with respect to any such
fiduciary account, and the accountings for each such fiduciary account are true and correct in all material respects and accurately reflect the assets of such fiduciary account in all material respects.
(o) The Subsidiaries are duly organized, validly existing and in good standing as corporations under the laws of the State of Hawaii or Connecticut, as
applicable, with full corporate power and authority to own, lease and operate their properties and to conduct their businesses as described in the Registration Statement and the Prospectus, and are duly qualified to do business as foreign
corporations and are in good standing in each jurisdiction in which the conduct of their business requires such qualification, except where the failure to so qualify would not have a Material Adverse Effect. The activities of the Subsdiaries are
permissible to subsidiaries of federal savings banks. The Subsidiaries have obtained all licenses, permits and other governmental authorizations currently required for the conduct of their business except those that individually or in the aggregate
would not materially adversely affect the financial condition, results of operations or business of the Company and the Bank, taken as a whole; all such licenses, permits and governmental authorizations will be in full force and effect, and the
Subsidiaries are in all material respects complying with all laws, rules, regulations and orders applicable to the operation of their businesses. All of the issued and outstanding capital stock of the Subsidiaries have been duly authorized and
validly issued, are fully paid and non-assessable and owned by the Bank directly, free and clear of any security interest, mortgage, pledge, lien, encumbrance or legal or equitable claim.
11
(p) The Bank is a member of the Federal Home Loan Bank of Seattle (“FHLB-Seattle”). The deposit
accounts of the Bank are insured by the FDIC up to the applicable limits, and no proceedings for the termination or revocation of such insurance are pending or, to the best knowledge of the Company or the Bank, threatened. The Bank is a
“qualified thrift lender” within the meaning of 12 U.S.C. § l467a(m).
(q) The Bank and the Company have good and marketable
title to all real property and good title to all other assets material to the business of the Company and the Bank, taken as a whole, and to those properties and assets described in the Registration Statement and Prospectus as owned by them, free
and clear of all liens, charges, encumbrances or restrictions, except such as are described in the Registration Statement and Prospectus or as are not material to the business of the Company and the Bank, taken as a whole; and all of the leases and
subleases material to the business of the Company and the Bank, taken as a whole, under which the Company or the Bank hold properties, including those described in the Registration Statement and Prospectus, are in full force and effect.
(r) The Company has received an opinion of its special counsel, Luse Gorman Pomerenk & Schick, P.C., with respect to the federal income tax
consequences of the Conversion and the opinions of its tax advisor, KPMG LLP, with respect to the Hawaii income tax consequences of the Conversion and all material aspects of such opinions are accurately summarized in the Registration Statement and
the Prospectus. The Company and the Bank represent and warrant that the facts upon which such opinions are based are truthful, accurate and complete in all material respects. Neither the Company nor the Bank will take any action inconsistent
therewith.
(s) Each of the Company, the MHC, Territorial Savings Group and the Bank has all such power, authority, authorizations,
approvals and orders as may be required to enter into this Agreement, to carry out the provisions and conditions hereof and to issue and sell the Shares to be sold by the Company as provided herein and as described in the Prospectus, subject to
approval or confirmation by the OTS of the final appraisal of the Bank. The execution, delivery and performance of this Agreement and the consummation of the transactions herein contemplated have been duly and validly authorized by all necessary
corporate action on the part of the Bank, the MHC, Territorial Savings Group and the Company. This Agreement has been validly executed and delivered by the Company, the MHC, Territorial Savings Group and the Bank and, assuming due execution and
delivery by the Agent, is the valid, legal and binding agreement of the Company, the MHC, Territorial Savings Group and the Bank enforceable in accordance with its terms (except as the enforceability thereof may be limited by bankruptcy, insolvency,
moratorium, reorganization or similar laws relating to or affecting the enforcement of creditors’ rights generally or the rights of creditors of savings and loan holding companies, the accounts of whose subsidiaries are insured by the FDIC, or
by general equity principles, regardless of whether such enforceability is considered in a proceeding in equity or at law, and except to the extent, if any, that the provisions of Sections 8 and 9 hereof may be unenforceable as against public policy
or pursuant to applicable Federal law and the rules and regulations of the Federal Reserve System).
12
(t) Neither the Company, the MHC, Territorial Savings Group nor the Bank is in violation of any directive
received from the OTS, the FDIC, or any other agency to make any material change in the method of conducting its business so as to comply in all material respects with all applicable statutes and regulations (including, without limitation,
regulations, decisions, directives and orders of the OTS and the FDIC) and, except as may be set forth in the Registration Statement, the General Disclosure Package and the Prospectus, there is no suit or proceeding or charge or action before or by
any court, regulatory authority or governmental agency or body, pending or, to the knowledge of the Company, the MHC, Territorial Savings Group or the Bank, threatened, which might materially and adversely affect the Offering, or which might result
in any Material Adverse Effect.
(u) The consolidated financial statements, schedules and notes related thereto which are included in the
General Disclosure Package and the Prospectus fairly present the balance sheet, income statement, statement of changes in equity capital and statement of cash flows of the MHC on a consolidated basis at the respective dates indicated and for the
respective periods covered thereby and comply as to form in all material respects with the applicable accounting requirements of the 1933 Act Regulations and Title 12 of the Code of Federal Regulations. Such consolidated financial statements,
schedules and notes related thereto have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) consistently applied through the periods involved except as noted therein and present fairly in all material
respects the information required to be stated therein and are consistent with financial statements and other reports filed by the Bank with the OTS, except to the extent that accounting principles employed in such filings conform to the
requirements of the OTS and not necessarily to GAAP. The other financial, statistical and pro forma information and related notes included in the Prospectus present fairly the information shown therein on a basis consistent with the audited and
unaudited consolidated financial statements of the Bank included in the Prospectus, and as to the pro forma adjustments, the adjustments made therein have been properly applied on the basis described therein.
(v) The Company, the MHC, Territorial Savings Group and the Bank carry, or are covered by, insurance in such amounts and covering such risks as the
Company, MHC, Territorial Savings Group and the Bank deem reasonably adequate for the conduct of their respective businesses and the value of their respective properties.
(w) Since the respective dates as of which information is given in the Registration Statement including the Prospectus and except as disclosed in the General Disclosure Package and the Prospectus: (i) there has
not been any material adverse change, financial or otherwise, in the condition of the Company, the MHC, Territorial Savings Group and the Bank and their subsidiaries, considered as one enterprise, or in the earnings, capital, properties, business or
prospects of the Company, the MHC, Territorial Savings Group and the Bank and their subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business; (ii) there has not been any material increase in the
long-term debt of the MHC, Territorial Savings Group or the Bank or the Subsidiaries or in the principal amount of the Company’s, the MHC’s, Territorial Savings Group’s or the Bank’s consolidated assets which are classified by
any of such
13
entities or the Subsidiaries as impaired, substandard, doubtful or loss or in loans past due 90 days or more or real estate acquired by foreclosure, by
deed-in-lieu of foreclosure or deemed in-substance foreclosure or any material decrease in equity capital or total assets of the Company, the MHC, Territorial Savings Group and the Bank or the Subsidiaries; nor has the Company, the MHC, Territorial
Savings Group or the Bank or the Subsidiaries issued any securities (other than in connection with the incorporation of the Company) or incurred any liability or obligation for borrowing other than in the ordinary course of business;
(iii) there have not been any material transactions entered into by the Company, the MHC, Territorial Savings Group or the Bank or the Subsidiaries; (iv) there has not been any material adverse change in the aggregate dollar amount (on a
consolidated basis with the Company, the MHC, Territorial Savings Group or the Bank and the Subsidiaries) of the MHC’s deposits or its net worth; (v) there has been no material adverse change in the Company’s, the MHC’s,
Territorial Savings Group’s or the Bank’s relationship with its insurance carriers, including, without limitation, cancellation or other termination of the Company’s, the MHC’s, Territorial Savings Group’s or the Bank’s
fidelity bond or any other type of insurance coverage; (vi) there has been no material change in management of the Company, the MHC, Territorial Savings Group or the Bank; (vii) none of the Company, the MHC, Territorial Savings Group, the
Bank or the Subsidiaries has sustained any material loss or interference with its respective business or properties from fire, flood, windstorm, earthquake, accident or other calamity, whether or not covered by insurance; (viii) neither the
Company, the MHC, Territorial Savings Group nor the Bank or the Subsidiaries has defaulted in the payment of principal or interest on any outstanding debt obligations; (ix) the capitalization, liabilities, assets, properties and business of the
Company, the MHC, Territorial Savings Group and the Bank and the Subsidiaries conform in all material respects to the descriptions thereof contained in the General Disclosure Package and the Prospectus; and (x) none of the Company, the MHC,
Territorial Savings Group, the Bank or the Subsidiaries has any material liabilities, contingent or otherwise, except as set forth in the Prospectus.
(x) None of the Company, the MHC, Territorial Savings Group or the Bank or any of the Subsidiaries is (i) in violation of their respective articles, charters or bylaws (and none of the Company, the MHC,
Territorial Savings Group or the Bank or any of the Subsidiaries will not be in violation of its articles of incorporation, charter or bylaws upon completion of the Conversion), or (ii) in default in the performance or observance of any
obligation, agreement, covenant, or condition contained in any material contract, lease, loan agreement, indenture or other instrument to which it is a party or by which it or any of its property may be bound. The execution and delivery of this
Agreement and the consummation of the transactions herein contemplated will not: (i) conflict with or constitute a breach of, or default under, or result in the creation of any lien, charge or encumbrance upon any of the assets of the Company,
the MHC, Territorial Savings Group or the Bank or the Subsidiaries pursuant to the respective articles of incorporation, charters or bylaws of the Company, the MHC, Territorial Savings Group or the Bank or the Subsidiaries or any contract, lease or
other instrument in which the Company, the MHC, Territorial Savings Group or the Bank or the Subsidiaries has a beneficial interest, or any applicable law, rule, regulation or order; (ii) violate any authorization, approval, judgment, decree,
order, statute, rule or regulation applicable to
14
the Company, the MHC, Territorial Savings Group or the Bank or the Subsidiaries, except for such violations which would not have a Material Adverse Effect;
or (iii) result in the creation of any material lien, charge or encumbrance upon any property of the Company, the MHC, Territorial Savings Group or the Bank or the Subsidiaries.
(y) All documents made available to or delivered or to be made available to or delivered by the Company, the MHC, Territorial Savings Group and the Bank
or the Subsidiaries or their representatives in connection with the issuance and sale of the Shares, including records of account holders and depositors of the Bank, or in connection with the Agent’s exercise of due diligence, except for those
documents which were prepared by parties other than the Company, the MHC, Territorial Savings Group or the Bank or the Subsidiaries or their representatives, to the best knowledge of the Company, the MHC, Territorial Savings Group and the Bank and
the Subsidiaries, were on the dates on which they were delivered, or will be on the dates on which they are to be delivered, true, complete and correct in all material respects.
(z) Upon consummation of the Conversion, the authorized, issued and outstanding equity capital of the Company will be within the range set forth in the
General Disclosure Package and the Prospectus under the caption “Capitalization,” and no Shares have been or will be issued and outstanding prior to the Closing Date; the Shares will have been duly and validly authorized for issuance and,
when issued and delivered by the Company pursuant to the Plan against payment of the consideration calculated as set forth in the Plan and in the Prospectus, will be duly and validly issued, fully paid and non-assessable, except for shares purchased
by the ESOP with funds borrowed from the Company to the extent payment therefor in cash has not been received by the Company; except to the extent that subscription rights and priorities pursuant thereto exist pursuant to the Plan, no preemptive
rights exist with respect to the Shares; and the terms and provisions of the Shares will conform in all material respects to the description thereof contained in the Registration Statement and the Prospectus. The Shares have been approved for
listing on the Nasdaq Global Select Market, subject to issuance. Upon the issuance of the Shares, good title to the Shares will be transferred from the Company to the purchasers thereof against payment therefor, subject to such claims as may be
asserted against the purchasers thereof by third-party claimants.
(aa) No default exists, and no event has occurred which, with notice or
lapse of time or both, would constitute a default, on the part of the Company, the MHC, Territorial Savings Group or the Bank in the due performance and observance of any term, covenant, agreement, obligation, representation, warranty or condition
of any indenture, mortgage, deed of trust, note, bank loan or credit agreement, lease, license, Permit or any other instrument or agreement to which the Company, the MHC, Territorial Savings Group or the Bank or by which any of them or any of their
respective property is bound or affected which, in any such case, could have, individually or in the aggregate with other breaches, violations or defaults, a Material Adverse Effect; each of such agreements is in full force and effect and is the
legal, valid and binding agreement of the applicable party and the other parties thereto, enforceable, to the knowledge of the Company, the MHC, Territorial Savings Group and the Bank, in accordance with its terms, except as the enforcement thereof
may be limited by bankruptcy, insolvency,
15
reorganization or similar laws affecting the rights of creditors generally and subject to general principles of equity and no other party to any such
agreement has instituted or, to the knowledge of the Company, the MHC, Territorial Savings Group or the Bank, threatened any action or proceeding wherein the Company, the MHC, Territorial Savings Group or the Bank or any subsidiary thereof would or
might be alleged to be in default thereunder. There are no contracts or documents that are required to be filed as exhibits to the Registration Statement or described in the Registration Statement, the Prospectus, or any Permitted Free Writing
Prospectus which are not so filed or described as required, and such contracts and documents as are summarized in the Registration Statement, the Prospectus, and any Permitted Free Writing Prospectus are fairly summarized in all material respects.
No party has sent or received any notice indicating the termination of or intention to terminate any of the contracts or agreements referred to or described in the Registration Statement, the Prospectus, or any Permitted Free Writing Prospectus, or
filed as an exhibit to the Registration Statement, and no such termination has been threatened by any party or, to the knowledge of any party, any other party to any such contract or agreement.
(bb) Subsequent to the date the Registration Statement is declared effective by the Commission and prior to the Closing Date, except as otherwise may be
indicated or contemplated in the Registration Statement, neither the Company, the MHC, Territorial Savings Group nor the Bank has or will have issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money,
except borrowings from the same or similar sources indicated in the Prospectus in the ordinary course of its business.
(cc) Except for the
Bank’s defined benefit pension plan and the 401(k) plan, neither the Bank, the MHC, Territorial Savings Group nor the Company maintains any other “pension plan,” as defined in the Employee Retirement Income Security Act of 1974, as
amended (“ERISA”). In addition, (A) the employee benefit plans, including employee welfare benefit plans, of the Company, the MHC, Territorial Savings Group and the Bank (the “Employee Plans”) have been operated in
compliance with the applicable provisions of ERISA, the Internal Revenue Code of 1986, as amended (the “Code”), all regulations, rulings and announcements promulgated or issued thereunder and all other applicable laws and governmental
regulations, (B) no reportable event under Section 4043(c) of ERISA has occurred with respect to any Employee Plan of the Company, the MHC, Territorial Savings Group or the Bank for which the reporting requirements have not been waived by
the Pension Benefit Guaranty Corporation, (C) no prohibited transaction under Section 406 of ERISA, for which an exemption does not apply, has occurred with respect to any Employee Plan of the Company, the MHC, Territorial Savings Group or
the Bank and (D) all Employee Plans that are group health plans have been operated in compliance with the group health plan continuation coverage requirements of Section 4980B of the Code, except to the extent such noncompliance,
reportable event or prohibited transaction would not have, individually or in the aggregate, a Material Adverse Effect. There are no pending or, to the knowledge of the Company, the MHC, Territorial Savings Group or the Bank, threatened, claims by
or on behalf of any Employee Plan, by any employee or beneficiary covered under any such Employee Plan or by any governmental authority, or
16
otherwise involving such Employee Plans or any of their respective fiduciaries (other than for routine claims for benefits).
(dd) No approval of any regulatory or supervisory or other public authority is required in connection with the execution and delivery of this Agreement or
the issuance of the Shares, except for the approval of the Commission and the OTS, and any necessary qualification, notification, registration or exemption under the securities or Blue Sky laws of the various states in which the Shares are to be
offered, and except as may be required under the rules and regulations of the FINRA.
(ee) KPMG LLP, which has certified the audited
consolidated financial statements and schedules of the MHC included in the Prospectus, has advised the Company, the MHC, Territorial Savings Group and the Bank in writing that they are, with respect to the Company, the MHC, Territorial Savings Group
and the Bank, independent registered public accountants as required by the Code of Professional Ethics of the American Institute of Certified Public Accountants, the 1933 Act and the 1933 Act Regulations, the Securities Exchange Act of 1934, as
amended (the “1934 Act”), and the regulations thereunder and such firm is not, with respect to the Company, the MHC, Territorial Savings Group and the Bank, in violation of the auditor independence requirements of the Sarbanes Oxley Act of
2002.
(ff) FinPro, Inc., which has prepared the Valuation Appraisal Report (as amended or supplemented, if so amended or supplemented) of
the MHC, has advised the MHC in writing that it is independent of the Company, the MHC, Territorial Savings Group and the Bank within the meaning of the Conversion Regulations and is believed by the Company, the MHC, Territorial Savings Group and
the Bank to be experienced and expert in the valuation and the appraisal of business entities, including savings institutions, and the Company, the MHC, Territorial Savings Group and the Bank believe that FinPro, Inc. has prepared the pricing
information set forth in the Prospectus in accordance with the requirements of the Conversion Regulations.
(gg) The Company, the MHC,
Territorial Savings Group and the Bank have timely filed or extended all required federal, state and local tax returns; the Company, the MHC, Territorial Savings Group and the Bank have paid all taxes that have become due and payable in respect of
such returns, except where permitted to be extended or where such taxes may be contested in good faith, have made adequate reserves for similar future tax liabilities and no deficiency has been asserted with respect thereto by any taxing authority.
The Company, the MHC, Territorial Savings Group and the Bank have no knowledge of any tax deficiency which has been or might be assessed against either of them which, if the subject of an unfavorable decision, ruling or finding, could have,
individually or in the aggregate with other tax deficiencies, a Material Adverse Effect. All material tax liabilities have been adequately provided for in the financial statements of the Company, the MHC, Territorial Savings Group and the Bank in
accordance with GAAP. There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement
by the Company or with the issuance or sale by the Company of the Shares.
17
(hh) The Company, the MHC, Territorial Savings Group and the Bank are in compliance in all material
respects with the applicable financial record-keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, and the regulations and rules thereunder.
(ii) All Sales Information (as defined in Section 8(a)) used by the Company in connection with the Conversion that is required by the OTS to be filed
has been filed with and approved by the OTS.
(jj) To the knowledge of the Company, the MHC, Territorial Savings Group and the Bank, none of
the Company, the MHC, Territorial Savings Group the Bank or the employees of the Company, the MHC, Territorial Savings Group or the Bank has made any payment of funds of the Company, the MHC, Territorial Savings Group or the Bank as a loan for the
purchase of the Shares or made any other payment of funds prohibited by law, and no funds have been set aside to be used for any payment prohibited by law.
(kk) Neither the Company, the MHC, Territorial Savings Group nor the Bank has: (i) issued any securities within the last 18 months (except for notes to evidence bank loans and reverse repurchase agreements or
other liabilities in the ordinary course of business or as described in the Prospectus); (ii) had any material dealings within the 12 months prior to the date hereof with any member of the FINRA, or any person related to or associated with such
member, other than discussions and meetings relating to the proposed Offering and routine purchases and sales of United States government and agency and other securities in the ordinary course of business; (iii) entered into a financial or
management consulting agreement except as contemplated hereunder; and (iv) engaged any intermediary between the Agent and the Company or the Bank in connection with the offering of the Shares, and no person is being compensated in any manner
for such service.
(ll) The Company, the MHC, Territorial Savings Group and the Bank have not relied upon the Agent or its legal counsel for
any legal, tax or accounting advice in connection with the Conversion.
(mm) The records used by the Company, the MHC, Territorial Savings
Group and the Bank to determine the identities of Eligible Account Holders, Supplemental Eligible Account Holders and Other Members are accurate and complete in all material respects.
(nn) Neither the Company, the MHC, Territorial Savings Group nor the Bank is, and neither intends to conduct business in a manner which would cause it to
become, an “investment company,” an entity “controlled” by an “investment company” or an “investment adviser” within the meaning of the Investment Company Act of 1940, as amended, or the Investment Advisers
Act of 1940, as amended.
(oo) Neither the Company, the MHC, Territorial Savings Group nor the Bank or any properties owned or operated by
the Company, the MHC, Territorial Savings Group or the Bank, is in violation of or liable under any Environmental Law (as defined below), except for such violations or liabilities that, individually or in the aggregate, would not
18
have a Material Adverse Effect. There are no actions, suits or proceedings, or demands, claims, notices or investigations (including, without limitation,
notices, demand letters or requests for information from any environmental agency) instituted or pending or, to the knowledge of the Company, the MHC, Territorial Savings Group or the Bank, threatened relating to the liability of any property owned
or operated by the Company, the MHC, Territorial Savings Group or the Bank under any Environmental Law. There are no events or circumstances known to the Company, the MHC, Territorial Savings Group or the Bank that could form the basis of an order
for clean-up or remediation, or an action, suit or proceeding by any private party or governmental body or agency, against or affecting the Company, the MHC, Territorial Savings Group or the Bank relating to any Environmental Law. For purposes of
this subsection, the term “Environmental Law” means any federal, state, local or foreign law, statute, ordinance, rule, regulation, code, license, permit, authorization, approval, consent, order, judgment, decree, injunction or agreement
with any regulatory authority relating to (i) the protection, preservation or restoration of the environment (including, without limitation, air, water, vapor, surface water, groundwater, drinking water supply, surface soil, subsurface soil,
plant and animal life or any other natural resource), and/or (ii) the use, storage, recycling, treatment, generation, transportation, processing, handling, labeling, production, release or disposal of any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or otherwise regulated, whether by type or by quantity, including any material containing any such substance as a component.
(pp) The Company, the MHC, Territorial Savings Group, the Bank and the Subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (A) transactions are executed in accordance with management’s general or specific authorizations, (B) transactions are recorded as necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain accountability for assets, (C) access to assets is permitted only in accordance with management’s general or specific authorization, and (D) the recorded accounts or assets
is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The books, records and accounts and systems of internal accounting control of the Company and its subsidiaries comply in
all material respects with the requirements of Section 13(b)(2) of the 1934 Act. The Company has established and maintains “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the 1934 Act) that are effective in
ensuring that the information it will be required to disclose in the reports it files or submits under the 1934 Act is accumulated and communicated to the Company’s management (including the Company’s chief executive officer and chief
financial officer) in a timely manner and recorded, processed, summarized and reported within the periods specified in the Commission’s rules and forms. KPMG LLP and the Audit Committee of the Board of Directors have been advised of:
(A) any significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which could adversely affect Company’s and the Bank’s ability to record, process, summarize, and report
financial data; and (B) any fraud, whether or not material, that involves management or other
19
employees who have a significant role in the Company’s or the Bank’s internal accounting controls.
(qq) All of the loans represented as assets of the Company, the MHC, Territorial Savings Group or the Bank in the Prospectus meet or are exempt from all
requirements of federal, state and local law pertaining to lending, including, without limitation, truth in lending (including the requirements of Regulation Z and 12 C.F.R. Part 226), real estate settlement procedures, consumer credit protection,
equal credit opportunity and all disclosure laws applicable to such loans, except for violations which, if asserted, would not have a Material Adverse Effect.
(rr) To the Company’s, the MHC’s, Territorial Savings Group’s and the Bank’s knowledge, there are no affiliations or associations between any member of the FINRA and any of the Company’s, the
MHC’s, Territorial Savings Group’s or the Bank’s officers, directors or 5% or greater securityholders, except as set forth in the Registration Statement and the Prospectus.
(ss) The Company has taken all actions necessary to obtain at the Closing Date a blue sky memorandum from Luse Gorman Pomerenk & Schick, P.C .
(tt) Any certificates signed by an officer of the Company, the MHC, Territorial Savings Group or the Bank pursuant to the conditions of
this Agreement and delivered to the Agent or their counsel that refers to this Agreement shall be deemed to be a representation and warranty by the Company, the MHC, Territorial Savings Group or the Bank, as the case may be, to the Agent as to the
matters covered thereby with the same effect as if such representation and warranty were set forth herein.
(uu) The statistical and market
related data contained in any Permitted Free Writing Prospectus, the Prospectus and the Registration Statement are based on or derived from sources which the Company, the MHC, Territorial Savings Group and the Bank believe were reliable and accurate
at the time they were filed with the Commission. No forward-looking statement (within the meaning of Section 27A of the 1933 Act and Section 21E of the 1934 Act) contained in the Registration Statement, the Prospectus, or any Permitted
Free Writing Prospectus has been made or reaffirmed without a reasonable basis or has been disclosed other than in good faith.
Section 5. Representations and Warranties of the Agent.
The Agent represents and warrants to the Company and the Bank as follows:
(a) The Agent is a corporation and is validly existing in good standing under the laws of the State of New York with full power and authority to provide the services to be furnished to the Company and the Bank
hereunder.
(b) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary action on the part of the Agent, and this Agreement has been duly and validly executed and delivered by the Agent and is a legal, valid and binding agreement of the Agent, enforceable in accordance with its terms,
except as the legality, validity, binding nature
20
and enforceability thereof may be limited by (i) bankruptcy, insolvency, moratorium, reorganization, conservatorship, receivership or other similar laws
relating to or affecting the enforcement of creditors’ rights generally, and (ii) general equity principles regardless of whether such enforceability is considered in a proceeding in equity or at law.
(c) Each of the Agent and its employees, agents and representatives who shall perform any of the services hereunder shall be duly authorized and
empowered, and shall have all licenses, approvals and permits necessary to perform such services; and the Agent is a registered selling agent in each of the jurisdictions in which the Shares are to be offered by the Company in reliance upon the
Agent as a registered selling agent as set forth in the Blue Sky memorandum prepared with respect to the Offering.
(d) The execution and
delivery of this Agreement by the Agent, the consummation of the transactions contemplated hereby and compliance with the terms and provisions hereof will not conflict with, or result in a breach of, any of the terms, provisions or conditions of, or
constitute a default (or an event which with notice or lapse of time or both would constitute a default) under, the Articles of Incorporation or Bylaws of the Agent or any agreement, indenture or other instrument to which the Agent is a party or by
which it or its property is bound.
(e) No approval of any regulatory or supervisory or other public authority is required in connection
with the Agent’s execution and delivery of this Agreement, except as may have been received.
(f) There is no suit or proceeding or
charge or action before or by any court, regulatory authority or government agency or body or, to the knowledge of the Agent, pending or threatened, which might materially adversely affect the Agent’s performance under this Agreement.
Section 5.1 Covenants of the Company, the MHC, Territorial Savings Group and the Bank.
The Company and the Bank hereby jointly
and severally covenant and agree with the Agent as follows:
(a) The Company will not, at any time after the date the Registration Statement
is declared effective, file any amendment or supplement to the Registration Statement without providing the Agent and its counsel an opportunity to review such amendment or supplement or file any amendment or supplement to which amendment or
supplement the Agent and its counsel shall reasonably object.
(b) If at any time following issuance of an Issuer-Represented Free Writing
Prospectus there occurred or occurs an event or development as a result of which such Issuer Represented Free Writing Prospectus conflicted or would conflict with the information contained in the Registration Statement or included or would include
an untrue statement of a material fact or omitted or would omit to state a material fact necessary in order to make the statements therein, in light of the circumstances prevailing at the subsequent time, not misleading, the Company has notified or
will notify promptly the Agent so that any use of such Issuer-Represented Free Writing Prospectus may cease
21
until it is amended or supplemented and the Company has promptly amended or will promptly amend or supplement such Issuer-Represented Free Writing Prospectus
to eliminate or correct such conflict, untrue statement or omission; provided, however, that this covenant shall not apply to any statements or omissions made in reliance upon and in conformity with information furnished in writing to the Company by
the Agent expressly for use therein.
(c) The Company, the MHC, Territorial Savings Group and the Bank each represents and agrees that,
unless it obtains the prior consent of the Agent, it has not made and will not make any offer relating to the offered Shares that would constitute an “issuer free writing prospectus” as defined in Rule 433 of the 1933 Act Regulations, or
that would constitute a “free writing prospectus,” as defined in Rule 405 of the 1933 Act Regulations, required to be filed with the Commission. Any such free writing prospectus consented to by the Company, the Bank and the Agent is
hereinafter referred to as a “Permitted Free Writing Prospectus.” The Company and the Bank represent that it has treated or agrees that it will treat each Permitted Free Writing Prospectus as an “issuer free writing prospectus,”
as defined in Rule 433 of the 1933 Act Regulations, and has complied and will comply in all material respects with the requirements of Rule 433 of the 1933 Act Regulations applicable to any Permitted Free Writing Prospectus, including timely
Commission filing where required, legending and record keeping. The Company and the Bank need not treat any communication as a free writing prospectus if it is exempt from the definition of prospectus pursuant to clause (a) of
Section 2(a)(10) of the 1933 Act without regard to Rule 172 or 173 of the 1933 Act Regulations.
(d) The Company, the MHC, Territorial
Savings Group and the Bank will not, at any time after the Form AC is approved by the OTS, file any amendment or supplement to such Form AC without providing the Agent and its counsel an opportunity to review such amendment or supplement or file any
amendment or supplement to which amendment or supplement the Agent and its counsel shall reasonably object.
(e) The Company will not, at
any time after the Holding Company Application is approved by the OTS, file any amendment or supplement to such Holding Company Application without providing the Agent and its counsel an opportunity to review the non-confidential portions of such
amendment or supplement or file any amendment or supplement to which amendment or supplement the Agent and its counsel shall reasonably object.
(f) The Company, the MHC, Territorial Savings Group and the Bank will use their best efforts to cause any post-effective amendment to the Registration Statement to be declared effective by the Commission and any post-effective amendment to
the Form AC or the Holding Company Application to be approved by the OTS and will immediately upon receipt of any information concerning the events listed below notify the Agent: (i) when the Registration Statement, as amended, has become
effective; (ii) when the Form AC or the Holding Company Application, as amended, has been approved by the OTS; (iii) of any comments from the Commission, the OTS or any other governmental entity with respect to the Conversion contemplated
by this Agreement; (iv) of the request by the Commission, the OTS or any other governmental entity for any amendment or
22
supplement to the Registration Statement, the Form AC, Holding Company Application or for additional information; (v) of the issuance by the Commission,
the OTS or any other governmental entity of any order or other action suspending the Conversion or the use of the Registration Statement or the Prospectus or any other filing of the Company or the Bank under the Conversion Regulations, or other
applicable law, or the threat of any such action; (vi) of the issuance by the Commission, the OTS or any authority of any stop order suspending the effectiveness of the Registration Statement or of the initiation or threat of initiation or
threat of any proceedings for that purpose; or (vii) of the occurrence of any event mentioned in paragraph (h) below. The Company, the MHC, Territorial Savings Group and the Bank will make every reasonable effort (i) to prevent the
issuance by the Commission, the OTS or any other state authority of any such order and, (ii) if any such order shall at any time be issued, to obtain the lifting thereof at the earliest possible time.
(g) The Company, the MHC, Territorial Savings Group and the Bank will deliver to the Agent and to its counsel two conformed copies of the Registration
Statement, the Form AC or the Holding Company Application, as originally filed and of each amendment or supplement thereto, including all exhibits. Further, the Company, the MHC, Territorial Savings Group and the Bank will deliver such additional
copies of the foregoing documents to counsel to the Agent as may be required for any FINRA filings.
(h) The Company and the Bank will
furnish to the Agent, from time to time during the period when the Prospectus (or any later prospectus related to this offering) is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of such Prospectus (as amended or
supplemented) as the Agent may reasonably request for the purposes contemplated by the 1933 Act, the 1933 Act Regulations, the 1934 Act or the rules and regulations promulgated under the 1934 Act (the “1934 Act Regulations”). The Company
authorizes the Agent to use the Prospectus (as amended or supplemented, if amended or supplemented) in any lawful manner contemplated by the Plan in connection with the sale of the Shares by the Agent.
(i) The Company, the MHC, Territorial Savings Group and the Bank will comply with any and all material terms, conditions, requirements and provisions with
respect to the Offering imposed by the Commission, the OTS or the Conversion Regulations, and by the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations to be complied with prior to or subsequent to the Closing Date and
when the Prospectus is required to be delivered, and during such time period the Company, the MHC, Territorial Savings Group and the Bank will comply, at their own expense, with all material requirements imposed upon them by the Commission, the OTS
or the Conversion Regulations, and by the 1933 Act, the 1933 Act Regulations, the 1934 Act and the 1934 Act Regulations, including, without limitation, Rule 10b-5 under the 1934 Act, in each case as from time to time in force, so far as necessary to
permit the continuance of sales or dealing in the Common Shares during such period in accordance with the provisions hereof and the Prospectus. The Company will comply in all material respects with all undertakings contained in the Registration
Statement.
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(j) If, at any time during the period when the Prospectus is required to be delivered, any event relating
to or affecting the Company, the MHC, Territorial Savings Group or the Bank shall occur, as a result of which it is necessary or appropriate, in the opinion of counsel for the Company and in the reasonable opinion of the Agent’s counsel, to
amend or supplement the Registration Statement or Prospectus in order to make the Registration Statement or Prospectus not misleading in light of the circumstances existing at the time the Prospectus is delivered to a purchaser, the Company will
immediately so inform the Agent and prepare and file, at its own expense, with the Commission and the OTS, and furnish to the Agent a reasonable number of copies, of an amendment or amendments of, or a supplement or supplements to, the Registration
Statement or Prospectus (in form and substance reasonably satisfactory to the Agent and its counsel after a reasonable time for review) which will amend or supplement the Registration Statement or Prospectus so that as amended or supplemented it
will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not
misleading. For the purpose of this Agreement, the Company will timely furnish to the Agent such information with respect to itself, the MHC, Territorial Savings Group and the Bank as the Agent may from time to time reasonably request.
(k) The Company, the MHC, Territorial Savings Group and the Bank will take all necessary actions in cooperating with the Agent and furnish to whomever
the Agent may direct such information as may be required to qualify or register the Shares for offering and sale by the Company or to exempt such Shares from registration, or to exempt the Company as a broker-dealer and its officers, directors and
employees as broker-dealers or agents under the applicable securities or Blue Sky laws of such jurisdictions in which the Shares are required under the Conversion Regulations to be sold or as the Agent and the Company may reasonably agree upon;
provided, however, that the Company shall not be obligated to file any general consent to service of process, to qualify to do business in any jurisdiction in which it is not so qualified, or to register its directors or officers as brokers,
dealers, salesmen or agents in any jurisdiction. In each jurisdiction where any of the Shares shall have been qualified or registered as above provided, the Company will make and file such statements and reports in each fiscal period as are or may
be required by the laws of such jurisdiction.
(l) The liquidation account for the benefit of Eligible Account Holders and Supplemental
Eligible Account Holders will be duly established and maintained in accordance with the requirements of the Conversion Regulations, and such Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain their savings
accounts in the Bank will have an inchoate interest in their pro rata portion of the liquidation account, which shall have a priority superior to that of the holders of the Common Stock in the event of a complete liquidation of the Bank.
(m) The Company and the Bank will not sell or issue, contract to sell or otherwise dispose of, for a period of 90 days after the Closing Date, without
the Agent’s prior written consent, any of their shares of their common stock, other than the Common Shares or other than in connection with any plan or arrangement described in the Prospectus.
24
(n) The Company will register its common stock under Section 12(b) of the 1934 Act. The Company
shall maintain the effectiveness of such registration for not less than three years from the time of effectiveness or such shorter period as may be required by the OTS.
(o) During the period during which the Common Shares are registered under the 1934 Act or for three years from the date hereof, whichever period is greater, the Company will furnish to its shareholders as soon as
practicable after the end of each fiscal year an annual report of the Company (including a consolidated balance sheet and statements of consolidated income, shareholders’ equity and cash flows of the Company and its subsidiaries as at the end
of and for such year, certified by independent registered public accountants in accordance with Regulation S-X under the 1933 Act and the 1934 Act) and make available as soon as practicable after the end of each of the first three quarters of each
fiscal year (beginning with the first fiscal quarter ending after the effective time of the Registration Statement) financial information of the Company and is subsidiaries for such quarter in reasonable detail.
(p) During the period of three years from the date hereof, the Company will furnish to the Agent: (i) as soon as practicable after such information
is publicly available, a copy of each report of the Company furnished to or filed with the Commission under the 1934 Act or any national securities exchange or system on which any class of securities of the Company is listed or quoted (including,
but not limited to, reports on Forms 10-K, 10-Q and 8-K and all proxy statements and annual reports to stockholders): (ii) a copy of each other non-confidential report of the Company mailed to its shareholders or filed with the Commission, the
OTS or any other supervisory or regulatory authority or any national securities exchange or system on which any class of securities of the Company is listed or quoted, each press release and material news items and additional documents and
information with respect to the Company or the Bank as the Agent may reasonably request; and (iii) from time to time, such other nonconfidential information concerning the Company or the Bank as the Agent may reasonably request.
(q) The Company and the Bank will use the net proceeds from the sale of the Shares in the manner set forth in the Prospectus under the caption “Use
of Proceeds.”
(r) The Company will make generally available to its security holders as soon as practicable, but not later than 60 days
after the close of the period covered thereby, an earnings statement (in form complying with the provisions of Rule 158 of the 1933 Act Regulations) covering a twelve-month period beginning not later than the first day of the Company’s fiscal
quarter next following the effective date (as defined in such Rule 158) of the Registration Statement.
(s) The Company will use its best
efforts to list the Common Shares on the Nasdaq Global Select Market on or prior to the Closing Date.
(t) The Bank will maintain
appropriate arrangements for depositing all funds received from persons mailing or delivering subscriptions for or orders to purchase Shares in the Offering with the Bank or another financial institution whose deposits are
25
insured by the FDIC, on an interest-bearing basis at the rate described in the Prospectus until the Closing Date and satisfaction of all conditions precedent
to the release of the Company’s or the Bank’s obligation to refund payments received from persons subscribing for or ordering Shares in the Offering in accordance with the Plan and as described in the Prospectus or until refunds of such
funds have been made to the persons entitled thereto or withdrawal authorizations canceled in accordance with the Plan and as described in the Prospectus. The Bank will maintain such records of all funds received to permit the funds of each
subscriber to be separately insured by the FDIC (to the maximum extent allowable) and to enable the Bank to make the appropriate refunds of such funds in the event that such refunds are required to be made in accordance with the Plan and as
described in the Prospectus.
(u) The Company will report the use of proceeds of the Offering in accordance with Rule 463 under the 1933
Act.
(v) The Company will promptly take all necessary action to register as a savings and loan holding company under the HOLA.
(w) The Company and the Bank will take such actions and furnish such information as are reasonably requested by the Agent in order for the Agent to
ensure compliance with FINRA Rule 2790.
(x) Neither the Company, the MHC, Territorial Savings Group nor the Bank will amend the Plan
without notifying the Agent and the Agent’s counsel prior thereto.
(y) The Company shall assist the Agent, if necessary, in connection
with the allocation of the Shares in the event of an oversubscription and shall provide the Agent with any information necessary to assist the Company in allocating the Shares in such event and such information shall be accurate and reliable in all
material respects.
(z) Prior to the Closing Date, the Company will inform the Agent of any event or circumstances of which it is aware as a
result of which the Registration Statement and/or Prospectus, as then amended or supplemented, would contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading.
(aa) The Company will not deliver the Shares until the Company, the MHC, Territorial Savings Group and the Bank have satisfied or caused to
be satisfied each condition set forth in Section 7 hereof, unless such condition is waived in writing by the Agent.
(bb) Subsequent to
the date the Registration Statement is declared effective by the Commission and prior to the Closing Date, except as otherwise may be indicated or contemplated therein or set forth in an amendment or supplement thereto, neither the Company, the MHC,
Territorial Savings Group nor the Bank will have: (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money, except borrowings from the same or similar sources indicated in the Prospectus in the
ordinary course of its business, or (ii) entered into any transaction which is material in
26
light of the business and properties of the Company, the MHC, Territorial Savings Group and the Bank, taken as a whole.
(cc) Until the Closing Date, the Company, the MHC, Territorial Savings Group and the Bank will conduct their businesses in compliance in all material
respects with all applicable federal and state laws, rules, regulations, decisions, directives and orders, including all decisions, directives and orders of the Commission, the FDIC and the OTS.
(dd) The facts and representations provided to Luse Gorman Pomerenk & Schick, P.C. by the Bank, the MHC, Territorial Savings Group and the
Company and upon which Luse Gorman Pomerenk & Schick, P.C. will base its opinion under Section 7(c)(1) are and will be truthful, accurate and complete.
(ee) The Company, the MHC, Territorial Savings Group and the Bank will not distribute any offering material in connection with the Offering except for the Prospectus and any supplemental sales material that has been
filed with the Registration Statement and the Form AC and authorized for use by the Commission and the OTS. The information contained in any supplemental sales material (in addition to the supplemental sales material filed as an exhibit to the
Registration Statement and the Form AC) shall not conflict with the information contained in the Registration Statement and the Prospectus.
(ff) The Company will comply with all applicable provisions of the Sarbanes-Oxley Act of 2002 and all applicable rules, regulations, guidelines and interpretations promulgated thereunder by the Commission.
Section 6. Payment of Expenses.
Whether or not the Conversion is completed or the sale of the Shares by the Company is consummated, the
Company, the MHC, Territorial Savings Group and the Bank jointly and severally agree to pay or reimburse the Agent for: (a) all filing fees in connection with all filings related to the Conversion with the FINRA; (b) any stock issue or
transfer taxes which may be payable with respect to the sale of the Shares; (c) subject to Section 2(d), all expenses of the Conversion, including but not limited to the Agent’s attorneys’ fees and expenses, Blue Sky fees,
transfer agent, registrar and other agent charges, fees relating to auditing and accounting or other advisors and costs of printing all documents necessary in connection with the Offering. In the event the Company is unable to sell the minimum
number of shares necessary to complete the Conversion or the Conversion is terminated or otherwise abandoned, the Company, the MHC, Territorial Savings Group and the Bank shall promptly reimburse the Agent in accordance with Section 2(d)
hereof.
In the event that the Agent incurs any expenses on behalf of the Company, the MHC, Territorial Savings Group or the Bank that are
customarily borne by the issuer, the Company, the MHC, Territorial Savings Group and the Bank will pay or reimburse the Agent for such expenses regardless of whether the Offering is successfully completed, and such reimbursements will not be
included in the expense limitations set forth in Section 2(d) hereof. The Company, the MHC, Territorial Savings Group and the Bank acknowledge, however, that such limitations may be increased by the mutual consent of the Bank and Agent in the
event of delay in the Offering requiring the Agent to utilize a Syndicated Community Offering, a delay as a result of circumstances requiring material additional work by Agent or its counsel or an update of the
27
financial information in tabular form contained in the Prospectus for a period later than
, 2009. Not later than two days prior to the Closing Date, the Agent will provide the Company with an accounting of all
reimbursable expenses to be paid at the Closing in next day funds. In the event the Bank determines to abandon or terminate the Conversion prior to Closing, payment of such expenses shall be made in next day funds on the date such determination is
made.
Section 7. Conditions to the Agent’s Obligations.
The obligations of the Agent hereunder, as to the Shares to be
delivered at the Closing Date, are subject, to the extent not waived in writing by the Agent, to the condition that all representations and warranties of the Company, the MHC, Territorial Savings Group and the Bank, herein are, at and as of the
commencement of the Offering and at and as of the Closing Date, true and correct in all material respects, the condition that the Company, the MHC, Territorial Savings Group and the Bank shall have performed all of its obligations hereunder to be
performed on or before such dates, and to the following further conditions:
(a) At the Closing Date, the Company, the MHC, Territorial
Savings Group and the Bank shall have conducted the Conversion in all material respects in accordance with the Plan, the Conversion Regulations, and all other applicable laws, regulations, decisions and orders, including all terms, conditions,
requirements and provisions precedent to the Conversion imposed upon them by the OTS.
(b) The Registration Statement shall have been
declared effective by the Commission and the Form AC and Holding Company Application shall have been approved by the OTS not later than 5:30 p.m. on the date of this Agreement, or with the Agent’s consent at a later time and date; and at the
Closing Date, no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefore initiated or threatened by the Commission or any state authority, and no order or other action
suspending the authorization of the Prospectus or the consummation of the Conversion shall have been issued or proceedings therefore initiated or, to the Company’s, the MHC’s, Territorial Savings Group’s or the Bank’s knowledge,
threatened by the Commission, the OTS, the FDIC or any other state authority.
(c) At the Closing Date, the Agent shall have received the
favorable opinion, dated as of the Closing Date and addressed to the Agent and for its benefit, of Luse Gorman Pomerenk & Schick, P.C., special counsel for the Company and the Bank, in form and substance as attached hereto as
Exhibit
C
.
(d) A blue sky memorandum from Luse Gorman Pomerenk & Schick, P.C. relating to the Offering, including Agent’s
participation therein, shall have been furnished prior to the mailing of the Prospectus to the Company with a copy thereof addressed to Agent or upon which Luse Gorman Pomerenk & Schick, P.C. shall state the Agent may rely. The blue sky
memorandum will relate to the necessity of obtaining or confirming exemptions, qualifications or the registration of the Shares under applicable state securities law.
(e) At the Closing Date, the Agent shall receive a certificate of the Chief Executive Officer and the Chief Financial Officer of the Company, the MHC, Territorial Savings
28
Group and the Bank in form and substance reasonably satisfactory to the Agent’s Counsel, dated as of such Closing Date, to the effect that:
(i) they have carefully examined the Prospectus and, in their opinion, at the time the Prospectus became authorized for final use, the Prospectus did not contain any untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein, in light of the circumstances under which they were made, not misleading; (ii) since the date the Prospectus became authorized for final use, no event has occurred which should have been set forth in an
amendment or supplement to the Prospectus which has not been so set forth, including specifically, but without limitation, any material adverse change in the condition, financial or otherwise, or in the earnings, capital, properties or business of
the Company, the MHC, Territorial Savings Group or the Bank and the conditions set forth in this Section 7 have been satisfied; (iii) since the respective dates as of which information is given in the Registration Statement, the General
Disclosure Package and the Prospectus, there has been no material adverse change in the condition, financial or otherwise, or in the earnings, capital, properties or business of the Company, the MHC, Territorial Savings Group or the Bank
independently, or of the Company, the MHC, Territorial Savings Group and the Bank considered as one enterprise, whether or not arising in the ordinary course of business; (iv) the representations and warranties in Section 4 are true and
correct with the same force and effect as though expressly made at and as of the Closing Date; (v) the Company, the MHC, Territorial Savings Group and the Bank complied in all material respects with all agreements and satisfied all conditions
on their part to be performed or satisfied at or prior to the Closing Date and will comply in all material respects with all obligations to be satisfied by them after the Closing Date; (vi) no stop order suspending the effectiveness of the
Registration Statement has been initiated or, to the best knowledge of the Company, the MHC, Territorial Savings Group or the Bank, threatened by the Commission or any state authority; (vii) no order suspending the Conversion, the Offering or
the use of the Prospectus has been issued and no proceedings for that purpose are pending or, to the best knowledge of the Company, the MHC, Territorial Savings Group or the Bank, threatened by the OTS or any state authority; and (viii) to the
best knowledge of the Company, the MHC, Territorial Savings Group or the Bank, no person has sought to obtain review of the final action of the OTS approving the Conversion.
(f) None of the Company, the MHC, Territorial Savings Group or the Bank shall have sustained, since the date of the latest financial statements included
in the Registration Statement, the General Disclosure Package and Prospectus, any material loss or interference with its business from fire, explosion, flood or other calamity, whether or not covered by insurance, or from any labor dispute or court
or governmental action, order or decree, otherwise than as set forth in the Registration Statement and the Prospectus, and since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall not
have been any Material Adverse Effect that is in the Agent’s reasonable judgment sufficiently material and adverse as to make it impracticable or inadvisable to proceed with the Offering or the delivery of the Shares on the terms and in the
manner contemplated in the Prospectus.
(g) Prior to and at the Closing Date: (i) in the reasonable opinion of the Agent, there shall
have been no material adverse change in the financial condition, results of
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operations or business of the Company, the MHC, Territorial Savings Group and the Bank considered as one enterprise, from that as of the latest dates as of
which such condition is set forth in the Prospectus, other than transactions referred to or contemplated therein; (ii) neither the Company, the MHC, Territorial Savings Group nor the Bank shall have received from the OTS or the FDIC any
direction (oral or written) to make any material change in the method of conducting their business with which it has not complied (which direction, if any, shall have been disclosed to the Agent) or which materially and adversely would affect the
financial condition, results of operations or business of the Company, the MHC, Territorial Savings Group and the Bank taken as a whole; (iii) none of the Company, the MHC, Territorial Savings Group or the Bank shall have been in default (nor
shall an event have occurred which, with notice or lapse of time or both, would constitute a default) under any provision of any agreement or instrument relating to any outstanding indebtedness; (iv) no action, suit or proceeding, at law or in
equity or before or by any federal or state commission, board or other administrative agency, not disclosed in the Prospectus, shall be pending or, to the knowledge of the Company, the MHC, Territorial Savings Group or the Bank, threatened against
the Company, the MHC, Territorial Savings Group or the Bank or affecting any of their properties wherein an unfavorable decision, ruling or finding would materially and adversely affect the financial condition, results of operations or business of
the Company, the MHC, Territorial Savings Group and the Bank taken as a whole; and (v) the Shares shall have been qualified or registered for offering and sale or exempted therefrom under the securities or Blue Sky laws of the jurisdictions as
the Agent shall have reasonably requested and as agreed to by the Company, the MHC, Territorial Savings Group and the Bank.
(h)
Concurrently with the execution of this Agreement, the Agent shall receive a letter from KPMG LLP, dated as of the date hereof and addressed to the Agent: (i) confirming that KPMG LLP is a firm of independent registered public accountants
within the applicable rules of the Public Company Accounting Oversight Board (United States) and stating in effect that in its opinion the consolidated financial statements and related notes of the Bank as of December 31, 2007, 2006 and 2005,
and for each of the years in the three-year period ended December 31, 2007, and covered by their opinion included in the Prospectus, and any other more recent unaudited financial statements included in the Prospectus comply as to form in all
material respects with the applicable accounting requirements and related published rules and regulations of the OTS and the 1933 Act; (ii) stating in effect that, on the basis of certain agreed upon procedures (but not an audit in accordance
with standards of the Public Company Accounting Oversight Board (United States)) consisting of a reading of the latest available consolidated financial statements of the MHC prepared by the MHC, a reading of the minutes of the meetings of the Boards
of Directors of the Company, the MHC, Territorial Savings Group and the Bank and consultations with officers of the Bank responsible for financial and accounting matters, nothing came to their attention which caused them to believe that:
(A) the audited consolidated financial statements and any unaudited interim financial statements included in the Prospectus are not in conformity with the 1933 Act, applicable accounting requirements of the OTS and accounting principles
generally accepted in the United States of America applied on a basis substantially consistent with that of the audited consolidated financial statements included in the Prospectus; or (B) during the period
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from the date of the latest consolidated financial statements included in the Prospectus to a specified date not more than three business days prior to the
date of the Prospectus, except as has been described in the Prospectus, there was any increase in borrowings of the MHC, other than normal deposit fluctuations for the Bank; or (C) there was any decrease in the net assets of the MHC at the date
of such letter as compared with amounts shown in the latest balance sheet included in the Prospectus; and (iii) stating that, in addition to the audit referred to in their opinion included in the Prospectus and the performance of the procedures
referred to in clause (ii) of this subsection (h), they have compared with the general accounting records of the MHC, which are subject to the internal controls of the MHC, the accounting system and other data prepared by the MHC, directly from
such accounting records, to the extent specified in such letter, such amounts and/or percentages set forth in the Prospectus as the Agent may reasonably request; and they have found such amounts and percentages to be in agreement therewith (subject
to rounding).
(i) At the Closing Date, the Agent shall receive a letter dated the Closing Date, addressed to the Agent, confirming the
statements made by KPMG LLP in the letter delivered by it pursuant to subsection (g) of this Section 7, the “specified date” referred to in clause (i) of subsection (h) to be a date specified in the letter required by
this subsection (h) which for purposes of such letter shall not be more than three business days prior to the Closing Date.
(j) At the
Closing Date, the Company shall receive a letter from FinPro, Inc., dated the Closing Date (i) confirming that said firm is independent of the Company, the MHC, Territorial Savings Group and the Bank and is experienced and expert in the area of
corporate appraisals within the meaning of Title 12 of the Code of Federal Regulations, Section 563b.200(b), (ii) stating in effect that the Appraisal prepared by such firm complies in all material respects with the applicable requirements
of Title 12 of the Code of Federal Regulations, and (iii) further stating that its opinion of the aggregate pro forma market value of the Company including the Bank, as most recently updated, remains in effect.
(k) At or prior to the Closing Date, the Agent shall receive: (i) a copy of the letters from the OTS approving the Form AC, the Holding Company
Application and authorizing the use of the Prospectus; (ii) a copy of the order from the Commission declaring the Registration Statement effective; (iii) certificates from the OTS evidencing the valid existence of the Bank, the MHC and
Territorial Savings Group; (iv) a certificate from the FDIC evidencing the Bank’s insurance of accounts; (v) a certificate from the FHLB-Seattle evidencing the Bank’s membership therein; and (vi) such other documents and
certificates as the Agent may reasonably request.
(l) Subsequent to the date hereof, there shall not have occurred any of the following;
(i) a suspension or limitation in trading in securities generally on the New York Stock Exchange (the “NYSE”) or in the over-the-counter market, or quotations halted generally on the Nasdaq Stock Market, or minimum or maximum prices
for trading have been fixed, or maximum ranges for prices for securities have been required by either of such exchanges or the Nasdaq Stock Market or by order of the Commission or any other
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governmental authority; (ii) a general moratorium on the operations of commercial banks, or federal savings and loan associations or a general
moratorium on the withdrawal of deposits from commercial banks or federal savings and loan associations declared by federal or state authorities; (iii) the engagement by the United States in hostilities which have resulted in the declaration,
on or after the date hereof, of a national emergency or war; or (iv) a material decline in the price of equity or debt securities if the effect of such decline, in the Agent’s reasonable judgment, makes it impracticable or inadvisable to
proceed with the Offering or the delivery of the Shares on the terms and in the manner contemplated in the Registration Statement and the Prospectus.
(m) At or prior to the Closing Date, counsel to the Agent shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the sale of the Shares
as herein contemplated and related proceedings or in order to evidence the occurrence or completeness of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the
Company, the MHC, Territorial Savings Group and the Bank in connection with the sale of the Shares as herein contemplated shall be satisfactory in form and substance to the Agent or its counsel.
(n) All such opinions, certificates, letters and documents will be in compliance with the provisions hereof only if they are reasonably satisfactory in
form and substance to the Agent or to counsel for the Agent. Any certificate signed by an officer of the Company, the MHC, Territorial Savings Group or the Bank and delivered to the Agent or to counsel for the Agent shall be deemed a representation
and warranty by the Company, the MHC, Territorial Savings Group or the Bank, as the case may be, to the Agent as to the statements made therein.
Section 8. Indemnification.
(a) The Company and the Bank jointly and severally agree to indemnify and hold harmless
the Agent, its officers and directors, employees and agents, and each person, if any, who controls the Agent within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act, against any and all loss, liability, claim,
damage or expense whatsoever (including, but not limited to, settlement expenses), joint or several, that the Agent or any of them may suffer or to which the Agent and any such persons may become subject under all applicable federal or state laws or
otherwise, and to promptly reimburse the Agent and any such persons upon written demand for any expense (including all fees and disbursements of counsel) incurred by the Agent or any of them in connection with investigating, preparing or defending
any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or actions: (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact
contained in the Registration Statement (or any amendment or supplement thereto), the General Disclosure Package, any Issuer-Represented Limited-Use Free Writing Prospectus, any Issuer Represented General Free Writing Prospectus, preliminary or
final Prospectus (or any amendment or supplement thereto), the Form AC (or any amendment or supplement thereto), the Holding Company Application (or any amendment or supplement thereto) or any instrument or document executed by the
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Company, the MHC, Territorial Savings Group or the Bank or based upon written information supplied by the Company filed in any state or jurisdiction to
register or qualify any or all of the Shares or to claim an exemption therefrom or provided to any state or jurisdiction to exempt the Company, the MHC, Territorial Savings Group or the Bank as a broker-dealer or its officers, directors and
employees as broker-dealers or agents, under the securities laws thereof (collectively, the “Blue Sky Application”), or any document, advertisement, oral statement or communication (“Sales Information”) prepared, made or executed
by or on behalf of the Company, the MHC, Territorial Savings Group or the Bank with its consent and based upon written or oral information furnished by or on behalf of the Company, the MHC, Territorial Savings Group or the Bank, whether or not filed
in any jurisdiction, in order to qualify or register the Shares or to claim an exemption therefrom under the securities laws thereof; (ii) arise out of or are based upon the omission or alleged omission to state in any of the foregoing
documents or information a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; or (iii) arise from any theory of liability whatsoever
relating to or arising from or based upon the Registration Statement (or any amendment or supplement thereto), preliminary or final Prospectus (or any amendment or supplement thereto), the General Disclosure Package, any Issuer-Represented
Limited-Use Free Writing Prospectus, any Issuer–Represented General Free Writing Prospectus, the Form AC (or any amendment or supplement thereto) the Holding Company Application (or any amendment or supplement thereto), any Blue Sky Application
or Sales Information or other documentation distributed in connection with the Conversion; provided, however, that no indemnification is required under this paragraph (a) to the extent such losses, claims, damages, liabilities or actions arise
out of or are based upon any untrue material statement or alleged untrue material statement in, or material omission or alleged material omission from, the Registration Statement (or any amendment or supplement thereto), preliminary or final
Prospectus (or any amendment or supplement thereto), the General Disclosure Package, any Issuer-Represented Limited-Use Free Writing Prospectus, any Issuer-Represented General Free Writing Prospectus, the Form AC, the Holding Company Application,
any Blue Sky Application or Sales Information made in reliance upon and in conformity with information furnished in writing to the Company, by the Agent or its counsel regarding the Agent, and provided, that it is agreed and understood that the only
information furnished in writing to the Company, by the Agent regarding the Agent is set forth in the Prospectus in the first sentence of the second paragraph under the caption “The Conversion; Plan of Distribution—Marketing and
Distribution; Compensation”; and, provided further, that such indemnification shall be limited to the extent prohibited by the Commission, the OTS, the FDIC and the Board of Governors of the Federal Reserve System.
(b) The Agent agrees to indemnify and hold harmless the Company, the MHC, Territorial Savings Group and the Bank, their directors and officers and each
person, if any, who controls the Company or the Bank within the meaning of Section 15 of the 1933 Act or Section 20(a) of the 1934 Act against any and all loss, liability, claim, damage or expense whatsoever (including but not limited to
settlement expenses), joint or several, which they, or any of them, may suffer or to which they, or any of them may become subject under all applicable federal and state laws or otherwise, and to promptly
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reimburse the Company, the MHC, Territorial Savings Group, the Bank, and any such persons upon written demand for any expenses (including reasonable fees and
disbursements of counsel) incurred by them, or any of them, in connection with investigating, preparing or defending any actions, proceedings or claims (whether commenced or threatened) to the extent such losses, claims, damages, liabilities or
actions: (i) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment or supplement thereto), the Form AC (or any amendment or supplement
thereto), the Holding Company Application, the preliminary or final Prospectus (or any amendment or supplement thereto), any Blue Sky Application or Sales Information, (ii) are based upon the omission or alleged omission to state in any of the
foregoing documents a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or (iii) arise from any theory of liability whatsoever
relating to or arising from or based upon the Registration Statement (or any amendment or supplement thereto), preliminary or final Prospectus (or any amendment or supplement thereto), the Form AC (or any amendment or supplement thereto), the
Holding Company Application, or any Blue Sky Application or Sales Information or other documentation distributed in connection with the Offering; provided, however, that the Agent’s obligations under this Section 8(b) shall exist only if
and only to the extent that such untrue statement or alleged untrue statement was made in, or such material fact or alleged material fact was omitted from, the Registration Statement (or any amendment or supplement thereto), the preliminary or final
Prospectus (or any amendment or supplement thereto), the Form AC (or any amendment or supplement thereto), the Holding Company Application, any Blue Sky Application or Sales Information in reliance upon and in conformity with information furnished
in writing to the Company or the Bank, by the Agent or its counsel regarding the Agent, and provided, that it is agreed and understood that the only information furnished in writing to the Company or the Bank, by the Agent regarding the Agent is set
forth in the Prospectus in the first sentence of the second paragraph under the caption “The Conversion; Plan of Distribution-Marketing and Distribution; Compensation.”
(c) Each indemnified party shall give prompt written notice to each indemnifying party of any action, proceeding, claim (whether commenced or threatened),
or suit instituted against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve it from any liability which it may have on account of this Section 8 or otherwise. An
indemnifying party may participate at its own expense in the defense of such action. In addition, if it so elects within a reasonable time after receipt of such notice, an indemnifying party, jointly with any other indemnifying parties receiving
such notice, may assume defense of such action with counsel chosen by it and approved by the indemnified parties that are defendants in such action, unless such indemnified parties reasonably object to such assumption on the ground that there may be
legal defenses available to them that are different from or in addition to those available to such indemnifying party. If an indemnifying party assumes the defense of such action, the indemnifying parties shall not be liable for any fees and
expenses of counsel for the indemnified parties incurred thereafter in connection with such action, proceeding or claim, other than reasonable costs of investigation. In no event shall the indemnifying parties be liable for the fees and expenses of
more than one
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separate firm of attorneys (and any special counsel that said firm may retain) for each indemnified party in connection with any one action, proceeding or
claim or separate but similar or related actions, proceedings or claims in the same jurisdiction arising out of the same general allegations or circumstances.
Section 9. Contribution.
In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in Section 8 is due in accordance with its terms but is for
any reason held by a court to be unavailable from the Company, the MHC, Territorial Savings Group, the Bank or the Agent, the Company, the MHC, Territorial Savings Group, the Bank and the Agent shall contribute to the aggregate losses, claims,
damages and liabilities (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding, but after deducting any contribution received by the Company, the MHC,
Territorial Savings Group, the Bank or the Agent from persons other than the other parties thereto, who may also be liable for contribution) in such proportion so that the Agent is responsible for that portion represented by the percentage that the
fees paid to the Agent pursuant to Section 2 of this Agreement (not including expenses) bears to the gross proceeds received by the Company from the sale of the Shares in the Offering, and the Company, the MHC, Territorial Savings Group and the
Bank shall be responsible for the balance. If, however, the allocation provided above is not permitted by applicable law, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative fault of the Company, the MHC, Territorial Savings Group and the Bank on the one hand and the Agent on the other in connection with the statements or omissions which resulted in such losses, claims,
damages or liabilities (or actions, proceedings or claims in respect thereto), but also the relative benefits received by the Company, the MHC, Territorial Savings Group and the Bank on the one hand and the Agent on the other from the Offering
(before deducting expenses). The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company, the MHC, Territorial Savings Group and the Bank on the one hand or the Agent on the other and the parties’ relative intent, good faith, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company, the MHC, Territorial Savings Group the Bank and the Agent agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro-rata allocation or by any other
method of allocation which does not take into account the equitable considerations referred to above in this Section 9. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions,
proceedings or claims in respect thereof) referred to above in this Section 9 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action,
proceeding or claim. It is expressly agreed that the Agent shall not be liable for any loss, liability, claim, damage or expense or be required to contribute any amount pursuant to Section 8(b) or this Section 9 which in the aggregate
exceeds the amount paid (excluding reimbursable expenses) to the Agent under this Agreement. It is understood that the above stated limitation on the Agent’s liability is essential to the Agent and that the Agent would not have entered into
this Agreement if such limitation had not been agreed to by the parties to this Agreement. No person found guilty of any fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not found guilty of such fraudulent misrepresentation. The obligations of the Company, the MHC,
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Territorial Savings Group, the Bank and the Agent under this Section 9 and under Section 8 shall be in addition to any liability which the Company
and the Agent may otherwise have. For purposes of this Section 9, each of the Agent’s, the Company’s, the MHC’s, Territorial Savings Group’s or the Bank’s officers and directors and each person, if any, who controls the
Agent or the Company, the MHC, Territorial Savings Group or the Bank within the meaning of the 1933 Act and the 1934 Act shall have the same rights to contribution as the Agent on the one hand, or, the Company, the MHC, Territorial Savings Group or
the Bank on the other hand. Any party entitled to contribution, promptly after receipt of notice of commencement of any action, suit, claim or proceeding against such party in respect of which a claim for contribution may be made against another
party under this Section 9, will notify such party from whom contribution may be sought, but the omission to so notify such party shall not relieve the party from whom contribution may be sought from any other obligation it may have hereunder
or otherwise than under this Section 9.
Section 10. Termination.
The Agent may terminate this Agreement by giving the
notice indicated below in Section 11 at any time after this Agreement becomes effective as follows:
(a) If any domestic or
international event or act or occurrence has materially disrupted the United States securities markets such as to make it, in the Agent’s reasonable opinion, impracticable to proceed with the offering of the Shares; or if trading on the NYSE
shall have suspended (except that this shall not apply to the imposition of NYSE trading collars imposed on program trading); or if the United States shall have become involved in a war or major hostilities; or if a general banking moratorium has
been declared by a state or federal authority which has a material effect on the Company, the MHC, Territorial Savings Group and the Bank on a consolidated basis; or if a moratorium in foreign exchange trading by major international banks or persons
has been declared; or if there shall have been a material adverse change in the financial condition, results of operations or business of the Company, the MHC, Territorial Savings Group or the Bank, or if the Company, the MHC, Territorial Savings
Group or the Bank shall have sustained a material or substantial loss by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act, whether or not said loss shall have been insured; or, if there shall have been
a material adverse change in the financial condition, results of operations or business of the Company, the MHC, Territorial Savings Group and the Bank taken as a whole.
(b) In the event the Company fails to sell the required minimum number of the Shares by the date when such sales must be completed, in accordance with the provisions of the Plan or as required by the Conversion
Regulations, and applicable law, this Agreement shall terminate upon refund by the Company to each person who has subscribed for or ordered any of the Shares the full amount which it may have received from such person, together with interest as
provided in the Prospectus, and no party to this Agreement shall have any obligation to the other hereunder, except as set forth in Sections 2(a) and (d), 6, 8 and 9 hereof.
(c) If any of the conditions specified in Section 7 shall not have been fulfilled when and as required by this Agreement, unless waived in writing,
or by the Closing Date, this
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Agreement and all of the Agent’s obligations hereunder may be cancelled by the Agent by notifying the Company of such cancellation in writing or by
telegram at any time at or prior to the Closing Date, and any such cancellation shall be without liability of any party to any other party except as otherwise provided in Sections 2(a), 2(d), 6, 8 and 9 hereof.
(d) If the Agent elects to terminate this Agreement as provided in this Section, the Company and the Bank shall be notified promptly by telephone or
telegram, confirmed by letter.
The Company, the MHC, Territorial Savings Group or the Bank may terminate this Agreement in the event the
Agent is in material breach of the representations and warranties or covenants contained in Section 5 and such breach has not been cured within a reasonable time period after the Company, the MHC, Territorial Savings Group or the Bank has
provided the Agent with notice of such breach.
This Agreement may also be terminated by mutual written consent of the parties hereto.
Section 11. Notices.
All communications hereunder, except as herein otherwise specifically provided, shall be mailed in
writing and if sent to the Agent shall be mailed, delivered or telegraphed and confirmed to Keefe, Bruyette & Woods, Inc., 211 Bradenton Drive, Dublin, Ohio 43017-5034, Attention: Patricia A. McJoynt (with a copy to Kilpatrick Stockton LLP,
607 14th Street, N.W., Suite 900, Washington, D.C. 20005, Attention: Joel E. Rappoport, Esq.) and, if sent to the Company or the Bank, shall be mailed, delivered or telegraphed and confirmed to the Company at 1132 Bishop Street, Suite 2200,
Honolulu, Hawaii 96813, Attention: Allan S. Kitagawa (with a copy to Luse Gorman Pomerenk & Schick, P.C., 5335 Wisconsin Avenue, N.W., Suite 400, Washington, D.C. 20015, Attention: Lawrence Spaccasi, Esq.).
Section 12. Parties.
The Company, the MHC, Territorial Savings Group and the Bank shall be entitled to act and rely on any request, notice,
consent, waiver or agreement purportedly given on behalf of the Agent when the same shall have been given by the undersigned. The Agent shall be entitled to act and rely on any request, notice, consent, waiver or agreement purportedly given on
behalf of the Company, the MHC, Territorial Savings Group or the Bank, when the same shall have been given by the undersigned or any other officer of the Company, the MHC, Territorial Savings Group or the Bank. This Agreement shall inure solely to
the benefit of, and shall be binding upon, the Agent, the Company, the MHC, Territorial Savings Group, the Bank and their respective successors and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy
or claim under or in respect of or by virtue of this Agreement or any provision herein contained.
Section 13. Closing.
The
closing for the sale of the Shares (the “Closing”) shall take place on the Closing Date at such location as mutually agreed upon by the Agent and the Company and the Bank. At the Closing, the Company, the MHC, Territorial Savings Group and
the Bank shall deliver to the Agent in next day funds the commissions, fees and expenses due and owing to the Agent as set forth in Sections 2 and 6 hereof and the opinions and certificates required hereby and other documents deemed reasonably
necessary by the Agent shall be
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executed and delivered to effect the sale of the Shares as contemplated hereby and pursuant to the terms of the Prospectus.
Section 14. Partial Invalidity.
In the event that any term, provision or covenant herein or the application thereof to any circumstance or
situation shall be invalid or unenforceable, in whole or in part, the remainder hereof and the application of said term, provision or covenant to any other circumstances or situation shall not be affected thereby, and each term, provision or
covenant herein shall be valid and enforceable to the full extent permitted by law.
Section 15. Governing Law and Construction.
This Agreement shall be governed by and construed in accordance with the laws of the State of New York without regard to principles of conflicts of law.
Section 16. Counterparts.
This Agreement may be executed in separate counterparts, each of which so executed and delivered shall be an original, but all of which together shall constitute but one and the
same instrument.
Section 17. Entire Agreement.
This Agreement, including schedules and exhibits hereto, which are integral
parts hereof and incorporated as though set forth in full, constitutes the entire agreement between the parties pertaining to the subject matter hereof superseding any and all prior or contemporaneous oral or prior written agreements, proposals,
letters of intent and understandings, and cannot be modified, changed, waived or terminated except by a writing which expressly states that it is an amendment, modification or waiver, refers to this Agreement and is signed by the party to be
charged. No course of conduct or dealing shall be construed to modify, amend or otherwise affect any of the provisions hereof.
Section 18. Survival.
The respective indemnities, agreements, representations, warranties and other statements of the Company, the MHC, Territorial Savings Group and the Bank and the Agent, as set forth in this Agreement, shall
remain in full force and effect, regardless of any termination or cancellation of this Agreement or any investigation (or any statement as to the results thereof) made by or on behalf of the Agent or any of the Agent’s officers or directors or
any person controlling the Agent, or the Company, the MHC, Territorial Savings Group and the Bank, or any of their respective officers or directors or any person controlling the Company, the MHC, Territorial Savings Group and the Bank, and shall
survive termination of this Agreement and receipt or delivery of any payment for the Shares.
Section 19. Waiver of Trial by Jury.
Each of the Agent and the Company, the MHC, Territorial Savings Group and the Bank waives all right to trial by jury in any action, proceeding, claim or counterclaim (whether based on contract, tort or otherwise) related to or arising out of
this Agreement.
This agreement is made solely for the benefit of and will be binding upon the parties hereto and their respective
successors and the directors, officer and controlling persons and no other person will have any right or obligation hereunder.
[Remainder of page intentionally blank]
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If the foregoing correctly sets forth the arrangement among the Company, the MHC, Territorial Savings
Group, the Bank and the Agent, please indicate acceptance thereof in the space provided below for that purpose, whereupon this letter and the Agent’s acceptance shall constitute a binding agreement.
Very truly yours,
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TERRITORIAL SAVINGS BANK
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TERRITORIAL BANCORP, INC.
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By Its Authorized Representative:
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By Its Authorized Representative:
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Allan S. Kitagawa
Chairman and Chief Executive Officer
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Allan S. Kitagawa
Chairman and Chief Executive
Officer
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TERRITORIAL MUTUAL HOLDING COMPANY
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TERRITORIAL SAVINGS GROUP, INC.
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By Its Authorized Representative:
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By Its Authorized Representative:
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Allan S. Kitagawa
Chairman and Chief Executive Officer
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Allan S. Kitagawa
Chairman and Chief Executive
Officer
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Accepted as of the date first above written
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KEEFE, BRUYETTE & WOODS, INC.
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By its Authorized Representative
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Managing Director
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Exhibit 2
PLAN OF CONVERSION AND REORGANIZATION
OF
TERRITORIAL MUTUAL HOLDING COMPANY
TABLE OF CONTENTS
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1.
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INTRODUCTION
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1
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2.
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DEFINITIONS
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1
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3.
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PROCEDURES FOR CONVERSION
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6
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4.
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HOLDING COMPANY APPLICATIONS AND APPROVALS
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8
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5.
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SALE OF SHARES
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8
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6.
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PURCHASE PRICE AND NUMBER OF SUBSCRIPTION SHARES
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8
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7.
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RETENTION OF OFFERING PROCEEDS BY THE HOLDING COMPANY
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9
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8.
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SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
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9
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9.
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SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY)
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10
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10.
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SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD PRIORITY)
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10
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11.
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SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
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11
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12.
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COMMUNITY OFFERING
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11
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13.
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SYNDICATED COMMUNITY OFFERING
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12
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14.
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LIMITATION ON PURCHASES
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13
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15.
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PAYMENT FOR SUBSCRIPTION SHARES
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14
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16.
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MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
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15
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17.
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UNDELIVERED, DEFECTIVE OR LATE ORDER FORM; INSUFFICIENT PAYMENT
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16
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18.
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RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
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16
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19.
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ESTABLISHMENT OF LIQUIDATION ACCOUNT
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17
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20.
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VOTING RIGHTS OF STOCKHOLDERS
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18
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21.
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RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
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18
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22.
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REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS FOLLOWING THE CONVERSION
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19
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23.
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TRANSFER OF DEPOSIT ACCOUNTS
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19
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24.
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REGISTRATION AND MARKETING
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19
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25.
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TAX RULINGS OR OPINIONS
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19
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26.
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STOCK BENEFIT PLANS AND EMPLOYMENT AGREEMENTS
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20
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27.
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RESTRICTIONS ON ACQUISITION OF BANK AND HOLDING COMPANY
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20
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28.
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PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
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21
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29.
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CONSUMMATION OF CONVERSION AND EFFECTIVE DATE
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21
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30.
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EXPENSES OF CONVERSION
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21
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31.
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AMENDMENT OR TERMINATION OF PLAN
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21
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32.
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CONDITIONS TO CONVERSION
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22
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33.
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INTERPRETATION
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22
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i
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EXHIBIT A
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AGREEMENT OF MERGER BETWEEN TERRITORIAL SAVINGS GROUP, INC., TERRITORIAL FEDERAL INTERIM BANK I AND TERRITORIAL SAVINGS BANK
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EXHIBIT B
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AGREEMENT OF MERGER BETWEEN TERRITORIAL MUTUAL HOLDING COMPANY, TERRITORIAL FEDERAL INTERIM BANK II AND TERRITORIAL SAVINGS BANK
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ii
PLAN OF CONVERSION AND REORGANIZATION OF
TERRITORIAL MUTUAL HOLDING COMPANY, INC.
This Plan of Conversion and
Reorganization (this “Plan”) provides for the conversion of Territorial Mutual Holding Company, Inc., a federal mutual holding company (the “Mutual Holding Company”), into the capital stock form of organization. The Mutual
Holding Company currently owns 100% of the common stock of Territorial Savings Group, Inc., a federal stock corporation (the “Mid-Tier Holding Company”), which owns 100% of the common stock of Territorial Savings Bank (the
“Bank”), a federal stock savings bank that is headquartered in Honolulu, Hawaii. A new stock holding company (the “Holding Company”) will be established as part of the Conversion and will succeed to all the rights and obligations
of the Mutual Holding Company and the Mid-Tier Holding Company and issue Common Stock in the Conversion. The purpose of the Conversion is to convert the Mutual Holding Company to the capital stock form of organization and to raise capital in the
Offering. The Holding Company will offer its Common Stock in the Offering upon the terms and conditions set forth herein. The subscription rights granted to Participants in the Subscription Offering are set forth in Sections 8 through 11 hereof. All
sales of Common Stock in the Community Offering or the Syndicated Community Offering will be at the sole discretion of the Board of Directors of the Mutual Holding Company and the Holding Company.
The Conversion will have no impact on depositors, borrowers or customers of the Bank. After the Conversion, the Bank’s insured deposits will
continue to be insured by the FDIC to the extent provided by applicable law.
This Plan has been adopted by the Boards of Directors of the
Mutual Holding Company, and the Mid-Tier Holding Company and the Bank and will be approved by the Board of the Holding Company. This Plan also must be approved by a majority of the total number of outstanding votes entitled to be cast by Voting
Members of the Mutual Holding Company at a Special Meeting of Members to be called for that purpose. The OTS must approve this Plan before it is presented to Voting Members for their approval.
For the purposes of this Plan, the
following terms have the following meanings:
Account Holder
– Any Person holding a Deposit Account in the Bank.
Acting in Concert
– The term Acting in Concert means (i) knowing participation in a joint activity or interdependent conscious parallel
action towards a common goal whether or not pursuant to an express agreement; or (ii) a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding,
relationship, agreement or other arrangement, whether written or otherwise. A person or company which acts in concert with another person or company (“other party”) shall also be deemed to be acting in concert with any person or company
who is also acting in concert with that other party, except that any Tax-qualified Employee Stock Benefit Plan will not be deemed to be Acting in Concert with its trustee or a person who serves in a similar capacity solely for the purpose of
determining whether stock held by the trustee and stock held by the plan will be aggregated.
Affiliate
– Any Person that directly or indirectly, through one or more intermediaries,
controls, is controlled by, or is under common control with another Person.
Appraised Value Range
– The range of the estimated
consolidated pro forma market value of the Holding Company, which shall also be equal to the estimated pro forma market value of the total number of Subscription Shares to be issued in the Conversion, as determined by the Independent Appraiser prior
to the Subscription Offering and as it may be amended from time to time thereafter. The maximum and minimum of the Appraised Value Range may vary as much as 15% above and 15% below, respectively, the midpoint of the Appraised Value Range. The
maximum of the Appraisal Value Range may be adjusted by up to 15% subsequent to the commencement of the Subscription Offering to reflect changes in market or financial conditions or demand for the Common Stock.
Associate
– The term Associate when used to indicate a relationship with any Person, means (i) any corporation or organization (other
than the Mid-Tier Holding Company, Mutual Holding Company, Holding Company, the Bank or a majority-owned subsidiary of any such party) if the Person is a senior officer or partner or beneficially owns, directly or indirectly, 10% or more of any
class of equity securities of the corporation or organization, (ii) any trust or other estate, if the Person has a substantial beneficial interest in the trust or estate or is a trustee or fiduciary of the trust or estate except that for the
purposes of this Plan relating to subscriptions in the Offering and the sale of Subscription Shares following the Conversion, a Person who has a substantial beneficial interest in any Non-Tax-Qualified Employee Stock Benefit Plan or any
Tax-Qualified Employee Stock Benefit Plan, or who is a trustee or fiduciary of such plan, is not an Associate of such plan, and except that, for purposes of aggregating total shares that may be held by Officers and Directors the term
“Associate” does not include any Tax-Qualified Employee Stock Benefit Plan, and (iii) any Person who is related by blood or marriage to such Person and who lives in the same home as such Person or who is a Director or Officer of the
Mid-Tier Holding Company, MHC, the Bank or the Holding Company, or any of its parents or subsidiaries.
Bank
– Territorial
Savings Bank, Honolulu, Hawaii.
Common Stock
– The common stock, par value $0.01 per share, of the Holding Company. The Common
Stock is not insured by the FDIC.
Community
– The State of Hawaii.
Community Offering
– The offering for sale to certain members of the general public directly by the Holding Company of shares not subscribed
for in the Subscription Offering.
Control –
(including the terms “controlling,” “controlled by,” and
“under common control with”) means the direct or indirect power to direct or exercise a controlling influence over the management or policies of a Person, whether through the ownership of voting securities, by contract or otherwise as
described in 12 C.F.R. Part 574.
2
Conversion
– The conversion and reorganization of the Mutual Holding Company to stock form
pursuant to this Plan, and all steps incident or necessary thereto, including the Offering.
Deposit Account
– Any withdrawable
account, including, without limitation, savings, time, demand, NOW accounts, money market, certificate and passbook accounts.
Director
– A member of the Board of Directors of the Bank, the Mid-Tier Holding Company, the Holding Company or the Mutual Holding Company, as appropriate in the context.
Eligible Account Holder
– Any Person holding a Qualifying Deposit on the Eligibility Record Date for purposes of determining subscription
rights and establishing subaccount balances in the Liquidation Account.
Eligibility Record Date
– The date for determining
Eligible Account Holders of the Bank, which is September 30, 2007.
Employees
– All Persons who are employed by the Bank,
Mid-Tier Holding Company, Holding Company or Mutual Holding Company.
Employee Plans
– Any one or more Tax-Qualified Employee
Stock Benefit Plans of the Bank or the Holding Company, including any ESOP and 401(k) Plan.
ESOP
– The Bank’s Employee
Stock Ownership Plan and related trust.
FDIC
– The Federal Deposit Insurance Corporation.
Holding Company
– The corporation formed for the purpose of acquiring all of the shares of capital stock of the Bank in connection with the
Conversion. Shares of Common Stock will be issued in the Conversion to Participants and others in the Offering.
Independent
Appraiser
– The independent appraiser retained by the Mutual Holding Company, the Mid-Tier Holding Company and the Bank to prepare an appraisal of the pro forma market value of the Subscription Shares.
Liquidation Account
– The interest in the Bank received by Eligible Account Holders and Supplemental Eligible Account Holders in exchange for
their interest in the Mutual Holding Company in connection with the Conversion.
Member
– Any Person or entity who qualifies as
a member of the Mutual Holding Company pursuant to its charter and bylaws.
MHC Merger
– The conversion of the Mutual Holding
Company into an interim stock savings bank and subsequent merger with and into the Bank, which shall occur immediately prior to completion of the Conversion, as set forth in this Plan.
Mid-Tier Holding Company
– Territorial Savings Group, Inc., the federal corporation that owns 100% of the Bank’s Common Stock and any
successor thereto.
3
Mid-Tier Merger
– The conversion of the Mid-Tier Holding Company into an interim stock
savings bank and subsequent merger with and into the Bank, which shall occur immediately prior to completion of the Conversion, as set forth in this Plan.
Mutual Holding Company
– Territorial Mutual Holding Company, the mutual holding company of the Mid-Tier Holding Company.
Offering
– The offering and issuance, pursuant to this Plan, of Common Stock in a Subscription Offering, Community Offering or Syndicated Community Offering, as the case may be.
Offering Range
– The range of the number of shares of Common Stock offered for sale in the Offering. The Offering Range shall be equal to the
Appraised Value Range divided by the Subscription Price.
Officer
– Means the chairman of the board, president, vice president,
treasurer, secretary, or comptroller of any company, or any other person who participates in its major policy decisions.
Order Form
– Any form (together with any cover letter and acknowledgments) sent to any Participant or Person containing among other things a description of the alternatives available to such Person under this Plan and by which any such Person may make
elections regarding subscriptions for Subscription Shares.
Other Member
– Any person holding a Deposit Account on the Voting
Record Date who is not an Eligible Account Holder or Supplemental Eligible Account Holder, or any borrower who qualifies as a Voting Member.
OTS
– The Office of Thrift Supervision, a division of the United States Department of Treasury.
Participant
– Any Eligible Account Holder, Employee Plan, Supplemental Eligible Account Holder, or Other Member.
Person
– An
individual, a corporation, a partnership, an association, a joint-stock company, a limited liability company, a trust, an unincorporated organization, or a government or political subdivision of a government.
Plan
– This Plan of Conversion and Reorganization of the Mutual Holding Company as it exists on the date hereof and as it may hereafter be
amended in accordance with its terms.
Prospectus
– The one or more documents used in offering the Subscription Shares.
Qualifying Deposit
– The aggregate balance of all Deposit Accounts in the Bank of (i) an Eligible Account Holder at the
close of business on the Eligibility Record Date, provided such aggregate balance is not less than $50, and (ii) a Supplemental Eligible Account Holder at the close of business on the Supplemental Eligibility Record Date, provided such
aggregate balance is not less than $50.
4
Resident
– Any Person who occupies a dwelling within the Community, has a present intent to
remain within the Community for a period of time, and manifests the genuineness of that intent by establishing an ongoing physical presence within the Community together with an indication that such presence within the Community is something other
than merely transitory in nature. To the extent the person is a corporation or other business entity, the principal place of business or headquarters shall determine residency under this provision. To the extent a person is a personal benefit plan
or trustees, the circumstances of the beneficiary shall apply with respect to this definition. In the case of all other benefit plans or trusts, the circumstances of the trustee shall be examined for purposes of this definition. The Mutual Holding
Company and Holding Company may utilize deposit or loan records of the Bank or such other evidence provided to it to make a determination as to whether a person is a resident. In all cases, however, such a determination shall be in the sole
discretion of the Mutual Holding Company and Holding Company. A Participant must be a “Resident” for purposes of determining whether such person “resides” in the Community as such term is used in this Plan.
SEC
– The Securities and Exchange Commission.
Special Meeting of Members
– The special meeting of Voting Members, and any adjournments thereof, held to consider and vote upon this Plan.
Subscription Offering
– The offering of Subscription Shares to Participants.
Subscription Price
– The price per Subscription Share to be paid by Participants and others in the Offering. The Subscription Price will be
determined by the Board of Directors of the Holding Company and fixed prior to the commencement of the Subscription Offering.
Subscription Shares
– Shares of Common Stock offered for sale in the Offering.
Supplemental Eligible Account
Holder
– Any Person, other than Directors and Officers of the Bank MHC and the Mid-Tier Holding Company and their Associates, holding a Qualifying Deposit on the Supplemental Eligibility Record Date, who is not an Eligible Account Holder.
Supplemental Eligibility Record Date
– The date for determining Supplemental Eligible Account Holders, which shall be the last
day of the calendar quarter preceding OTS approval of the application for conversion.
Syndicated Community Offering
–
The offering of Subscription Shares, at the sole discretion of the Holding Company, following commencement of the Subscription Offering through a syndicate of broker-dealers.
Tax-Qualified Employee Stock Benefit Plan
– Any defined benefit plan or defined contribution plan, such as an employee stock ownership plan,
stock bonus plan, profit-sharing plan or other plan, which, with its related trust, meets the requirements to be “qualified” under Section 401 of the Internal Revenue Code of 1986, as amended. The Bank may make scheduled discretionary
contributions to a tax-qualified employee stock benefit plan,
provided
such contributions do not cause the Bank to fail to meet its regulatory capital requirements. A “Non-Tax-Qualified Employee Stock Benefit Plan” is any defined
benefit plan or defined contribution plan that is not so qualified.
5
Voting Member –
Any Person who at the close of business on the Voting Record Date is entitled
to vote as a Member of the Mutual Holding Company pursuant to its charter and bylaws.
Voting Record Date
– The date fixed by
the Directors for determining eligibility to vote at the Special Meeting of Members.
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3.
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PROCEDURES FOR CONVERSION
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A. After approval of
this Plan by the Boards of Directors of the Mutual Holding Company and Holding Company, this Plan together with all other requisite material shall be submitted to the OTS for approval. Notice of the adoption of this Plan by the Boards of Directors
of the Mutual Holding Company and Holding Company and the submission of this Plan to the OTS for approval will, as required by applicable regulation, be published in a newspaper having general circulation in each community in which an office of the
Bank is located, and copies of this Plan will be made available at each office of the Bank for inspection by depositors. The Mutual Holding Company and Holding Company also will publish a notice of the filing with the OTS of an application to
convert in accordance with the provisions of this Plan, and as required by applicable regulation.
B. Following approval of this Plan by
the OTS, this Plan will be submitted to a vote of the Voting Members at the Special Meeting of Members. The Mutual Holding Company will mail to all Voting Members, at their last known address appearing on the records of the Bank, a proxy statement
in either long or summary form describing this Plan, which will be submitted to a vote of Voting Members at the Special Meeting of Members. The Holding Company also will mail to all Participants a Prospectus and Order Form for the purchase of
Subscription Shares. Upon approval of this Plan by a majority of the total number of votes entitled to be cast by Voting Members, the Holding Company and Mutual Holding Company will take all other necessary steps pursuant to applicable laws and
regulations to consummate the Conversion and Offering. The Conversion must be completed within 24 months of the approval of this Plan by Voting Members, unless a longer time period is permitted by governing laws and regulations.
C. The Conversion will be effected as follows, or in any other manner that is consistent with the purposes of this Plan and applicable laws and
regulations, including mergers of the Mutual Holding Company and Mid-Tier Holding Company into the Bank followed immediately by the closing of the sale of Subscription Shares. The choice of which method to use to effect the Conversion will be made
by the Board of Directors of the Mutual Holding Company immediately prior to the closing of the Conversion. Each of the steps set forth below shall be deemed to occur in such order as is necessary to consummate the Conversion pursuant to this Plan,
the intent of the Board of Directors of the Mutual Holding Company and Holding Company, and applicable federal and state regulations and policy. Approval of this Plan by Voting Members also shall constitute approval of each of the transactions
necessary to implement this Plan.
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(1)
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The Bank will establish the Holding Company as a stock corporation.
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6
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(2)
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The Mid-Tier Holding Company will convert to an interim stock savings bank and merge with and into the Bank (the “Mid-Tier Merger”) with the Bank as the resulting entity
pursuant to the Agreement of Merger attached hereto as Exhibit A between the Mid-Tier Holding Company and the Bank, whereby the Mutual Holding Company will receive shares of Bank common stock in exchange for its Mid-Tier Holding Company common
stock.
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(3)
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Immediately after the Mid-Tier Merger, the Mutual Holding Company will convert to an interim stock savings bank and will merge with and into the Bank (the “MHC Merger”)
pursuant to the Agreement of Merger attached hereto as Exhibit B between the Mutual Holding Company and the Bank, whereby the shares of Bank common stock held by the Mutual Holding Company will be canceled and each Eligible Account Holder and
Supplemental Eligible Account Holder will receive an interest in a Liquidation Account of the Bank in exchange for such person’s interest in the Mutual Holding Company.
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(4)
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Immediately after the MHC Merger, the Bank will issue 100 shares of its common stock to Holding Company in exchange for at least fifty percent (50%) of the net proceeds raised
in the Offering. As a result, the Bank will become a wholly-owned subsidiary of Holding Company.
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D. The Holding Company
shall register the issuance of the Subscription Shares with the SEC and any appropriate state securities authorities.
E. All assets,
rights, interests, privileges, powers, franchises and property (real, personal and mixed) of the Mid-Tier Holding Company and Mutual Holding Company shall be automatically transferred to and vested in the Holding Company by virtue of the Conversion
without any deed or other document of transfer. The Holding Company, without any order or action on the part of any court or otherwise and without any documents of assumption or assignment, shall hold and enjoy all of the properties, franchises and
interests, including appointments, powers, designations, nominations and all other rights and interests as the agent or other fiduciary in the same manner and to the same extent as such rights, franchises, and interests and powers were held or
enjoyed by the Mid-Tier Holding Company and Mutual Holding Company. The Holding Company shall be responsible for all of the liabilities, restrictions and duties of every kind and description of the Mid-Tier Holding Company and Mutual Holding Company
immediately prior to the Conversion, including liabilities for all debts, obligations and contracts of the Mid-Tier Holding Company and Mutual Holding Company, matured or unmatured, whether accrued, absolute, contingent or otherwise and whether or
not reflected or reserved against on balance sheets, books or accounts or records of the Mid-Tier Holding Company and Mutual Holding Company.
F. The home office and branch offices of the Bank shall be unaffected by the Conversion. The executive offices of the Holding Company shall be located at the current offices of the Mutual Holding Company and Mid-Tier Holding Company.
7
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4.
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HOLDING COMPANY APPLICATIONS AND APPROVALS
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The
Boards of Directors of the Mutual Holding Company, the Mid-Tier Holding Company, the Holding Company and the Bank will take all necessary steps to convert the Mutual Holding Company to stock form, form the Holding Company and complete the Offering.
The Mutual Holding Company, Mid-Tier Holding Company, Bank and Holding Company shall make timely applications to the OTS and filings with the SEC for any requisite regulatory approvals to complete the Conversion.
The Subscription Shares will be
offered simultaneously in the Subscription Offering to the Participants in the respective priorities set forth in this Plan. The Subscription Offering may begin as early as the mailing of the Proxy Statement for the Special Meeting of Members. The
Bank will not extend credit to any Person for the purpose of purchasing shares of Common Stock.
Any shares of Common Stock for which
subscriptions have not been received in the Subscription Offering may be issued in the Community Offering or Syndicated Community Offering. The Community Offering and Syndicated Community Offering may begin at any time after commencement of or
concurrent with the Subscription Offering and the Community Offering must be completed within 45 days after completion of the Subscription Offering unless extended by the Mutual Holding Company and the Holding Company with any required regulatory
approval.
Any shares of Common Stock sold in a Community Offering or Syndicated Community Offering, or in any other manner permitted by
the Office of Thrift Supervision that will achieve the widest distribution of the Common Stock. The Syndicated Community may be conducted in addition to, or instead of, a Community Offering. The issuance of Common Stock in any Subscription Offering
and any Community Offering will be consummated simultaneously on the date the sale of Common Stock in the Syndicated Community Offering is consummated and only if the required minimum number of shares of Common Stock has been issued.
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6.
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PURCHASE PRICE AND NUMBER OF SUBSCRIPTION SHARES
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The total number of shares, or a range thereof, of Subscription Shares to be offered for sale in the Offering will be determined jointly by the Boards of Directors of the Mutual Holding Company and the Holding Company immediately prior to
the commencement of the Subscription Offering, and will be based on the Appraised Value Range and the Subscription Price. The Offering Range will be equal to the Appraised Value Range divided by the Subscription Price. The estimated pro forma
consolidated market value of the Holding Company will be subject to adjustment within the Appraised Value Range if necessitated by market or financial conditions, with the receipt of any required approvals of the OTS, and the maximum of the
Appraised Value Range may be increased by up to 15% subsequent to the commencement of the Subscription Offering to reflect changes in market and financial conditions or demand for the Common Stock. The number of Subscription Shares issued in the
Offering will be equal to the estimated pro forma consolidated market value of the Holding Company, as may be amended, divided by the Subscription Price.
8
In the event that the Subscription Price multiplied by the number of Subscription Shares to be issued in
the Offering is below the minimum of the Appraised Value Range, or materially above the maximum of the Appraised Value Range, a resolicitation of purchasers may be required,
provided
that up to a 15% increase above the maximum of the
Appraised Value Range will not be deemed material so as to require a resolicitation. Any such resolicitation shall be effected in such manner and within such time as the Holding Company and the Mutual Holding Company shall establish, if all required
regulatory approvals are obtained.
Notwithstanding the foregoing, Subscription Shares will not be issued unless, prior to the consummation
of the Offering, the Independent Appraiser confirms to the Bank, the Mutual Holding Company, the Holding Company and OTS, that, to the best knowledge of the Independent Appraiser, nothing of a material nature has occurred which, taking into account
all relevant factors, would cause the Independent Appraiser to conclude that the number of Subscription Shares to be issued in the Offering multiplied by the Subscription Price is incompatible with its estimate of the aggregate consolidated pro
forma market value of the Holding Company. If such confirmation is not received, the Holding Company may cancel the Offering, extend the Offering and establish a new Subscription Price and/or Appraised Value Range, extend, reopen or hold a new
Offering, or take such other action as the OTS may permit.
The Common Stock to be issued in the Offering shall be fully paid and
non-assessable.
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7.
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RETENTION OF OFFERING PROCEEDS BY THE HOLDING COMPANY
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The Holding Company may retain up to 50% of the net proceeds of the Offering. The Holding Company believes that the Offering proceeds will provide economic strength to the Holding Company and the Bank for the future in a highly competitive
and regulated financial services environment and would facilitate the continued expansion through acquisitions of financial service organizations, continued diversification into other related businesses and for other business and investment
purposes, including the possible payment of dividends and possible future repurchases of the Common Stock as permitted by applicable federal and state regulations and policy.
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8.
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SUBSCRIPTION RIGHTS OF ELIGIBLE ACCOUNT HOLDERS (FIRST PRIORITY)
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A. Each Eligible Account Holder shall have nontransferable subscription rights to subscribe for in the Subscription Offering up to the greater of 50,000 shares of Common Stock, 0.10% of the total number of shares of
Common Stock issued in the Offering, or fifteen times the product (rounded down to the next whole number) obtained by multiplying the number of Subscription Shares offered in the Offering by a fraction of which the numerator is the amount of the
Eligible Account Holder’s Qualifying Deposit and the denominator is the total amount of Qualifying Deposits of all Eligible Account Holders, in each case on the Eligibility Record Date, subject to the provisions of Section 14.
9
B. In the event that Eligible Account Holders exercise subscription rights for a number of Subscription
Shares in excess of the total number of such shares eligible for subscription, the Subscription Shares shall be allocated among the subscribing Eligible Account Holders so as to permit each subscribing Eligible Account Holder to purchase a number of
shares sufficient to make his or her total allocation of Subscription Shares equal to the lesser of 100 shares or the number of shares for which such Eligible Account Holder has subscribed. Any remaining shares will be allocated among the
subscribing Eligible Account Holders whose subscriptions remain unsatisfied in the proportion that the amount of the Qualifying Deposit of each Eligible Account Holder whose subscription remains unsatisfied bears to the total amount of the
Qualifying Deposits of all Eligible Account Holders whose subscriptions remain unsatisfied. If the amount so allocated exceeds the amount subscribed for by any one or more Eligible Account Holders, the excess shall be reallocated (one or more times
as necessary) among those Eligible Account Holders whose subscriptions are still not fully satisfied on the same principle until all available shares have been allocated.
C. Subscription rights as Eligible Account Holders received by Directors and Officers and their Associates that are based on increased deposits during the year before the Eligibility Record Date shall be subordinated
to the subscription rights of all other Eligible Account Holders, except as permitted by the OTS.
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9.
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SUBSCRIPTION RIGHTS OF EMPLOYEE PLANS (SECOND PRIORITY)
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The Employee Plans of the Holding Company and the Bank shall have subscription rights to purchase in the aggregate up to 10% of the Subscription Shares issued in the Offering, including any Subscription Shares to be issued as a result of an
increase in the maximum of the Offering Range after commencement of the Subscription Offering and prior to completion of the Offering. Consistent with applicable laws and regulations and practices and policies, the Employee Plans may use funds
contributed by the Holding Company or the Bank and/or borrowed from an independent financial institution to exercise such subscription rights, and the Holding Company and the Bank may make scheduled discretionary contributions thereto, provided that
such contributions do not cause the Holding Company or the Bank to fail to meet any applicable regulatory capital requirements. The Employee Plans shall not be deemed to be Associates or Affiliates of or Persons Acting in Concert with any Director
or Officer of the Mutual Holding Company, Holding Company, Mid-Tier Holding Company, Bank or a majority owned subsidiary of any such entity. Alternatively, if permitted by the OTS, the Employee Plans may purchase all or a portion of such shares in
the open market.
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10.
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SUBSCRIPTION RIGHTS OF SUPPLEMENTAL ELIGIBLE ACCOUNT HOLDERS (THIRD PRIORITY)
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A. Each Supplemental Eligible Account Holder shall have nontransferable subscription rights to subscribe for in the Subscription Offering up to the greater of 50,000 shares of Common Stock, 0.10% of the total number
of shares of Common Stock issued in the Offering, or fifteen times the product (rounded down to the next whole number) obtained by multiplying the number of shares Subscription Shares offered in the Offering by a fraction of which the numerator is
the amount of the Supplemental Eligible Account Holder’s Qualifying Deposit and the denominator is the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders, in each
10
case on the Supplemental Eligibility Record Date, subject to the availability of sufficient shares after filling in full all subscription orders of the
Eligible Account Holders and Employee Plans and to the purchase limitations specified in Section 14.
B. In the event that
Supplemental Eligible Account Holders exercise subscription rights for a number of Subscription Shares in excess of the total number of such shares eligible for subscription, the Subscription Shares shall be allocated among the subscribing
Supplemental Eligible Account Holders so as to permit each such subscribing Supplemental Eligible Account Holder, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation of Subscription Shares equal to
the lesser of 100 shares or the number of shares for which each such Supplemental Eligible Account Holder has subscribed. Any remaining shares will be allocated among the subscribing Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied in the proportion that the amount of the Qualifying Deposit of each such Supplemental Eligible Account Holder bears to the total amount of the Qualifying Deposits of all Supplemental Eligible Account Holders whose subscriptions remain
unsatisfied. If the amount so allocated exceeds the amount subscribed for by any one or more Supplemental Eligible Account Holders, the excess shall be reallocated (one or more times as necessary) among those Supplemental Eligible Account Holders
whose subscriptions are still not fully satisfied on the same principle until all available shares have been allocated.
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11.
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SUBSCRIPTION RIGHTS OF OTHER MEMBERS (FOURTH PRIORITY)
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A. Each Other Member shall have nontransferable subscription rights to subscribe for in the Subscription Offering up to the greater of 50,000 shares of Common Stock or 0.10% of the total number of shares of Common Stock issued in the
Offering, subject to the availability of sufficient shares after filling in full all subscription orders of Eligible Account Holders, Employee Plans and Supplemental Eligible Account Holders and subject to the purchase limitations specified in
Section 14.
B. In the event that such Other Members subscribe for a number of Subscription Shares which, when added to the
Subscription Shares subscribed for by the Eligible Account Holders, Employee Plans and Supplemental Eligible Account Holders, is in excess of the total number of Subscription Shares to be issued, the available shares will be allocated to Other
Members so as to permit each such subscribing Other Member, to the extent possible, to purchase a number of shares sufficient to make his or her total allocation of Subscription Shares equal to the lesser of 100 shares or the number of shares for
which each such Other Member has subscribed. Any remaining shares will be allocated among the subscribing Other Members whose subscriptions remain unsatisfied in the proportion that the amount of the subscription of each such Other Member bears to
the total amount of the subscriptions of all Other Members whose subscriptions remain unsatisfied.
If subscriptions are not
received for all Subscription Shares offered for sale in the Subscription Offering, shares for which subscriptions have not been received may be issued for sale in the Community Offering through a direct community marketing program which may use a
broker, dealer, consultant or investment banking firm experienced and expert in the sale of
11
savings institutions securities. Such entities may be compensated on a fixed fee basis or on a commission basis, or a combination thereof. In the event
orders for Common Stock in the Community Offering exceed the number of shares available for sale, shares may be allocated (to the extent shares remain available) first to cover orders of natural persons residing in the Community, and thereafter to
cover orders of other members of the general public, so that each Person in such category of the Community Offering may receive the lesser of 100 shares or the number of shares they ordered. In addition, orders received for shares in the Community
Offering will be filled up to a maximum of two percent (2%) of the shares sold in the Offering, and thereafter any remaining shares will be allocated on an equal number of shares basis per order. The Mutual Holding Company and Holding Company
shall use their best efforts consistent with this Plan to distribute Common Stock sold in the Community Offering in such a manner as to promote the widest distribution practicable of such stock. The Mutual Holding Company and Holding Company reserve
the right to reject any or all orders, in whole or in part, which are received in the Community Offering. Any Person may purchase up to 50,000 shares of Common Stock in the Community Offering, subject to the purchase limitations specified in
Section 14.
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13.
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SYNDICATED COMMUNITY OFFERING
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If feasible, the
Board of Directors may determine to offer Subscription Shares not issued in the Subscription Offering or the Community Offering, if any, in a Syndicated Community, subject to such terms, conditions and procedures as may be determined by the Mutual
Holding Company or Holding Company, in a manner that will achieve the widest distribution of the Common Stock, subject to the right of the Mutual Holding Company or Holding Company to accept or reject in whole or in part any subscriptions in the
Syndicated Community Offering. In the Syndicated Community Offering, any Person may purchase up to 50,000 shares of Common Stock, subject to the purchase limitations specified in Section 14. Orders received for shares in a Syndicated Community
Offering will first be filled up to a maximum of two percent (2%) of the shares sold in the Offering, and thereafter any remaining shares will be allocated on an equal number of shares basis per order.
Provided that the Subscription Offering has commenced, the Holding Company may commence the Syndicated Community Offering at any time,
provided
that the completion of the offer and sale of the Common Stock will be conditioned upon the approval of this Plan by Voting Members.
If for
any reason a Syndicated Community Offering of shares of Common Stock not sold in the Subscription Offering or Community Offering if any, cannot be effected, or in the event that any insignificant residue of shares of Common Stock is not sold in the
Subscription Offering or Community Offering or in the Syndicated Community Offering, if possible, the Holding Company will make other arrangements for the disposition of unsubscribed shares aggregating at least the minimum of the Offering Range.
Such other purchase arrangements will be subject to receipt of any required approval of the OTS.
12
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14.
|
LIMITATION ON PURCHASES
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The following limitations
shall apply to all purchases and issuances of shares of Subscription Shares:
A. The maximum number of Common Stock that may be subscribed
for or purchased in all categories in the Offering by any Person or Participant together with any Associate or group of Persons Acting in Concert shall not exceed 100,000 shares of Common Stock, except that the Employee Plans may subscribe for up to
10% of the Common Stock issued in the Offering (including shares issued in the event of an increase in the maximum of the Offering Range of 15%).
B. The maximum number of shares of Common Stock that may be issued to or purchased in all categories of the Offering by Officers and Directors and their Associates in the aggregate, shall not exceed 25% of the shares of Common Stock issued
in the Offering.
C. A minimum of 25 shares of Common Stock must be purchased by each Person purchasing shares in the Offering to the
extent those shares are available;
provided, however
, that in the event the minimum number of shares of Common Stock purchased times the price per share exceeds $500, then such minimum purchase requirement shall be reduced to such number of
shares which when multiplied by the price per share shall not exceed $500, as determined by the Board.
If the number of shares of Common
Stock otherwise allocable pursuant to Sections 8 through 13, inclusive, to any Person or that Person’s Associates would be in excess of the maximum number of shares permitted as set forth above, the number of shares of Common Stock allocated to
each such person shall be reduced to the lowest limitation applicable to that Person, and then the number of shares allocated to each group consisting of a Person and that Person’s Associates shall be reduced so that the aggregate allocation to
that Person and his or her Associates complies with the above limits.
Depending upon market or financial conditions, the Boards of
Directors of the Holding Company and Mutual Holding Company, with the receipt of any required approvals of the OTS and without further approval of Voting Members, may decrease or increase the purchase limitations in this Plan;
provided,
that
the maximum purchase limitations may not be increased to a percentage in excess of 5% of the shares issued in the Offering except as provided below. If the Mutual Holding Company or Holding Company increase the maximum purchase limitations, the
Mutual Holding Company or Holding Company are only required to resolicit Persons who subscribed for the maximum purchase amount in the Subscription Offering and may, in the sole discretion of the Mutual Holding Company or Holding Company, resolicit
certain other large subscribers. In the event that the maximum purchase limitation is increased to 5% of the shares of Common Stock sold in the Offering, such limitation may be further increased to 9.99% of shares of Common Stock sold in the
Offering;
provided,
that orders for Common Stock exceeding 5% of the shares of Common Stock issued in the Offering shall not exceed in the aggregate 10% of the total shares of Common Stock issued in the Offering. Requests to purchase
additional Subscription Shares in the event that the purchase limitation is so increased will be determined by the Boards of Directors of the Mutual Holding Company and Holding Company in their sole discretion.
13
In the event of an increase in the total number of shares offered in the Subscription Offering due to an
increase in the maximum of the Offering Range of up to 15% (the “Adjusted Maximum”), the additional shares may be used to fill the Employee Plans orders before all other orders and then will be allocated in accordance with the priorities
set forth in this Plan.
For purposes of this Section 14, (i) Directors, Officers and employees of the Bank, the Mid-Tier Holding
Company, the Mutual Holding Company and the Holding Company or any of their subsidiaries shall not be deemed to be Associates or a group affiliated with each other or otherwise Acting in Concert solely as a result of their capacities as such,
(ii) shares purchased by Tax-Qualified Employee Stock Benefit Plans shall not be attributable to the individual trustees or beneficiaries of any such plan for purposes of determining compliance with the limitations set forth in paragraphs A.
and B. of this Section 14, and (iii) shares purchased by a Tax-Qualified Employee Stock Benefit Plan pursuant to instructions of an individual in an account in such plan in which the individual has the right to direct the investment,
including any plan of the Bank qualified under Section 401(k) of the Internal Revenue Code of 1986, as amended, shall be aggregated and included in that individual’s purchases and not attributed to the Tax-Qualified Employee Stock Benefit
Plan.
Each Person purchasing Common Stock in the Offering shall be deemed to confirm that such purchase does not conflict with the above
purchase limitations contained in this Plan.
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15.
|
PAYMENT FOR SUBSCRIPTION SHARES
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All payments for
Common Stock subscribed for in the Subscription Offering and Community Offering must be delivered in full to the Bank or Holding Company, together with a properly completed and executed Order Form, on or prior to the expiration date of the Offering;
provided, however
, that if the Employee Plans subscribe for shares in the Subscription Offering, such plans will not be required to pay for the shares at the time they subscribe but rather may pay for such shares of Common Stock subscribed
for by such plans at the Subscription Price upon consummation of the Offering.
Payment for Common Stock subscribed for shall be made by
check, money order or bank draft. Alternatively, subscribers in the Subscription and Community Offerings may pay for the shares for which they have subscribed by authorizing the Bank on the Order Form to make a withdrawal from the designated types
of Deposit Accounts at the Bank in an amount equal to the aggregate Subscription Price of such shares. Such authorized withdrawal shall be without penalty as to premature withdrawal. If the authorized withdrawal is from a certificate account, and
the remaining balance does not meet the applicable minimum balance requirement, the certificate shall be canceled at the time of withdrawal, without penalty, and the remaining balance will earn interest at the passbook rate. Funds for which a
withdrawal is authorized will remain in the subscriber’s Deposit Account but may not be used by the subscriber during the Subscription and Community Offerings. Thereafter, the withdrawal will be given effect only to the extent necessary to
satisfy the subscription (to the extent it can be filled) at the Subscription Price per share. Interest will continue to be earned on any amounts authorized for withdrawal
14
until such withdrawal is given effect. Interest on funds received in check, money order or bank draft will be paid by the Bank at not less than the passbook
rate on payments for Common Stock. Such interest will be paid from the date payment is received by the Bank until consummation or termination of the Offering. If for any reason the Offering is not consummated, all payments made by subscribers in the
Subscription and Community Offerings will be refunded to them with interest. In case of amounts authorized for withdrawal from Deposit Accounts, refunds will be made by canceling the authorization for withdrawal. The Bank is prohibited by regulation
from knowingly making any loans or granting any lines of credit for the purchase of stock in the Offering, and therefore, will not do so.
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16.
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MANNER OF EXERCISING SUBSCRIPTION RIGHTS THROUGH ORDER FORMS
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As soon as practicable after the registration statement prepared by the Holding Company and Mutual Holding Company has been declared effective by the SEC and the stock offering materials have been approved by the OTS,
Order Forms will be distributed to the Eligible Account Holders, Employee Plans, Supplemental Eligible Account Holders and Other Members at their last known addresses appearing on the records of the Bank for the purpose of subscribing for shares of
Common Stock in the Subscription Offering and will be made available for use by those Persons to whom a Prospectus is delivered.
Each
Order Form will be preceded or accompanied by a Prospectus describing the Holding Company, Mutual Holding Company, Mid-Tier Holding Company, Bank, the Common Stock and the Offering. Each Order Form will contain, among other things, the following:
A. A specified date by which all Order Forms must be received by the Mutual Holding Company or Holding Company, which date shall be not
less than 20 days, nor more than 45 days, following the date on which the Order Forms are mailed by the Holding Company, and which date will constitute the termination of the Subscription Offering unless extended;
B. The Subscription Price per share for shares of Common Stock to be sold in the Offering;
C. A description of the minimum and maximum number of Subscription Shares that may be subscribed for pursuant to the exercise of subscription rights or
otherwise purchased in the Subscription and Community Offering;
D. Instructions as to how the recipient of the Order Form is to indicate
thereon the number of Subscription Shares for which such person elects to subscribe and the available alternative methods of payment therefor;
E. An acknowledgment that the recipient of the Order Form has received a final copy of the prospectus prior to execution of the Order Form;
F. A statement to the effect that all subscription rights are nontransferable, will be void at the end of the Subscription Offering, and can only be exercised by delivering to the Mutual Holding Company or Holding
Company within the subscription period such properly completed and executed Order Form, together with payment in the full amount of the aggregate purchase
15
price as specified in the Order Form for the shares of Common Stock for which the recipient elects to subscribe in the Subscription Offering (or by
authorizing on the Order Form that the Bank withdraw said amount from the subscriber’s Deposit Account at the Bank); and
G. A
statement to the effect that the executed Order Form, once received by the Mutual Holding Company or Holding Company, may not be modified or amended by the subscriber without the consent of the Holding Company.
Notwithstanding the above, the Mutual Holding Company or Holding Company reserve the right in its sole discretion to accept or reject orders received on
photocopied or facsimilied order forms.
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17.
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UNDELIVERED, DEFECTIVE OR LATE ORDER FORM; INSUFFICIENT PAYMENT
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In the event Order Forms (a) are not delivered by the United States Postal Service, (b) are not received back by the Mutual Holding Company or Holding Company or are received by the Mutual Holding Company or
Holding Company after the expiration date specified thereon, (c) are defectively filled out or executed, (d) are not accompanied by the full required payment, unless waived by the Mutual Holding Company or Holding Company, for the shares
of Common Stock subscribed for (including cases in which deposit accounts from which withdrawals are authorized are insufficient to cover the amount of the required payment), or (e) are not mailed pursuant to a “no mail” order placed
in effect by the account holder, the subscription rights of the Person to whom such rights have been granted will lapse as though such Person failed to return the completed Order Form within the time period specified thereon;
provided,
however
, that the Mutual Holding Company or Holding Company may, but will not be required to, waive any immaterial irregularity on any Order Form or require the submission of corrected Order Forms or the remittance of full payment for subscribed
shares by such date as the Mutual Holding Company or Holding Company may specify. The interpretation of the Mutual Holding Company or Holding Company of terms and conditions of this Plan and of the Order Forms will be final, subject to the authority
of the OTS.
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18.
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RESIDENTS OF FOREIGN COUNTRIES AND CERTAIN STATES
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The Mutual Holding Company and Holding Company will make reasonable efforts to comply with the securities laws of all States in the United States in which Persons entitled to subscribe for shares of Common Stock pursuant to this Plan
reside. However, no such Person will be issued subscription rights or be permitted to purchase shares of Common Stock in the Subscription Offering if such Person resides in a foreign country; or in a State of the United States with respect to which
any of the following apply: (A) a small number of Persons otherwise eligible to subscribe for shares under this Plan reside in such state; (B) the issuance of subscription rights or the offer or sale of shares of Common Stock to such
Persons would require the Holding Company under the securities laws of such state, to register as a broker, dealer, salesman or agent or to register or otherwise qualify its securities for sale in such state; or (C) such registration or
qualification would be impracticable for reasons of cost or otherwise.
16
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19.
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ESTABLISHMENT OF LIQUIDATION ACCOUNT
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At the time
of the MHC Merger, a Liquidation Account shall be established at the Bank in an amount equal to the Mutual Holding Company’s total equity as reflected in the latest statement of financial condition contained in the final Prospectus used in the
Offering. Following the Conversion, the Liquidation Account will be maintained by the Bank for the benefit of the Eligible Account Holders and Supplemental Eligible Account Holders who continue to maintain their Deposit Accounts at the Bank. Each
Eligible Account Holder and Supplemental Eligible Account Holder shall, with respect to his Deposit Account, hold a related inchoate interest in a portion of the Liquidation Account balance, in relation to his Deposit Account balance at the
Eligibility Record Date or Supplemental Eligibility Record Date, respectively, or to such balance as it may be subsequently reduced, as hereinafter provided.
In the unlikely event of a complete liquidation of the Bank (and only in such event), following all liquidation payments to creditors (including those to Account Holders to the extent of their Deposit Accounts) each
Eligible Account Holder and Supplemental Eligible Account Holder shall be entitled to receive a liquidating distribution from the Liquidation Account, in the amount of the then adjusted subaccount balance for his Deposit Account then held, before
any liquidation distribution may be made to any holders of the Bank’s capital stock. No merger, consolidation, purchase of bulk assets with assumption of Deposit Accounts and other liabilities, or similar transactions with an FDIC-insured
institution, in which the Bank is not the surviving institution, shall be deemed to be a complete liquidation for this purpose. In such transactions, the Liquidation Account shall be assumed by the surviving institution.
The initial subaccount balance for a Deposit Account held by an Eligible Account Holder and Supplemental Eligible Account Holder shall be determined by
multiplying the opening balance in the Liquidation Account by a fraction, the numerator of which is the amount of the Qualifying Deposits of such Account Holder and the denominator of which is the total amount of all Qualifying Deposits of all
Eligible Account Holders and Supplemental Account Holders. For Deposit Accounts in existence at both the Eligibility Record Date and the Supplemental Eligibility Record Date, separate initial subaccount balances shall be determined on the basis of
the Qualifying Deposits in such Deposit Account on each such record date. Such initial subaccount balance shall not be increased, but shall be subject to downward adjustment as described below.
If, at the close of business on any December 31 annual closing date, commencing on or after the effective date of the Conversion, the deposit
balance in the Deposit Account of an Eligible Account Holder or Supplemental Eligible Account Holder is less than the lesser of (i) the balance in the Deposit Account at the close of business on any other annual closing date subsequent to the
Eligibility Record Date or Supplemental Eligibility Record Date, or (ii) the amount of the Qualifying Deposit in such Deposit Account as of the Eligibility Record Date or Supplemental Eligibility Record Date, the subaccount balance for such
Deposit Account shall be adjusted by reducing such subaccount balance in an amount proportionate to the reduction in such deposit balance. In the event of such downward adjustment, the subaccount balance shall not be subsequently increased,
notwithstanding any subsequent increase in the deposit balance of the related Deposit Account. If any such Deposit Account is closed, the related subaccount shall be reduced to zero.
17
The creation and maintenance of the Liquidation Account shall not operate to restrict the use or
application of any of the equity accounts of the Bank, except that the Bank shall not declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect thereof would cause its equity to be reduced below (i) the amount
required for the Liquidation Account; or (ii) the regulatory capital requirements of the Bank.
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20.
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VOTING RIGHTS OF STOCKHOLDERS
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Following
consummation of the Conversion, the holders of the voting capital stock of the Holding Company shall have the exclusive voting rights with respect to the Holding Company.
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21.
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RESTRICTIONS ON RESALE OR SUBSEQUENT DISPOSITION
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A. All shares of Common Stock purchased by Directors or Officers of the Holding Company Bank, Mid-Tier Holding Company and Mutual Holding Company in the Offering shall be subject to the restriction that, except as provided in this
Section 21 or as may be approved by the OTS, no interest in such shares may be sold or otherwise disposed of for value for a period of one year following the date of purchase in the Offering.
B. The restriction on disposition of Subscription Shares set forth above in this Section 21 shall not apply to the following:
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(1)
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Any exchange of such shares in connection with a merger or acquisition involving the Bank or the Holding Company, as the case may be, which has been approved by the appropriate
federal regulatory agency; and
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(2)
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Any disposition of such shares following the death of the person to whom such shares were initially sold under the terms of this Plan.
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C. With respect to all Subscription Shares subject to restrictions on resale or subsequent disposition, each of the following provisions shall apply:
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(1)
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Each certificate representing shares restricted by this section shall bear a legend prominently stamped on its face giving notice of the restriction;
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(2)
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Instructions shall be issued to the stock transfer agent for the Holding Company not to recognize or effect any transfer of any certificate or record of ownership of any such shares
in violation of the restriction on transfer; and
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(3)
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Any shares of capital stock of the Holding Company issued with respect to a stock dividend, stock split, or otherwise with respect to ownership of outstanding Subscription Shares
subject to the restriction on transfer hereunder shall be subject to the same restriction as is applicable to such Subscription Shares.
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18
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22.
|
REQUIREMENTS FOR STOCK PURCHASES BY DIRECTORS AND OFFICERS FOLLOWING THE CONVERSION
|
For a period of three years following the Conversion, no Officer, Director or their Associates shall purchase, without the prior written approval of the
OTS, any outstanding shares of Common Stock except from a broker-dealer registered with the SEC. This provision shall not apply to negotiated transactions involving more than 1% of the outstanding shares of Common Stock, the exercise of any
options pursuant to a stock option plan or purchases of Common Stock made by or held by any Tax-Qualified Employee Stock Benefit Plan or Non-Tax-Qualified Employee Stock Benefit Plan of the Bank or the Holding Company (including the Employee Plans)
which may be attributable to any Officer or Director. As used herein, the term “negotiated transaction” means a transaction in which the securities are offered and the terms and arrangements relating to any sale are arrived at through
direct communications between the seller or any person acting on its behalf and the purchaser or his investment representative. The term “investment representative” shall mean a professional investment advisor acting as agent for the
purchaser and independent of the seller and not acting on behalf of the seller in connection with the transaction.
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23.
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TRANSFER OF DEPOSIT ACCOUNTS
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Each person holding a
Deposit Account at the Bank at the time of Conversion shall retain an identical Deposit Account at the Bank following Conversion in the same amount and subject to the same terms and conditions (except as to voting and liquidation rights).
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24.
|
REGISTRATION AND MARKETING
|
Within the time period
required by applicable laws and regulations, the Holding Company will register the securities issued in connection with the Offering pursuant to the Securities Exchange Act of 1934 and will not deregister such securities for a period of at least
three years thereafter, except that the requirement that registration be maintained for three years may be fulfilled by any successor to the Holding Company. In addition, the Holding Company will use its best efforts to encourage and assist a
market-maker to establish and maintain a market for the Common Stock and to list those securities on a national or regional securities exchange or the Nasdaq Stock Market.
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25.
|
TAX RULINGS OR OPINIONS
|
Consummation of the
Conversion is expressly conditioned upon prior receipt by the Mutual Holding Company, the Mid-Tier Holding Company, Holding Company or Bank of either a ruling or an opinion of counsel with respect to federal tax laws, and either a ruling, an opinion
of counsel, or a letter of advice from their tax advisor with respect to applicable state tax laws, to the effect that consummation of the transactions contemplated by the Conversion and this Plan will not result in a taxable reorganization under
the provisions of the applicable codes or otherwise result in any adverse tax consequences to the Mutual Holding Company, Mid-Tier Holding Company, Holding Company or Bank, or the account holders receiving subscription rights before or after the
Conversion, except in each case to the extent, if any, that subscription rights are deemed to have value on the date such rights are issued.
19
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26.
|
STOCK BENEFIT PLANS AND EMPLOYMENT AGREEMENTS
|
A.
The Holding Company and Bank are authorized to adopt Tax-Qualified Employee Stock Benefit Plans in connection with the Offering, including without limitation, an ESOP. Existing as well as any newly created Tax-Qualified Employee Stock Benefit Plans
may purchase shares of Common Stock in the Offering, to the extent permitted by the terms of such benefit plans and this Plan.
B. The
Holding Company and Bank are authorized to enter into employment agreements and change in control with their executive officers.
C. The
Holding Company and Bank are authorized to adopt stock option plans, restricted stock grant plans and other Non-Tax-Qualified Employee Stock Benefit Plans, provided that such plans conform to any applicable requirements of federal regulations.
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27.
|
RESTRICTIONS ON ACQUISITION OF BANK AND HOLDING COMPANY
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A.
|
|
(1)
|
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The charter of the Bank shall contain a provision stipulating that no person, except the Holding Company, for a period of five years following the closing date of the Conversion, may directly
or indirectly acquire or offer to acquire the beneficial ownership of more than 10% of any class of an equity security of the Bank, without the prior written approval of the OTS. In addition, such charter shall also provide that for a period of five
years following the closing date of the Conversion, shares beneficially owned in violation of the above-described charter provision shall not be entitled to vote and shall not be voted by any person or counted as voting stock in connection with any
matter submitted to stockholders for a vote. In addition, special meetings of the stockholders relating to changes in control or amendment of the charter may only be called by the Board of Directors, and shareholders shall not be permitted to
cumulate their votes for the election of Directors.
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(2)
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For a period of three years from the date of consummation of the Conversion, no person, other than the Holding Company, may directly or indirectly offer to acquire or acquire the beneficial
ownership of more than 10% of any class of an equity security of the Bank without the prior written consent of the OTS.
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B. The Articles of Incorporation of the Holding Company shall contain a provision stipulating that
in no event shall any record owner of any outstanding shares of Common Stock who beneficially owns in excess of 10% of such outstanding shares be entitled or permitted to any vote with respect to any shares held in excess of 10%. In addition, the
Articles of Incorporation and Bylaws of the Holding Company may contain provisions which prohibit cumulative voting for the election of directors and provide for staggered terms of the directors, impose certain requirements for directors,
limitations on the calling of special meetings, a fair price provision for certain business combinations and certain notice requirements.
20
C. For the purposes of this section:
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(1)
|
The term “person” includes an individual, a firm, a corporation or other entity;
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|
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(2)
|
The term “offer” includes every offer to buy or acquire, solicitation of an offer to sell, tender offer for, or request or invitation for tenders of, a security or
interest in a security for value;
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(3)
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The term “acquire” includes every type of acquisition, whether effected by purchase, exchange, operation of law or otherwise; and
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(4)
|
The term “security” includes non-transferable subscription rights issued pursuant to a plan of conversion as well as a “security” as defined in 15 U.S.C. §
77b(a)1.
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28.
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PAYMENT OF DIVIDENDS AND REPURCHASE OF STOCK
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A.
The Holding Company shall comply with any applicable law or regulation in the repurchase of any shares of its capital stock following consummation of the Conversion.
B. The Bank shall not declare or pay a cash dividend on, or repurchase any of, its capital stock if the effect thereof would cause its regulatory capital to be reduced below (i) the amount required for the
Liquidation Account, or (ii) the federal or state regulatory capital requirements.
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29.
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CONSUMMATION OF CONVERSION AND EFFECTIVE DATE
|
The
Effective Date of the Conversion shall be the date upon which the Articles of Combination (or similar documents) shall be filed with OTS with respect to the MHC Merger and the Mid-Tier Merger. The Articles of Combination shall be filed after all
requisite regulatory and depositor approvals have been obtained, all applicable waiting periods have expired, and sufficient subscriptions and orders for Subscription Shares have been received. The Closing of the sale of all shares of Common Stock
sold in the Offering shall occur simultaneously on the effective date of the Closing.
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30.
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EXPENSES OF CONVERSION
|
The Mutual Holding Company,
the Mid-Tier Holding Company, the Bank and the Holding Company may retain and pay for the services of legal, financial and other advisors to assist in connection with any or all aspects of the Conversion, including the Offering, and such parties
shall use their best efforts to assure that such expenses are reasonable.
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31.
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AMENDMENT OR TERMINATION OF PLAN
|
If deemed
necessary or desirable, this Plan may be substantively amended as a result of comments from the OTS or otherwise at any time prior to solicitation of proxies from Voting Members to vote on this Plan by the Board of Directors of the Mutual Holding
Company, and at any time thereafter by the Board of Directors of the Mutual Holding Company with the
21
concurrence of the OTS. Any amendment to this Plan made after approval by Voting Members with the approval of the OTS shall not require further approval by
Voting Members unless otherwise required by the OTS. The Board of Directors of the Mutual Holding Company may terminate this Plan at any time prior to the Special Meeting of Members to vote on this Plan, and at any time thereafter with the
concurrence of the OTS.
By adopting this Plan, Voting Members of the Mutual Holding Company authorize the Board of Directors of the Mutual
Holding Company to amend or terminate this Plan under the circumstances set forth in this Section 31.
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32.
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CONDITIONS TO CONVERSION
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Consummation of the
Conversion pursuant to this Plan is expressly conditioned upon the following:
A. Prior receipt by the Mutual Holding Company, the Mid-Tier
Holding Company, or the Bank of rulings of the United States Internal Revenue Service and the state taxing authorities, or opinions of counsel or tax advisers as described in Section 25 hereof;
B. The issuance of the Subscription Shares offered in the Offering; and
C. The completion of the Conversion within the time period specified in Section 3 of this Plan.
All interpretations of this Plan
and application of its provisions to particular circumstances by a majority of the Board of Directors of the Mutual Holding Company shall be final, subject to the authority of the OTS.
Dated: November 4, 2008
22
EXHIBIT A
AGREEMENT OF MERGER BETWEEN
TERRITORIAL SAVINGS GROUP, INC.,
TERRITORIAL FEDERAL INTERIM BANK I,
AND TERRITORIAL SAVINGS BANK
FORM OF
AGREEMENT OF MERGER BETWEEN
TERRITORIAL SAVINGS GROUP, INC.,
TERRITORIAL FEDERAL INTERIM BANK I, AND
TERRITORIAL FEDERAL SAVINGS BANK
THIS AGREEMENT OF MERGER
(the “Mid-Tier Merger Agreement”) dated as of
, 2009, is made by and between Territorial Savings Group, Inc., a federal corporation (the “Mid-Tier Holding
Company”), Territorial Savings Bank, a federal savings bank (the “Bank”), and Territorial Federal Interim Bank I, an interim federal savings bank (“Interim I”).
RECITALS:
1. The Mid-Tier Holding Company is a federal corporation that owns
100% of the common stock of the Bank.
2. Contemporaneously with the transactions contemplated by this Mid-Tier Merger Agreement, the
Mid-Tier Holding Company will exchange its charter for that of Interim I, and Interim I will merge with and into the Bank with the Bank as the surviving entity.
3. At least two-thirds of the members of the boards of directors of the Bank and the Mid-Tier Holding Company have approved this Mid-Tier Merger Agreement whereby Interim I shall be merged with and into the Bank with
the Bank as the surviving or resulting institution (the “Mid-Tier Merger”), and have authorized the execution and delivery thereof.
NOW, THEREFORE,
in consideration of the premises and mutual agreements contained herein, the parties hereto have agreed as follows:
1.
Merger
. At and on the Effective Date of the Mid-Tier Merger, (i) the Mid-Tier Holding Company will exchange its charter for that of Interim I, and will merge with and into the Bank with the Bank as the resulting entity (the
“Resulting Institution”), and (ii) the Mutual Holding Company shall receive shares of Bank common stock in exchange for its Mid-Tier Holding Company common stock.
2.
Effective Date
. The Mid-Tier Merger shall not be effective until and unless (i) the Mid-Tier Merger is approved by the Office of Thrift
Supervision (the “OTS”) after approval by at least two-thirds of the outstanding common stock of the Mid-Tier Holding Company and of the Bank, (ii) the Plan is approved by a majority of the total outstanding votes held by Voting
Members, and (iii) the Articles of Combination shall have been filed with the OTS with respect to the Mid-Tier Merger. Approval of the Plan by the Voting Members shall constitute approval of the Mid-Tier Merger Agreement by the Voting Members.
Approval of the Plan by the sole stockholder of the Mid-Tier Holding Company and by the sole stockholder of the Bank shall constitute approval of the Mid-Tier Merger Agreement by such stockholder.
3.
Name
. The name of the Resulting Institution shall be Territorial Savings Bank.
4.
Offices
. The main banking office of the Resulting Institution shall be 1132 Bishop Street,
Suite 2200, Honolulu, Hawaii 96813. The branch offices of the Bank that were in lawful operation prior to the Mid-Tier Merger shall be operated as branch offices of the Resulting Institution.
5.
Directors and Officers
. The directors and officers of the Bank immediately prior to the Effective Date shall be the directors and officers of
the Resulting Institution after the Effective Date.
6.
Rights and Duties of the Resulting Institution
. At the Effective Date, the
Mid-Tier Holding Company shall convert to Interim I, which shall be merged with and into the Bank with the Bank as the Resulting Institution. The business of the Resulting Institution shall be that of a federal savings bank as provided in its
Charter. All assets, rights, interests, privileges, powers, franchises and property (real, personal and mixed) of the Mid-Tier Holding Company, the Bank and Interim I shall be transferred automatically to and vested in the Resulting Institution by
virtue of the Mid-Tier Merger without any deed or other document of transfer. The Resulting Institution, without any order or action on the part of any court or otherwise and without any documents of assumption or assignment, shall hold and enjoy
all of the properties, franchises and interests, including appointments, powers, designations, nominations and all other rights and interests as the agent or other fiduciary in the same manner and to the same extent as such rights, franchises, and
interests and powers were held or enjoyed by the Bank, the Mid-Tier Holding Company and Interim I. The Resulting Institution shall be responsible for all of the liabilities, restrictions and duties of every kind and description of the Mid-Tier
Holding Company, the Bank and Interim I immediately prior to the Mid-Tier Merger, including liabilities for all debts, obligations and contracts of the Mid-Tier Holding Company, the Bank and Interim I, matured or unmatured, whether accrued,
absolute, contingent or otherwise and whether or not reflected or reserved against on balance sheets, books of accounts or records of the Mid-Tier Holding Company, the Bank and Interim I. The stockholders of the Bank shall possess all voting rights
with respect to the shares of stock of Interim I and the Mid-Tier Holding Company. All rights of creditors and other obligees and all liens on property of the Bank, the Mid-Tier Holding Company and Interim I shall be preserved and shall not be
released or impaired.
7.
Other Terms
. All terms used in this Mid-Tier Merger Agreement shall, unless defined herein, have the
meanings set forth in the Plan. The Plan is incorporated herein by this reference and made a part hereof to the extent necessary or appropriate to effect and consummate the terms of this Mid-Tier Merger Agreement and the Conversion.
A-2
IN WITNESS WHEREOF
, the Mid-Tier Holding Company, Interim I and the Bank have caused this Mid-Tier
Merger Agreement to be executed as of the date first above written.
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Territorial Savings Group, Inc.
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(a federal corporation)
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ATTEST:
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By:
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Vernon Hirata, Corporate Secretary
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Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer
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Territorial Savings Bank
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(a federal savings bank)
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ATTEST:
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By:
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Vernon Hirata, Corporate Secretary
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Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer
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ATTEST:
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Territorial Federal Interim Bank I
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(an interim federal savings bank)
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By:
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Vernon Hirata, Corporate Secretary
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Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer
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A-3
EXHIBIT B
AGREEMENT OF MERGER BETWEEN
TERRITORIAL MUTUAL HOLDING COMPANY
TERRITORIAL FEDERAL INTERIM BANK II, AND TERRITORIAL SAVINGS BANK
EXHIBIT B
FORM OF
AGREEMENT OF MERGER BETWEEN
TERRITORIAL MUTUAL HOLDING COMPANY,
TERRITORIAL FEDERAL INTERIM BANK II, AND
TERRITORIAL SAVINGS BANK
THIS AGREEMENT OF MERGER
(the “MHC Merger Agreement”), dated as of
, 2009, is made by and between Territorial Mutual Holding Company, a federal corporation (the “Mutual Holding
Company”), Territorial Savings Bank, a federal savings bank (the “Bank”), and Territorial Federal Interim Bank II, an interim federal savings bank (“Interim II”).
RECITALS:
1. The Mutual Holding Company is a federal corporation that owns all
of the common stock of the Bank as a result of the merger of Territorial Savings Group, Inc., a federal corporation, into the Bank (the “Mid-Tier Merger”) immediately prior to the merger provided for in this MHC Merger Agreement.
2. Contemporaneously with the transactions contemplated by this MHC Merger Agreement, the Mutual Holding Company will exchange its charter
for that of Interim II and Interim II will merge with and into the Bank with the Bank as the resulting entity.
3. At least two-thirds of
the members of the boards of directors of the Bank and the Mutual Holding Company have approved this MHC Merger Agreement whereby Interim II will be merged with and into the Bank with the Bank as the surviving or resulting institution (the “MHC
Merger”), and authorized the execution and delivery thereof.
NOW, THEREFORE,
in consideration of the premises and mutual
agreements contained herein, the parties hereto have agreed as follows:
1.
Merger
. At and on the Effective Date of the MHC Merger,
(i) the Mutual Holding Company shall exchange its charter for that of Interim II, and will merge with and into the Bank with the Bank as the resulting entity (the “Resulting Institution”), whereupon all shares of Bank common stock
owned by the Mutual Holding Company shall be canceled. As part of the MHC Merger, each Eligible Account Holder and Supplemental Eligible Account Holder (as defined in the Plan of Conversion and Reorganization (the “Plan”)), shall
automatically receive an interest in the Liquidation Account established in the Bank, in exchange for such person’s interest in the Mutual Holding Company as set forth in the Plan.
2.
Effective Date
. The MHC Merger shall not be effective until and unless it is approved by the Office of Thrift Supervision (the “OTS”)
after (i) approval by at least two-thirds of the outstanding common stock of the Bank, (ii) approval by a majority of the total eligible votes of Voting Members, and (iii) the Articles of Combination shall have been filed with the OTS
with respect to the MHC Merger. Approval of the Plan by the Voting Members shall constitute approval of the MHC Merger Agreement by the Voting Members. Approval of the Plan by the sole stockholder of the Bank shall constitute approval of the MHC
Merger Agreement by such stockholder.
3.
Name
. The name of the Resulting Institution shall be Territorial Savings Bank
4.
Offices
. The main banking office of the Resulting Institution shall be 1132 Bishop Street, Suite 2200, Honolulu, Hawaii 96813. The branch
offices of the Bank that were in lawful operation prior to the MHC Merger shall be operated as branch offices of the Resulting Institution.
5.
Directors and Officers
. The directors and officers of the Bank immediately prior to the Effective Date shall be the directors and officers of the Resulting Institution after the Effective Date.
6.
Rights and Duties of the Resulting Institution
. At the Effective Date, the Mutual Holding Company shall convert to Interim II, which shall be
merged with and into the Bank with the Bank as the Resulting Institution. The business of the Resulting Institution shall be that of a federal savings bank as provided in its Charter. All assets, rights, interests, privileges, powers, franchises and
property (real, personal and mixed) of the Mutual Holding Company, the Bank and Interim II shall be transferred automatically to and vested in the Resulting Institution by virtue of the MHC Merger without any deed or other document of transfer. The
Resulting Institution, without any order or action on the part of any court or otherwise and without any documents of assumption or assignment, shall hold and enjoy all of the properties, franchises and interests, including appointments, powers,
designations, nominations and all other rights and interests as the agent or other fiduciary in the same manner and to the same extent as such rights, franchises, and interests and powers were held or enjoyed by the Bank, the Mutual Holding Company
and Interim II. The Resulting Institution shall be responsible for all of the liabilities, restrictions and duties of every kind and description of the Mutual Holding Company, the Bank and Interim II immediately prior to the Merger, including
liabilities for all debts, obligations and contracts of the Mutual Holding Company, the Bank and Interim II, matured or unmatured, whether accrued, absolute, contingent or otherwise and whether or not reflected or reserved against on balance sheets,
books of accounts or records of the Mutual Holding Company, the Bank and Interim II. The stockholders of the Bank shall possess all voting rights with respect to the shares of stock of the Bank. All rights of creditors and other obligees and all
liens on property of the Mutual Holding Company, the Bank and Interim II shall be preserved and shall not be released or impaired.
7.
Other Terms
. All terms used in this MHC Merger Agreement shall, unless defined herein, have the meanings set forth in the Plan. The Plan is incorporated herein by this reference and made a part hereof to the extent necessary or appropriate to
effect and consummate the terms of this MHC Merger Agreement and the Conversion.
B-2
IN WITNESS WHEREOF
, the Mutual Holding Company, Interim II and the Bank have caused this MHC
Merger Agreement to be executed as of the date first above written.
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Territorial Savings Group, Inc.
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(a federal corporation)
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ATTEST:
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By:
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Vernon Hirata, Corporate Secretary
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Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer
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Territorial Savings Bank
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(a federal savings bank)
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ATTEST:
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By:
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Vernon Hirata, Corporate Secretary
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Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer
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ATTEST:
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Territorial Federal Interim Bank II
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(an interim federal savings bank)
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By:
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Vernon Hirata, Corporate Secretary
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Allan S. Kitagawa, Chairman of the Board, President and Chief Executive Officer
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B-3
Exhibit 3.1
ARTICLES OF INCORPORATION
TERRITORIAL BANCORP INC.
The undersigned, Lawrence M.F. Spaccasi, whose address is 5335 Wisconsin Avenue, N.W., Suite 400, Washington, DC 20015, being at least eighteen years of
age, acting as incorporator, does hereby form a corporation under the general laws of the State of Maryland, having the following Articles of Incorporation (the “Articles”):
ARTICLE 1. Name.
The name of the corporation is Territorial Bancorp Inc. (herein the “Corporation”).
ARTICLE 2. Principal Office.
The address of the principal office of the Corporation in the State of Maryland is c/o CSC-Lawyers Incorporating
Service Company, 7 St. Paul Street, Suite 1660, Baltimore, Maryland 21202.
ARTICLE 3. Purpose.
The purpose for which the
Corporation is formed is to engage in any lawful act or activity for which corporations may be organized under the general laws of the State of Maryland as now or hereafter in force.
ARTICLE 4. Resident Agent.
The name and address of the registered agent of the Corporation in the State of Maryland is CSC-Lawyers
Incorporating Service Company, 7 St. Paul Street, Suite 1660, Baltimore, Maryland 21202. Said resident agent is a Maryland corporation.
ARTICLE 5. Capital Stock
A. Authorized Stock.
The total number of shares of capital stock of all classes that
the Corporation has authority to issue is one hundred fifty million (150,000,000) shares, consisting of:
1. Fifty million
(50,000,000) shares of preferred stock, par value one cent ($0.01) per share (the “Preferred Stock”); and
2. One hundred
million (100,000,000) shares of common stock, par value one cent ($0.01) per share (the “Common Stock”).
The aggregate par
value of all the authorized shares of capital stock is one million, five hundred thousand dollars ($1,500,000). Except to the extent required by governing law, rule or regulation, the shares of capital stock may be issued from time to time by the
Board of Directors without further approval of the stockholders of the Corporation. The Corporation shall have the authority to purchase its capital stock out of funds lawfully available therefor, which funds shall include, without limitation, the
Corporation’s unreserved and unrestricted capital surplus. The Board of Directors, pursuant to a resolution approved by a majority of the Whole Board (rounded up to the nearest whole number), and without action by the stockholders, may amend
these Articles to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that the Corporation has authority to issue. For the purposes of these Articles, the term “Whole Board”
shall mean the total number of directors that the Corporation would have if there were no vacancies on the Board of Directors at the time any such resolution is presented to the Board of Directors for adoption.
B. Common Stock.
Except as provided under the terms of any series of Preferred Stock and as
limited by Section D of this Article 5, the exclusive voting power shall be vested in the Common Stock. Except as otherwise provided in these Articles, each holder of the Common Stock shall be entitled to one vote for each share of Common
Stock standing in the holder’s name on the books of the Corporation. Subject to any rights and preferences of any series of Preferred Stock, holders of Common Stock shall be entitled to such dividends as may be declared by the Board of
Directors out of funds lawfully available therefor. Upon any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, holders of Common Stock shall be entitled to receive pro rata the remaining
assets of the Corporation after payment or provision for payment of all debts and liabilities of the Corporation and payment or provision for payment of any amounts owed to the holders of any series of Preferred Stock having preference over the
Common Stock on distributions on liquidation, dissolution or winding up of the Corporation.
C. Preferred Stock.
The Board of
Directors is hereby expressly authorized, subject to any limitations prescribed by law, to provide for the issuance of the shares of Preferred Stock in series, to establish from time to time the number of shares to be included in each such series,
and to fix the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of the shares of each such series. The number of authorized shares of the
Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the Common Stock, without a vote of the holders of the Preferred Stock, or of any
series thereof, unless a vote of any such holders is required by law or pursuant to the terms of such Preferred Stock.
D. Restrictions
on Voting Rights of the Corporation’s Equity Securities.
1. Notwithstanding any other provision of these Articles, in no event
shall the record owner (or if more than one record owner, all such record owners taken as a group) of any outstanding Common Stock that is beneficially owned, directly or indirectly, by a Person who, as of any record date for the determination of
stockholders entitled to vote on any matter, beneficially owns in excess of 10% of the then-outstanding shares of Common Stock (the “Limit”), be entitled, or permitted to any vote in respect of the shares held in excess of the Limit. The
number of votes that may be cast by any particular record owner by virtue of the provisions hereof in respect of Common Stock beneficially owned by such Person owning shares in excess of the Limit (a “Holder in Excess”) shall be a number
equal to the total number of votes that a single record owner of all Common Stock owned by such Holder in Excess would be entitled to cast after giving effect to the provisions hereof, multiplied by a fraction, the numerator of which is the number
of shares of such class or series that are both (i) beneficially owned by such Holder in Excess and (ii) owned of record by such particular record owner and the denominator of which is the total number of shares of Common Stock
beneficially owned by such Holder in Excess. The provisions of this Section D of this Article 5 shall not be applicable if, before the Holder in Excess acquired beneficial ownership of such shares in excess of the Limit, such acquisition was
approved by a majority of the “Unaffiliated Directors.” For this purpose, the term “Unaffiliated
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Director” means any member of the Board of Directors who is unaffiliated with the Holder in Excess and was a member of the Board of Directors prior to
the time that the Holder in Excess became such, and any director who is thereafter chosen to fill any vacancy on the Board of Directors and who is elected and who, in either event, is unaffiliated with the Holder in Excess and in connection with his
or her initial assumption of office is recommended for appointment or election by a majority of the Unaffiliated Directors then serving on the Board of Directors.
2. The following definitions shall apply to this Section D of this Article 5.
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(a)
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An “affiliate” of a specified Person shall mean a Person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common
control with, the Person specified.
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(b)
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“Beneficial ownership” shall be determined pursuant to Rule 13d-3 of the General Rules and Regulations under the Securities Exchange Act of 1934 (or any successor rule or
statutory provision), or, if said Rule 13d-3 shall be rescinded and there shall be no successor rule or statutory provision thereto, pursuant to said Rule 13d-3 as in effect on December 31, 2007; provided, however, that a Person shall, in any
event, also be deemed the “beneficial owner” of any Common Stock:
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(1)
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that such Person or any of its affiliates beneficially owns, directly or indirectly; or
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(2)
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that such Person or any of its affiliates has (i) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any
agreement, arrangement or understanding (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of an agreement, contract, or other arrangement with the Corporation to effect any transaction of the type described in
clause (i) or (ii) of the first sentence of Article 9 hereof) or upon the exercise of conversion rights, exchange rights, warrants, or options or otherwise, or (ii) sole or shared voting or investment power with respect thereto
pursuant to any agreement, arrangement, understanding, relationship or otherwise (but shall not be deemed to be the beneficial owner of any voting shares solely by reason of a revocable proxy granted for a particular meeting of stockholders,
pursuant to a public solicitation of proxies for such meeting, with respect to shares of which neither such Person nor any such affiliate is otherwise deemed the beneficial owner); or
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(3)
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that are beneficially owned, directly or indirectly, by any other Person with which such first mentioned Person or any of its affiliates acts as a partnership,
limited partnership, syndicate or other group pursuant to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of capital stock of the Corporation; and provided further, however, that
(i) no director
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or officer of the Corporation (or any affiliate of any such director or officer) shall, solely by reason of any or all of such directors or officers acting
in their capacities as such, be deemed, for any purposes hereof, to beneficially own any Common Stock beneficially owned by any other such director or officer (or any affiliate thereof), and (ii) neither any employee stock ownership or similar
plan of the Corporation or any subsidiary of the Corporation nor any trustee with respect thereto (or any affiliate of such trustee) shall, solely by reason of such capacity of such trustee, be deemed, for any purposes hereof, to beneficially own
any Common Stock held under any such plan. For purposes of computing the percentage of beneficial ownership of Common Stock of a Person, the outstanding Common Stock shall include shares deemed owned by such Person through application of this
subsection but shall not include any other shares of Common Stock that may be issuable by the Corporation pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise. For all other purposes, the outstanding
Common Stock shall include only Common Stock then outstanding and shall not include any Common Stock that may be issuable by the Corporation pursuant to any agreement, or upon the exercise of conversion rights, warrants or options, or otherwise.
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(c)
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A “Person” shall mean any individual, firm, corporation, or other entity.
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(d)
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The Board of Directors shall have the power to construe and apply the provisions of this Section D and to make all determinations necessary or desirable to implement such
provisions, including but not limited to matters with respect to (i) the number of shares of Common Stock beneficially owned by any Person, (ii) whether a Person is an affiliate of another, (iii) whether a Person has an agreement,
arrangement, or understanding with another as to the matters referred to in the definition of beneficial ownership, (iv) the application of any other definition or operative provision of this Section D to the given facts, or (v) any
other matter relating to the applicability or effect of this Section D.
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3. The Board of Directors shall have the right to
demand that any Person reasonably believed by the Board of Directors to be a Holder in Excess (or holder of record of Common Stock beneficially owned by any Holder in Excess) supply the Corporation with complete information as to (i) the record
owner(s) of all shares beneficially owned by such Holder in Excess, and (ii) any other factual matter relating to the applicability or effect of this section as may reasonably be requested of such Holder in Excess. The Board of Directors shall
further have the right to receive from any Holder in Excess reimbursement for all expenses incurred by the Board in connection with its investigation of any matters relating to the applicability or effect of this section on such Holder in Excess, to
the extent such investigation is deemed appropriate by the Board of Directors as a result of the Holder in Excess refusing to supply the Corporation with the information described in the previous sentence.
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4. Any constructions, applications, or determinations made by the Board of Directors pursuant to this
Section D in good faith and on the basis of such information and assistance as was then reasonably available for such purpose, shall be conclusive and binding upon the Corporation and its stockholders.
5. In the event any provision (or portion thereof) of this Section D shall be found to be invalid, prohibited or unenforceable for any reason, the
remaining provisions (or portions thereof) of this Section D shall remain in full force and effect, and shall be construed as if such invalid, prohibited or unenforceable provision had been stricken herefrom or otherwise rendered inapplicable,
it being the intent of the Corporation and its stockholders that each such remaining provision (or portion thereof) of this Section D remain, to the fullest extent permitted by law, applicable and enforceable as to all stockholders, including
Holders in Excess, notwithstanding any such finding.
E. Majority Vote.
Pursuant to Section 2-104(b)(5) of the Maryland General
Corporation Law (“MGCL”), notwithstanding any provision of the MGCL requiring stockholder authorization of an action by a greater proportion than a majority of the total number of shares of all classes of capital stock or of the total
number of shares of any class of capital stock, such action shall be valid and effective if authorized by the affirmative vote of the holders of a majority of the total number of shares of all classes outstanding and entitled to vote thereon, except
as otherwise provided in these Articles.
F. Quorum
. Except as otherwise provided by law or expressly provided in these Articles,
the presence, in person or by proxy, of the holders of record of shares of capital stock of the Corporation entitling the holders thereof to cast a majority of the votes (after giving effect, if required, to the provisions of Article 5,
Section D) entitled to be cast by the holders of shares of capital stock of the Corporation entitled to vote shall constitute a quorum at all meetings of the stockholders, and every reference in these Articles to a majority or other proportion
of capital stock (or the holders thereof) for purposes of determining any quorum requirement or any requirement for stockholder consent or approval shall be deemed to refer to such majority or other proportion of the votes (or the holders thereof)
then entitled to be cast in respect of such capital stock.
ARTICLE 6. Preemptive Rights and Appraisal Rights.
A. Preemptive Rights.
Except for preemptive rights approved by the Board of Directors pursuant to a resolution approved by a majority of the
directors then in office, no holder of the capital stock of the Corporation or series of stock or of options, warrants or other rights to purchase shares of any class or series of stock or of other securities of the Corporation shall have any
preemptive right to purchase or subscribe for any unissued capital stock of any class or series, or any unissued bonds, certificates of indebtedness, debentures or other securities convertible into or exchangeable for capital stock of any class or
series or carrying any right to purchase stock of any class or series.
B. Appraisal Rights.
Holders of shares of stock shall not be
entitled to exercise any rights of an objecting stockholder provided for under Title 3, Subtitle 2 of the MGCL or any successor statute unless the Board of Directors, pursuant to a resolution approved by a majority
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of the directors then in office, shall determine that such rights apply with respect to all or any classes or series of stock, to one or more transactions
occurring after the date of such determination in connection with which holders of such shares would otherwise be entitled to exercise such rights.
ARTICLE 7. Directors.
The following provisions are made a part of these Articles for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the
powers of the Corporation and of its directors and stockholders:
A. Management of the Corporation.
The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors. All powers of the Corporation may be exercised by or under the authority of the Board of Directors, except as conferred on or as reserved to the stockholders by law or by
these Articles or the Bylaws of the Corporation; provided, however, that any limitations on the Board of Director’s management or direction of the affairs of the Corporation shall reserve the directors’ full power to discharge their
fiduciary duties.
B. Number, Class and Terms of Directors; No Cumulative Voting.
The number of directors constituting the Board of
Directors of the Corporation shall initially be seven (6), which number may be increased or decreased in the manner provided in the Bylaws of the Corporation; provided, however, that such number shall never be less than the minimum number of
directors required by the MGCL now or hereafter in force. The directors, other than those who may be elected by the holders of any series of Preferred Stock, shall be divided into three classes, as nearly equal in number as reasonably possible, with
the term of office of the first class (“Class I”) to expire at the conclusion of the first annual meeting of stockholders, the term of office of the second class (“Class II”) to expire at the conclusion of the annual meeting of
stockholders one year thereafter and the term of office of the third class (“Class III”) to expire at the conclusion of the annual meeting of stockholders two years thereafter, with each director to hold office until his or her successor
shall have been duly elected and qualified. At each annual meeting of stockholders, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of
stockholders after their election or for such shorter period of time as the Board of Directors may determine, with each director to hold office until his or her successor shall have been duly elected and qualified.
The names of the individuals who will serve as directors of the Corporation until their successors are elected and qualify are as follows:
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Class I Directors:
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Term to Expire in
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Harold H. Ohama
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2009
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Kirk W. Caldwell
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2009
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Class II Directors:
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Term to Expire in
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David S. Murakami
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2010
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Howard Y. Ikeda
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2010
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Class III Directors:
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Term to Expire in
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Richard I. Murakami
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2011
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Allan S. Kitagawa
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2011
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Stockholders shall not be permitted to cumulate their votes in the election of directors.
C. Vacancies.
Any vacancies in the Board of Directors may be filled in the manner provided in the Bylaws of the Corporation.
D. Removal.
Subject to the rights of the holders of any series of Preferred Stock then outstanding, any director, or the entire Board of
Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least 80% of the voting power of all of the then-outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of directors (after giving effect to the provisions of Article 5 hereof) voting together as a single class.
E. Stockholder Proposals and Nominations of Directors.
Advance notice of stockholder nominations for the election of directors and of business to be brought by stockholders before any meeting of the stockholders of the Corporation
shall be given in the manner provided in the Bylaws of the Corporation. Stockholder proposals to be presented in connection with a special meeting of stockholders shall be presented by the Corporation only to the extent required by
Section 2-502 of the MGCL and the Bylaws of the Corporation.
ARTICLE 8. Bylaws.
The Board of Directors is expressly
empowered to adopt, amend or repeal the Bylaws of the Corporation. Any adoption, amendment or repeal of the Bylaws of the Corporation by the Board of Directors shall require the approval of a majority of the Whole Board. The stockholders shall also
have power to adopt, amend or repeal the Bylaws of the Corporation. In addition to any vote of the holders of any class or series of stock of the Corporation required by law or by these Articles, the affirmative vote of the holders of at least 80%
of the voting power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (after giving effect to the provisions of Article 5 hereof), voting together as a single
class, shall be required for the adoption, amendment or repeal of any provisions of the Bylaws of the Corporation by the stockholders.
ARTICLE 9. Evaluation of Certain Offers.
The Board of Directors, when evaluating (i) any offer of another Person (as defined below) to (A) make a tender or exchange offer for any equity security of the Corporation,
(B) merge or consolidate the Corporation with another corporation or entity, or (C) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation or (ii) any other actual or proposed
transaction that would or may involve a change in control of the Corporation (whether by purchases of shares of stock or any other securities of the Corporation in the open market, or otherwise, tender offer, merger, consolidation, share exchange,
dissolution, liquidation, sale of all or substantially all of the assets of the Corporation, proxy solicitation or otherwise), may, in connection with the exercise of its business judgment in determining what is in the best interests of the
Corporation
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and its stockholders and in making any recommendation to the Corporation’s stockholders, give due consideration to all relevant factors, including, but
not limited to: (A) the economic effect, both immediate and long-term, upon the Corporation’s stockholders, including stockholders, if any, who do not participate in the transaction; (B) the social and economic effect on the present
and future employees, creditors and customers of, and others dealing with, the Corporation and its subsidiaries and on the communities in which the Corporation and its subsidiaries operate or are located; (C) whether the proposal is acceptable
based on the historical, current or projected future operating results or financial condition of the Corporation; (D) whether a more favorable price could be obtained for the Corporation’s stock or other securities in the future;
(E) the reputation and business practices of the other entity to be involved in the transaction and its management and affiliates as they would affect the employees of the Corporation and its subsidiaries; (F) the future value of the stock
or any other securities of the Corporation or the other entity to be involved in the proposed transaction; (G) any antitrust or other legal and regulatory issues that are raised by the proposal; (H) the business and historical, current or
expected future financial condition or operating results of the other entity to be involved in the transaction, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection
with the proposed transaction, and other likely financial obligations of the other entity to be involved in the proposed transaction; and (I) the ability of the Corporation to fulfill its objectives as a financial institution holding company
and on the ability of its subsidiary financial institution(s) to fulfill the objectives of a federally insured financial institution under applicable statutes and regulations. If the Board of Directors determines that any proposed transaction of the
type described in clause (i) or (ii) of the immediately preceding sentence should be rejected, it may take any lawful action to defeat such transaction, including, but not limited to, any or all of the following: advising stockholders not
to accept the proposal; instituting litigation against the party making the proposal; filing complaints with governmental and regulatory authorities; acquiring the stock or any of the securities of the Corporation; selling or otherwise issuing
authorized but unissued stock or other securities or granting options or rights with respect thereto; and obtaining a more favorable offer from another individual or entity. This Article 9 does not create any implication concerning factors that
may be considered by the Board of Directors regarding any proposed transaction of the type described in clause (i) or (ii) of the first sentence of this Article 9.
For purposes of this Article 9, a “Person” shall include an individual, a group acting in concert, a corporation, a partnership, an
association, a joint venture, a pool, a joint stock company, a trust, an unincorporated organization or similar company, a syndicate or any other group or entity formed for the purpose of acquiring, holding or disposing of securities.
ARTICLE 10. Indemnification, etc. of Directors and Officers.
A. Indemnification.
The Corporation shall indemnify (1) its current and former directors and officers, whether serving the Corporation or at its request any other entity, to the fullest extent required or
permitted by the MGCL now or hereafter in force, including the advancement of expenses under the procedures and to the fullest extent permitted by law, and (2) other employees and agents to such extent as shall be authorized by the Board of
Directors and permitted by law; provided, however, that, except as provided in Section B of this Article 10 with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with
a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation.
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B. Procedure.
If a claim under Section A of this Article 10 is not paid in full by the
Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may
at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall also be entitled to be reimbursed the expense of prosecuting or defending such suit. It shall be a defense to any action for advancement of expenses that the Corporation has not received both (i) an
undertaking as required by law to repay such advances in the event it shall ultimately be determined that the standard of conduct has not been met and (ii) a written affirmation by the indemnitee of his good faith belief that the standard of
conduct necessary for indemnification by the Corporation has been met. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement
of expenses) it shall be a defense that, and (ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication
that, the indemnitee has not met the applicable standard for indemnification set forth in the MGCL. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the MGCL, nor an actual determination by the
Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of
conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article 10 or otherwise shall be on the Corporation.
C. Non-Exclusivity.
The rights to indemnification and to the advancement of expenses conferred in this Article 10 shall not be
exclusive of any other right that any Person may have or hereafter acquire under any statute, these Articles, the Corporation’s Bylaws, any agreement, any vote of stockholders or the Board of Directors, or otherwise.
D. Insurance.
The Corporation may maintain insurance, at its expense, to insure itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such Person against such expense, liability or loss
under the MGCL.
E. Miscellaneous.
The Corporation shall not be liable for any payment under this Article 10 in connection with
a claim made by any indemnitee to the extent such indemnitee has
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otherwise actually received payment under any insurance policy, agreement, or otherwise, of the amounts otherwise indemnifiable hereunder. The rights to
indemnification and to the advancement of expenses conferred in Sections A and B of this Article 10 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to
the benefit of the indemnitee’s heirs, executors and administrators.
F. Limitations Imposed by Federal Law
. Notwithstanding
any other provision set forth in this Article 10, in no event shall any payments made by the Corporation pursuant to this Article 10 exceed the amount permissible under applicable federal law, including, without limitation, Section 18(k) of the
Federal Deposit Insurance Act and the regulations promulgated thereunder.
Any repeal or modification of this Article 10 shall not in
any way diminish any rights to indemnification or advancement of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to events occurring, or claims made, while this Article 10 is in force.
ARTICLE 11. Limitation of Liability.
An officer or director of the Corporation, as such, shall not be liable to the
Corporation or its stockholders for money damages, except (A) to the extent that it is proved that the Person actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money,
property or services actually received; or (B) to the extent that a judgment or other final adjudication adverse to the Person is entered in a proceeding based on a finding in the proceeding that the Person’s action, or failure to act, was
the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding; or (C) to the extent otherwise provided by the MGCL. If the MGCL is amended to further eliminate or limit the personal
liability of officers and directors, then the liability of officers and directors of the Corporation shall be eliminated or limited to the fullest extent permitted by the MGCL, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a
director or officer of the Corporation existing at the time of such repeal or modification.
ARTICLE 12. Amendment of the Articles
of Incorporation.
The Corporation reserves the right to amend or repeal any provision contained in these Articles in the manner prescribed by the MGCL, including any amendment altering the terms or contract rights, as expressly set forth in
these Articles, of any of the Corporation’s outstanding stock by classification, reclassification or otherwise, and no stockholder approval shall be required if the approval of stockholders is not required for the proposed amendment or repeal
by the MGCL, and all rights conferred upon stockholders are granted subject to this reservation.
The Board of Directors, pursuant to a
resolution approved by a majority of the Whole Board (rounded up to the nearest whole number), and without action by the stockholders, may amend these Articles to increase or decrease the aggregate number of shares of stock or the number of shares
of stock of any class or series that the Corporation has authority to issue.
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No proposed amendment or repeal of any provision of these Articles shall be submitted to a stockholder
vote unless the Board of Directors shall have (1) approved the proposed amendment or repeal, (2) determined that it is advisable, and (3) directed that it be submitted for consideration at either an annual or special meeting of the
stockholders pursuant to a resolution approved by the Board of Directors. Any proposed amendment or repeal of any provision of these Articles may be abandoned by the Board of Directors at any time before its effective time upon the adoption of a
resolution approved by a majority of the Whole Board (rounded up to the nearest whole number).
The amendment or repeal of any provision of
these Articles shall be approved by at least two-thirds of all votes entitled to be cast by the holders of shares of capital stock of the Corporation entitled to vote on the matter (after giving due effect to the provisions of Article 5 of these
Articles), except that the proposed amendment or repeal of any provision of these Articles need only be approved by the vote of a majority of all the votes entitled to be cast by the holders of shares of capital stock of the Corporation entitled to
vote on the matter (after giving due effect to the provisions of Article 5 of these Articles) if the amendment or repeal of such provision is approved by the Board of Directors pursuant to a resolution approved by at least two-thirds of the Whole
Board (rounded up to the nearest whole number).
Notwithstanding any other provision of these Articles or any provision of law that might
otherwise permit a lesser vote or no vote, but in addition to any vote of the holders of any class or series of the stock of the Corporation required by law or by these Articles, the affirmative vote of the holders of at least 80% of the voting
power of all of the then-outstanding shares of the capital stock of the Corporation entitled to vote generally in the election of directors (after giving effect to the provisions of Article 5), voting together as a single class, shall be
required to amend or repeal this Article 12, Section C, D, E or F of Article 5, Article 7, Article 8, Article 9, Article 10 or Article 11.
ARTICLE 13. Name and Address of Incorporator.
The name and mailing address of the sole incorporator are as follows:
Lawrence M.F. Spaccasi, Esq.
5335 Wisconsin
Ave., N.W. Suite 400
Washington, D.C. 20015
[Remainder of Page Intentionally Left Blank]
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I, THE UNDERSIGNED, being the incorporator, for
the purpose of forming a corporation under the laws of the State of Maryland, do make, file and record this Charter, do certify that the facts herein stated are true, and, accordingly, have hereto set my hand this 3
rd
day of November, 2008.
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/s/ Lawrence M.F. Spaccasi
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Lawrence M.F. Spaccasi, Incorporator
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Exhibit 3.2
TERRITORIAL BANCORP INC.
BYLAWS
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
The Corporation
shall hold an annual meeting of its stockholders to elect directors and to transact any other business within its powers, at such place, on such date during the month of May, and at such time as the Board of Directors shall fix. Failure to hold an
annual meeting does not invalidate the Corporation’s existence or affect any otherwise valid corporate act.
Section 2. Special Meetings.
Special meetings of stockholders of the Corporation may be called by the President or by the Board of Directors pursuant to a resolution
adopted by a majority of the total number of directors that the Corporation would have if there were no vacancies on the Board of Directors (hereinafter the “Whole Board”). Special meetings of the stockholders shall be called by the
Secretary at the request of stockholders only on the written request of stockholders entitled to cast at least a majority of all the votes entitled to be cast at the meeting. Such written request shall state the purpose or purposes of the meeting
and the matters proposed to be acted upon at the meeting, and shall be delivered at the principal office of the Corporation addressed to the President or the Secretary. The Secretary shall inform the stockholders who make the request of the
reasonably estimated cost of preparing and mailing a notice of the meeting and, upon payment of these costs to the Corporation, notify each stockholder entitled to notice of the meeting. The Board of Directors shall have the sole power to fix
(1) the record date for determining stockholders entitled to request a special meeting of stockholders and the record date for determining stockholders entitled to notice of and to vote at the special meeting and (2) the date, time and
place of the special meeting and the means of remote communication, if any, by which stockholders and proxy holders may be considered present in person and may vote at the special meeting.
Section 3. Notice of Meetings; Adjournment.
Not
less than 10 nor more than 90 days before each stockholders’ meeting, the Secretary shall give notice of the meeting in writing or by electronic transmission to each stockholder entitled to vote at the meeting and to each other stockholder
entitled to notice of the meeting. The notice shall state the time and place of the meeting, the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and may vote at the meeting, and,
if the meeting is a special meeting or notice of the purpose is required by statute, the purpose of the meeting. Notice is given to a stockholder when it is personally delivered to the stockholder, left at the stockholder’s residence or usual
place of business, mailed to the stockholder at his or her address as it appears on the records of the Corporation, or transmitted to the stockholder by an electronic transmission to any address or number of the
stockholder at which the stockholder receives electronic transmissions. If the Corporation has received a request from a stockholder that notice not be sent
by electronic transmission, the Corporation may not provide notice to the stockholder by electronic transmission. Notwithstanding the foregoing provisions, each person who is entitled to notice waives notice if such person, before or after the
meeting, delivers a written waiver or waiver by electronic transmission which is filed with the records of the stockholders’ meetings, or is present at the meeting in person or by proxy.
A meeting of stockholders convened on the date for which it was called may be adjourned from time to time without further notice to a date not more than
120 days after the original record date. At any adjourned meeting, any business may be transacted that might have been transacted at the original meeting.
As used in these Bylaws, the term “electronic transmission” shall have the meaning given to such term by Section 1-101(
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) of the Maryland General Corporation Law (the “MGCL”) or any
successor provision.
Section 4. Quorum.
Unless the Articles of the Corporation provide otherwise, where a separate vote by a class or classes is required, a majority of the shares of such class or classes, present in person or represented by proxy, shall constitute a quorum
entitled to take action with respect to that vote on that matter.
If a quorum shall fail to attend any meeting, the chairman of the
meeting or the holders of a majority of the shares of stock who are present at the meeting, in person or by proxy, may, in accordance with Section 3 of this Article I, adjourn the meeting to another place, date or time.
Section 5. Organization and Conduct of Business.
The Chairman of the Board of the Corporation or Chief Executive Officer, or in his or her absence, the President, or in his or her absence, such other person as may be designated by a majority of the Whole Board, shall call to order any
meeting of the stockholders and act as chairman of the meeting. In the absence of the Secretary, the secretary of the meeting shall be such person as the chairman appoints. The chairman of any meeting of stockholders shall determine the order of
business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seem to him or her in order.
Section 6. Advance Notice Provisions for Business to be Transacted at Annual Meetings and Elections of Directors.
(a)
At any annual meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting (i) as specified in the Corporation’s notice of the meeting, (ii) by or at the direction of the Board of
Directors or (iii) by any stockholder of the Corporation who: (1) is a stockholder of record on the date such stockholder gives the notice provided for in this Section 6(a) and on the record date for the determination of stockholders
entitled to vote at such annual meeting; and (2) complies with the notice procedures set forth in this Section 6(a). For business to be properly brought before an annual meeting by a stockholder
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pursuant to clause (iii) of the immediately preceding sentence, the stockholder must have given timely notice thereof in writing to the Secretary of the
Corporation and such business must otherwise be a proper matter for action by stockholders. To be timely, a stockholder’s notice must be delivered or mailed to and received by the Secretary of the Corporation at the principal executive office
of the Corporation not less than 80 days nor more than 90 days prior to any such meeting; provided, however, that if less than 90 days’ notice or prior public disclosure of the date of the meeting is given to stockholders, such written notice
shall be delivered or mailed to and received by the Secretary of the Corporation at the principal executive office of the Corporation not later than the tenth day following the day on which notice of the meeting was mailed to stockholders or such
public disclosure was made.
A stockholder’s notice to the Secretary must set forth as to each matter such stockholder proposes to
bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address of such stockholder as
they appear on the Corporation’s books and of the beneficial owner, if any, on whose behalf the proposal is made; (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record
by such stockholder and such beneficial owner; (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such
stockholder and any material interest of such stockholder in such business; and (v) a representation that such stockholder intends to appear in person or by proxy at the annual meeting to bring such business before the meeting.
Notwithstanding anything in these Bylaws to the contrary, no business shall be brought before or conducted at an annual meeting except in accordance with
the provisions of this Section 6(a). The officer of the Corporation or other person presiding over the annual meeting shall, if the facts so warrant, determine and declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 6(a) and, if he or she should so determine, he or she shall so declare to the meeting and any such business so determined to be not properly brought before the meeting shall not be transacted.
At any special meeting of the stockholders, only such business shall be conducted as shall have been brought before the meeting pursuant
to the Corporation’s notice of the meeting.
(b) Only persons who are nominated in accordance with the following procedures shall be
eligible for election as directors of the Corporation. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of stockholders at which directors are to be elected only (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the Corporation who (1) is a stockholder of record on the date such stockholder gives the notice provided for in this Section 6(b) and on the record date for the
determination of stockholders entitled to vote at such meeting, and (2) complies with the notice procedures set forth in this Section 6(b). Such nominations, other than those made by or at the direction of the Board of Directors, shall be
made by timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder’s notice shall be delivered or mailed to and received by the Secretary of the Corporation at the principal executive office of the Corporation not
less than 80 days nor more than 90 days prior to any such meeting; provided, however, that if less than 90 days’ notice
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or prior public disclosure of the date of the meeting is given to stockholders, such written notice shall be delivered or mailed, as prescribed, to the
Secretary of the Corporation not later than the tenth day following the day on which notice of the meeting was mailed to stockholders or such public disclosure was made.
A stockholder’s notice must be in writing and set forth (a) as to each person whom the stockholder proposes to nominate for election as a director, all information relating to such person that would indicate
such person’s qualification under Article 2, Section 12, of these Bylaws including an affidavit that such person would not be disqualified under the provisions of Article 2, Section 12(b) of these Bylaws and such information relating
to such person that is required to be disclosed in connection with solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), or any successor rule or regulation; and (b) as to the stockholder giving the notice: (i) the name and address of such stockholder as they appear on the Corporation’s books and of the beneficial owner, if
any, on whose behalf the nomination is made; (ii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder and such beneficial owner; (iii) a description of
all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder; (iv) a representation that
such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice; and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other
filings required to be made in connection with solicitations of proxies for election of directors pursuant to Regulation 14A under the Exchange Act or any successor rule or regulation. Such notice must be accompanied by a written consent of
each proposed nominee to be named as a nominee and to serve as a director if elected. No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the provisions of this Section 6(b). The officer
of the Corporation or other person presiding at the meeting shall, if the facts so warrant, determine that a nomination was not made in accordance with such provisions and, if he or she should so determine, he or she shall so declare to the meeting
and the defective nomination shall be disregarded.
(c) For purposes of subsections (a) and (b) of this Section 6, the term
“public disclosure” shall mean disclosure (i) in a press release reported by a nationally recognized news service, (ii) in a document publicly filed or furnished by the Corporation with the U.S. Securities and Exchange
Commission or (iii) on a website maintained by the Corporation. The timely notice requirements provided in subsections (a) and (b) of this Section 6 shall apply to all stockholder nominations for election as a director and all
stockholder proposals for business to be conducted at an annual meeting regardless of whether such proposal is submitted for inclusion in the Corporation’s proxy materials pursuant to Rule 14a-8 of Regulation 14A under the Exchange Act.
Section 7. Proxies and Voting.
Unless the Articles of the Corporation provide for a greater or lesser number of votes per share or limits or denies voting rights, each outstanding share of stock, regardless of class, is entitled to one vote on each matter submitted to a
vote at a meeting of stockholders; however, a
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share is not entitled to be voted if any installment payable on it is overdue and unpaid. In all elections for directors, directors shall be determined by a
plurality of the votes cast, and except as otherwise required by law or as provided in the Articles of the Corporation, all other matters voted on by stockholders shall be determined by a majority of the votes cast on the matter.
A stockholder may vote the stock the stockholder owns of record either in person or by proxy. A stockholder may sign a writing authorizing another person
to act as proxy. Signing may be accomplished by the stockholder or the stockholder’s authorized agent signing the writing or causing the stockholder’s signature to be affixed to the writing by any reasonable means, including facsimile
signature. A stockholder may authorize another person to act as proxy by transmitting, or authorizing the transmission of, an authorization for the person to act as the proxy to the person authorized to act as proxy or to any other person authorized
to receive the proxy authorization on behalf of the person authorized to act as the proxy, including a proxy solicitation firm or proxy support service organization. The authorization may be transmitted by a telegram, cablegram, datagram, electronic
mail or any other electronic or telephonic means. Unless a proxy provides otherwise, it is not valid more than 11 months after its date. A proxy is revocable by a stockholder at any time without condition or qualification unless the proxy states
that it is irrevocable and the proxy is coupled with an interest. A proxy may be made irrevocable for as long as it is coupled with an interest. The interest with which a proxy may be coupled includes an interest in the stock to be voted under the
proxy or another general interest in the Corporation or its assets or liabilities.
Section 8. Conduct of Voting
The Board of Directors shall, in advance of any meeting of stockholders, appoint one or more persons as inspectors of election, to act at the meeting or
any adjournment thereof and make a written report thereof, in accordance with applicable law. At all meetings of stockholders, the proxies and ballots shall be received, and all questions relating to the qualification of voters and the validity of
proxies and the acceptance or rejection of votes shall be decided or determined by the inspector of election. All voting, including on the election of directors but excepting where otherwise required by law, may be by a voice vote; provided,
however, that upon demand therefor by a stockholder entitled to vote or his or her proxy or the chairman of the meeting, a written vote shall be taken. Every written vote shall be taken by ballot, each of which shall state the name of the
stockholder or proxy voting and such other information as may be required under the procedure established for the meeting. Every vote taken by ballot shall be counted by an inspector or inspectors appointed by the chairman of the meeting. No
candidate for election as a director at a meeting shall serve as an inspector at such meeting.
Section 9. Control Share Acquisition Act.
Notwithstanding any other provision of the Articles of the Corporation or these Bylaws, Title 3, Subtitle 7 of the MGCL (or
any successor statute) shall not apply to any acquisition by any person of shares of stock of the Corporation. This Section 9 may be repealed by the Whole Board, in whole or in part, at any time, whether before or after an acquisition of
Control Shares (as defined in Section 3-701(d) of the MGCL, or any successor provision) and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent Control Share Acquisition (as defined in
Section 3-701(d) of the MGCL, or any successor provision).
5
ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
The business and affairs of the Corporation shall be managed under the direction of the Board of Directors. The number of directors of the Corporation
shall, by virtue of the Corporation’s election made hereby to be governed by Section 3-804(b) of the MGCL, be fixed from time to time exclusively by vote of the Board of Directors; provided, however, that such number shall never be less
than the minimum number of directors required by the MGCL now or hereafter in force. The Board of Directors shall annually elect a Chairman of the Board from among its members and shall designate the Chairman of the Board or his designee to preside
at its meetings.
The directors, other than those who may be elected by the holders of any series of preferred stock, shall be divided into
three classes, as nearly equal in number as reasonably possible, with the term of office of the first class to expire at the first annual meeting of stockholders, the term of office of the second class to expire at the annual meeting of stockholders
one year thereafter and the term of office of the third class to expire at the annual meeting of stockholders two years thereafter, with each director to hold office until his or her successor shall have been duly elected and qualified. At each
annual meeting of stockholders, commencing with the first annual meeting, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after
their election or for such shorter period of time as the Board of Directors may determine, with each director to hold office until his or her successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
By virtue of the Corporation’s election made hereby to be subject to Section 3-804(c) of the MGCL, any vacancies in the Board of Directors resulting from an increase in the size of the Board of Directors or the death, resignation
or removal of a director may be filled only by the affirmative vote of two-thirds of the remaining directors in office, even if the remaining directors do not constitute a quorum, and any director elected to fill a vacancy shall hold office for the
remainder of the full term of the class of directors in which the vacancy occurred and until a successor is elected and qualifies. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent
director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or places or by means of remote communication, on such date or dates, and at such time or times as shall have been established by the Board of Directors and publicized
among all directors. A notice of each regular meeting shall not be required. Any regular meeting of the Board of Directors may adjourn from time to time to reconvene at the same or some other place, and no notice need be given of any such adjourned
meeting other than by announcement.
6
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third (
1
/
3
) of the directors then in office (rounded up to the nearest whole number), the Chairman of the Board, or by the President and
shall be held at such place or by means of remote communication, on such date, and at such time as they or he or she shall fix. Notice of the place, date, and time of each such special meeting shall be given to each director who has not waived
notice by mailing and post-marking written notice not less than five days before the meeting, or by facsimile or other electronic transmission of the same not less than 24 hours before the meeting. Any director may waive notice of any special
meeting, either before or after such meeting, by delivering a written waiver or a waiver by electronic transmission that is filed with the records of the meeting. Attendance of a director at a special meeting shall constitute a waiver of notice of
such meeting, except where the director attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be
transacted nor the purpose of any special meeting of the Board of Directors need be specified in the notice of such meeting. Any special meeting of the Board of Directors may adjourn from time to time to reconvene at the same or some other place,
and no notice need be given of any such adjourned meeting other than by announcement.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the authorized number of directors then constituting the Board shall constitute a quorum for all
purposes. If a quorum shall fail to attend any meeting, a majority of those present may adjourn the meeting to another place, date, or time, without further notice or waiver thereof.
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of
Directors, or of any committee thereof, may participate in a meeting of such Board or committee by means of a conference telephone or other communications equipment if all persons participating in the meeting can hear each other at the same time.
Such participation shall constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present, except as otherwise provided in these Bylaws or the Corporation’s Articles or required by law. Action may be taken by the Board of Directors without a meeting if a
unanimous consent which sets forth the action is given in writing or by electronic transmission by each member of the Board of Directors and filed in paper or electronic form with the minutes of proceedings of the Board of Directors.
7
Section 8. Powers.
All powers of the Corporation may be exercised by or under the authority of the Board of Directors except as provided by the Corporation’s Articles. Consistent with the foregoing, the Board of Directors shall
have, among other powers, the unqualified power:
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(i)
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To declare dividends from time to time in accordance with law;
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(ii)
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To purchase or otherwise acquire any property, rights or privileges on such terms as it shall determine;
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(iii)
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To authorize the creation, making and issuance, in such form as it may determine, of written obligations of every kind, negotiable or non-negotiable, secured or unsecured, and to do
all things necessary in connection therewith;
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(iv)
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To remove any officer of the Corporation with or without cause, and from time to time to devolve the powers and duties of any officer upon any other person for the time being;
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(v)
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To confer upon any officer of the Corporation the power to appoint, remove and suspend subordinate officers, employees and agents;
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(vi)
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To adopt from time to time such stock, option, stock purchase, bonus or other compensation plans for directors, officers, employees and agents of the Corporation and its
subsidiaries as it may determine;
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(vii)
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To adopt from time to time such insurance, retirement, and other benefit plans for directors, officers, employees and agents of the Corporation and its subsidiaries as it may
determine; and
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(viii)
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To adopt from time to time regulations, not inconsistent with these Bylaws, for the management of the Corporation’s business and affairs.
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Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including, without limitation, their services as members of committees of the Board of
Directors.
Section 10. Resignation.
Any director may resign at any time by giving written notice of such resignation to the President or the Secretary at the principal office of the Corporation. Unless otherwise specified therein, such resignation shall take effect upon
receipt thereof.
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Section 11. Presumption of Assent.
A director of the Corporation who is present at a meeting of the Board of Directors at which action on any corporate matter is taken shall be presumed to
have assented to such action unless such director announces his dissent at the meeting and (a) such director’s dissent is entered in the minutes of the meeting, (b) such director files his written dissent to such action with the
secretary of the meeting before the adjournment thereof, or (c) such director forwards his written dissent within 24 hours after the meeting is adjourned, by certified mail, return receipt requested, bearing a postmark from the United States
Postal Service, to the secretary of the meeting or the Secretary of the Corporation. Such right to dissent shall not apply to a director who voted in favor of such action or failed to make his dissent known at the meeting.
Section 12. Director Qualifications
No person
shall be eligible for nomination, election or appointment to the Board of Directors: (i) if such person has been the subject of supervisory action by a financial regulatory agency that resulted in a cease and desist order or an agreement or
other written statement subject to public disclosure under 12 U.S.C. §1818(u), or any successor provision; (ii) if such person has been convicted of a crime involving dishonesty or breach of trust which is punishable by imprisonment for a
term exceeding one year under state or federal law; (iii) if such person is currently charged in any information, indictment, or other complaint with the commission of or participation in such a crime; and (iv) unless such person has been,
for a period of at least one year immediately before his or her nomination or appointment, a resident of a County in the State of Hawaii. No person may serve on the Board of Directors and at the same time be a director or officer of another
co-operative bank, credit union, savings bank, savings and loan association, trust company, bank holding company or banking association (in each case whether chartered by a state, the federal government or any other jurisdiction) that engages in
business activities in the same market area as the Corporation or any of its subsidiaries. No person shall be eligible for election or appointment to the Board of Directors if such person is the nominee or representative of a company, as that term
is defined in Section 10 of the Home Owners’ Loan Act or any successor provision, of which any director, partner, trustee or stockholder controlling more than 10% of any class of voting stock would not be eligible for election to the Board
of Directors under this Section 12. No person shall be eligible for election to the Board of Directors if such person is the nominee or representative of a person or group, or of a group acting in concert (as defined in 12 C.F.R.
Section 574.4(d)), that includes a person who is ineligible for election to the Board of Directors under this Section 12. The Board of Directors shall have the power to construe and apply the provisions of this Section 12 and to make
all determinations necessary or desirable to implement such provisions, including but not limited to determinations as to whether a person is a nominee or representative of a person, a company or a group, whether a person or company is included in a
group, and whether a person is the nominee or representative of a group acting in concert.
Section 13. Attendance at Board Meetings.
The Board of Directors shall have the right to remove any director from the board upon a director’s unexcused absence of three
consecutive regularly scheduled meetings of the Board of Directors.
9
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors.
(a)
General Provisions.
The Board of Directors may appoint from among its members an Audit Committee, a Compensation Committee, a
Governance/Nominating Committee, and such other committees as the Board of Directors deems necessary or desirable. The membership of the Audit Committee, the Compensation Committee and the Governance/Nominating Committee shall consist of independent
directors to the extent required by the applicable rules of the Securities and Exchange Commission or the NASDAQ Stock Market. The Board of Directors may delegate to any committee so appointed any of the powers and authorities of the Board of
Directors to the fullest extent permitted by the MGCL and any other applicable law.
(b)
Composition.
Each committee shall be
composed of one or more directors or any other number of members specified in these Bylaws. The Chairman of the Board may recommend committees, committee memberships, and committee chairmanships to the Board of Directors. The Board of Directors
shall have the power at any time to appoint the chairman and the members of any committee, change the membership of any committee, to fill all vacancies on committees, to designate alternate members to replace or act in the place of any absent or
disqualified member of a committee, or to dissolve any committee.
(c)
Governance/Nominating Committee.
The Governance/Nominating
Committee, if appointed, shall consist of not less than three members who meet the applicable independence requirements referenced in Section 1.(a), above and shall have authority: (i) to review any nominations for election to the Board of
Directors made by a stockholder of the Corporation pursuant to Article I, Section 6 of these Bylaws in order to determine compliance with such Bylaw provision; and (ii) to recommend to the Board of Directors nominees for election to the
Board of Directors to replace those Directors whose terms expire at the annual meeting of stockholders next ensuing. No Director shall participate in the deliberations or vote in the meeting of the Governance/Nominating Committee at which he or she
has been or is seeking to be proposed as a nominee.
(d)
Issuance of Stock.
If the Board of Directors has given general
authorization for the issuance of stock providing for or establishing a method or procedure for determining the maximum number of shares to be issued, a committee of the Board of Directors, in accordance with that general authorization or any stock
option or other plan or program adopted by the Board of Directors, may authorize or fix the terms of stock subject to classification or reclassification and the terms on which any stock may be issued, including all terms and conditions required or
permitted to be established or authorized by the Board of Directors. Any committee so designated may exercise the power and authority of the Board of Directors if the resolution that designated the committee or a supplemental resolution of the Board
of Directors shall so provide.
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Section 2. Conduct of Business.
Each committee may determine the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third of the members shall constitute a quorum unless the committee shall consist of one or two members, in which event one member shall constitute a quorum; and all matters shall be determined by a
majority vote of the members present. Action may be taken by any committee without a meeting if a unanimous consent which sets forth the action is given in writing or by electronic transmission by each member of the committee and filed in paper or
electronic form with the minutes of the proceedings of such committee. The members of any committee may conduct any meeting thereof by conference telephone or other communications equipment in accordance with the provisions of Section 6 of
Article II.
ARTICLE IV
OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after the annual meeting of stockholders shall choose a Chairman of the Board, Chief Executive Officer, President, one or more Vice Presidents, a Secretary and
a Chief Financial Officer/Treasurer and from time to time may choose such other officers as it may deem proper. Any number of offices may be held by the same person, except that no person may concurrently serve as both President and Vice President
of the Corporation.
(b) The term of office of all officers shall be until the next annual election of officers and until their respective
successors are chosen, but any officer may be removed from office at any time by the affirmative vote of a majority of the authorized number of directors then constituting the Board of Directors.
(c) All officers chosen by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices, subject to the
specific provisions of this Article IV. Such officers shall also have such powers and duties as from time to time may be conferred by the Board of Directors or by any committee thereof.
Section 2. Chairman of the Board of Directors.
The Chairman of the Board of Directors of the Corporation shall perform all duties and have all powers which are commonly incident to the office of Chairman of the Board or which are delegated to him or her by the Board of Directors. He or
she shall have power to sign all stock certificates, contracts and other instruments of the Corporation that are authorized.
Section 3. Chief
Executive Officer.
The Chief Executive Officer, subject to the control of the Board of Directors, shall serve in general executive
capacity and have general power over the management and oversight of the administration and operation of the Corporation’s business and general supervisory power and authority over its policies and affairs. The Chief Executive Officer shall see
that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect.
11
Section 4. President.
The President shall perform the duties of the Chief Executive Officer in the Chief Executive Officer’s absence or during his or her disability to act. In addition, the President shall perform the duties and
exercise the powers usually incident to their respective office and/or such other duties and powers as may be properly assigned to the President from time to time by the Board of Directors, the Chairman of the Board or the Chief Executive Officer.
Section 5. Vice President.
The
Vice President or Vice Presidents (including Executive Vice Presidents or other levels of Vice President designated by the Board of Directors), if any, shall perform the duties of the Chief Executive Officer in the absence of both the Chief
Executive Officer and the President, or during their disability to act. In addition, the Vice Presidents shall perform the duties and exercise the powers usually incident to their respective office and/or such other duties and powers as may be
properly assigned to the Vice Presidents from time to time by the Board of Directors, the Chairman of the Board or the Chief Executive Officer.
Section 6. Secretary.
The Secretary or an Assistant Secretary shall issue notices of meetings, shall keep the minutes
of meetings, shall have charge of the seal and the corporate books, shall perform such other duties and exercise such other powers as are usually incident to such offices and/or such other duties and powers as are properly assigned thereto by the
Board of Directors, the Chairman of the Board or the Chief Executive Officer.
Section 7. Chief Financial Officer/Treasurer.
The Chief Financial Officer/Treasurer shall have charge of all monies and securities of the Corporation, other than monies and securities of any division
of the Corporation that has a treasurer or financial officer appointed by the Board of Directors, and shall keep regular books of account. The funds of the Corporation shall be deposited in the name of the Corporation by the Chief Financial
Officer/Treasurer with such banks or trust companies or other entities as the Board of Directors from time to time shall designate. The Chief Financial Officer/Treasurer shall sign or countersign such instruments as require his or her signature,
shall perform all such duties and have all such powers as are usually incident to such office and/or such other duties and powers as are properly assigned to him or her by the Board of Directors, the Chairman of the Board or the Chief Executive
Officer, and may be required to give bond for the faithful performance of his or her duties in such sum and with such surety as may be required by the Board of Directors.
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Section 8. Other Officers.
The Board of Directors may designate and fill such other offices in its discretion and the persons holding such other offices shall have such powers and shall perform such duties as the Board of Directors or Chief
Executive Officer may from time to time assign.
Section 9. Action with Respect to Securities of Other Corporations
Stock of other corporations or associations, registered in the name of the Corporation, may be voted by the Chief Executive Officer, the President, a
Vice-President, or a proxy appointed by either of them. The Board of Directors, however, may by resolution appoint some other person to vote such shares, in which case such person shall be entitled to vote such shares upon the production of a
certified copy of such resolution.
ARTICLE V
STOCK
Section 1. Certificates of Stock.
The Board of Directors may determine to issue certificated or uncertificated shares of capital stock and other securities of the Corporation. For
certificated stock, each stockholder is entitled to certificates which represent and certify the shares of stock he or she holds in the Corporation. Each stock certificate shall include on its face the name of the Corporation, the name of the
stockholder or other person to whom it is issued, and the class of stock and number of shares it represents. It shall also include on its face or back (a) a statement of any restrictions on transferability and a statement of the designations
and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications, and terms and conditions of redemption of the stock of each class which the Corporation is authorized to issue, of the
differences in the relative rights and preferences between the shares of each series of preferred stock which the Corporation is authorized to issue, to the extent they have been set, and of the authority of the Board of Directors to set the
relative rights and preferences of subsequent series of preferred stock or (b) a statement which provides in substance that the Corporation will furnish a full statement of such information to any stockholder on request and without charge. Such
request may be made to the Secretary or to the Corporation’s transfer agent. Upon the issuance of uncertificated shares of capital stock, the Corporation shall send the stockholder a written statement of the same information required above on
stock certificates. Each stock certificate shall be in such form, not inconsistent with law or with the Corporation’s Articles, as shall be approved by the Board of Directors or any officer or officers designated for such purpose by resolution
of the Board of Directors. Each stock certificate shall be signed by the Chairman of the Board, the President, or a Vice-President, and countersigned by the Secretary, an Assistant Secretary, the Treasurer, or an Assistant Treasurer. Each
certificate may be sealed with the actual corporate seal or a facsimile of it or in any other form and the signatures may be either manual or facsimile signatures. A certificate is valid and may be issued whether or not an officer who signed it is
still an officer when it is issued. A certificate may not be issued until the stock represented by it is fully paid.
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Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the Corporation kept at an office of the Corporation or by transfer agents designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these Bylaws, an outstanding certificate for the number of shares involved shall be surrendered for cancellation before a new certificate is issued therefor.
Section 3. Record Dates or Closing of Transfer Books.
The Board of Directors may, and shall have the power to, set a record date or direct that the stock transfer books be closed for a stated period for the purpose of making any proper determination with respect to stockholders, including
which stockholders are entitled to notice of a meeting, vote at a meeting, receive a dividend, or be allotted other rights. The record date may not be prior to the close of business on the day the record date is fixed nor, subject to Section 3
of Article I, more than 90 days before the date on which the action requiring the determination will be taken; the transfer books may not be closed for a period longer than 20 days; and, in the case of a meeting of stockholders, the record date
or the closing of the transfer books shall be at least ten days before the date of the meeting. Any shares of the Corporation’s own stock acquired by the Corporation between the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders and the time of the meeting may be voted at the meeting by the holder of record as of the record date and shall be counted in determining the total number of outstanding shares entitled to be voted at the
meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
The Board of Directors of the Corporation may determine the conditions for issuing a new stock certificate in place of one which is alleged to have been lost, stolen, or destroyed, or the Board of Directors may
delegate such power to any officer or officers of the Corporation. In their discretion, the Board of Directors or such officer or officers may require the owner of the certificate to give a bond, with sufficient surety, to indemnify the Corporation
against any loss or claim arising as a result of the issuance of a new certificate. In their discretion, the Board of Directors or such officer or officers may refuse to issue such new certificate without the order of a court having jurisdiction
over the matter.
Section 5. Stock Ledger.
The Corporation shall maintain a stock ledger which contains the name and address of each stockholder and the number of shares of stock of each class which the stockholder holds. The stock ledger may be in written form or in any other form
which can be converted within a reasonable time into written form for visual inspection. The original or a duplicate of the stock ledger shall be kept at the offices of a transfer agent for the particular class of stock or, if none, at the principal
executive office of the Corporation.
Section 6. Regulations.
The issue, transfer, conversion and registration of certificates of stock shall be governed by such other regulations as the Board of Directors may establish.
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ARTICLE VI
MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere specifically authorized in these Bylaws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof.
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, bearing the name of the Corporation, which shall be in the charge of the Secretary.
The Board of Directors may authorize one or more duplicate seals and provide for the custody thereof. If the Corporation is required to place its corporate seal to a document, it is sufficient to meet the requirement of any law, rule, or regulation
relating to a corporate seal to place the word “(seal)” adjacent to the signature of the person authorized to sign the document on behalf of the Corporation.
Section 3. Books and Records.
The Corporation shall keep correct and complete books and records
of its accounts and transactions and minutes of the proceedings of its stockholders and Board of Directors and of any committee when exercising any of the powers of the Board of Directors. The books and records of the Corporation may be in written
form or in any other form which can be converted within a reasonable time into written form for visual inspection. Minutes shall be recorded in written form but may be maintained in the form of a reproduction. The original or a certified copy of
these Bylaws shall be kept at the principal office of the Corporation.
Section 4. Reliance upon Books, Reports and Records.
Each director, each member of any committee designated by the Board of Directors, and each officer and agent of the Corporation shall, in the performance
of his or her duties, in addition to any protections conferred upon him or her by law, be fully protected in relying in good faith upon the books of account or other records of the Corporation and upon such information, opinions, reports or
statements presented to the Corporation by any of its officers or employees, or committees of the Board of Directors so designated, or by any other person as to matters which such director, committee member, officer or agent reasonably believes are
within such other person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Corporation.
Section 5. Fiscal Year.
The fiscal year of the Corporation shall commence on the first day of January and end on the
last day of December in each year.
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Section 6. Time Periods.
In applying any provision of these Bylaws that requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an
event, calendar days shall be used, the day of the doing of the act shall be excluded and the day of the event shall be included.
Section 7.
Checks, Drafts, Etc.
All checks, drafts and orders for the payment of money, notes and other evidences of indebtedness, issued in the
name of the Corporation, shall be signed by any officer, employee or agent of the Corporation that is authorized by the Board of Directors.
Section 8. Mail.
Any notice or other document that is required by these Bylaws to be mailed shall be deposited in the
United States mail, postage prepaid.
Section 9. Contracts and Agreements.
To the extent permitted by applicable law, and except as otherwise prescribed by the Articles or these Bylaws, the Board of Directors may authorize any
officer, employee or agent of the Corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation. Such authority may be general or confined to specific instances. A person who holds more
than one office in the Corporation may not act in more than one capacity to execute, acknowledge, or verify an instrument required by law to be executed, acknowledged, or verified by more than one officer.
ARTICLE VIII
AMENDMENTS
These Bylaws may be adopted, amended or repealed as provided in the Articles of the Corporation.
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Exhibit 4
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
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No.
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T
ERRITORIAL
B
ANCORP
I
NC
.
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Shares
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FULLY PAID AND NON-ASSESSABLE
PAR VALUE $0.01 PER SHARE
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CUSIP:
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THE SHARES REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO
RESTRICTIONS, SEE REVERSE
SIDE
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THIS CERTIFIES that
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is the owner of
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SHARES OF COMMON STOCK
of
Territorial Bancorp Inc.
a Maryland corporation
The shares evidenced by this certificate are transferable only
on the books of Territorial Bancorp Inc. by the holder hereof, in person or by attorney, upon surrender of this certificate properly endorsed. The capital stock evidenced hereby is not an account of an insurable type and is not insured by the
Federal Deposit Insurance Corporation or any other Federal or state governmental agency.
IN WITNESS WHEREOF, Territorial Bancorp Inc. has
caused this certificate to be executed by the facsimile signatures of its duly authorized officers and has caused a facsimile of its seal to be hereunto affixed.
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By
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[SEAL]
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By
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VERNON HIRATA
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ALLAN S. KITAGAWA
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VICE CHAIRMAN, CO-CHIEF OPERATING OFFICER AND CORPORATE SECRETARY
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CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
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The Board of Directors of Territorial Bancorp Inc. (the “Company”) is authorized by resolution
or resolutions, from time to time adopted, to provide for the issuance of more than one class of stock, including preferred stock in series, and to fix and state the voting powers, designations, preferences, limitations and restrictions thereof. The
Company will furnish to any stockholder upon request and without charge a full description of each class of stock and any series thereof.
The shares evidenced by this certificate are subject to a limitation contained in the Articles of Incorporation to the effect that in no event shall any record owner of any outstanding common stock which is beneficially owned, directly or
indirectly, by a person who beneficially owns in excess of 10% of the outstanding shares of common stock (the “Limit”) be entitled or permitted to any vote in respect of shares held in excess of the Limit.
The shares represented by this certificate may not be cumulatively voted on any matter. The Articles of Incorporation require that, with limited
exceptions, no amendment, addition, alteration, change or repeal of the Articles of Incorporation shall be made, unless such is first approved by the Board of Directors of the Company and approved by the stockholders by a majority of the total
shares entitled to vote, or in certain circumstances approved by the affirmative vote of up to eighty percent (80%) of the shares entitled to vote.
The following abbreviations when used in the inscription on the face of this certificate shall be construed as though they were written out in full according to applicable laws or regulations.
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TEN COM
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- as tenants in common
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UNIF GIFT MIN ACT
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Custodian
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(Cust)
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TEN ENT
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Under Uniform Gifts to Minors Act
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JT TEN
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survivorship and not as tenants
in common
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(State)
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Additional abbreviations may also be used though not in the above list
For value received,
hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY NUMBER OR OTHER IDENTIFYING NUMBER
(please print or typewrite name and address including postal zip code of assignee)
Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and
appoint
Attorney to transfer the said shares on the books of the within named corporation
with full power of substitution in the premises.
Dated,
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In the presence of
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Signature:
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NOTE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME OF THE STOCKHOLDER(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATSOEVER.
Exhibit 5
LUSE GORMAN POMERENK & SCHICK
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
5335 WISCONSIN
AVENUE, N.W., SUITE 400
WASHINGTON, D.C. 20015
TELEPHONE (202) 274-2000
FACSIMILE (202) 362-2902
www.luselaw.com
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WRITER’S DIRECT DIAL NUMBER
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WRITER’S EMAIL
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(202) 274-2000
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November 14, 2008
The Board of Directors
Territorial Bancorp Inc.
1132
Bishop Street
Suite 2200
Honolulu, Hawaii 96813
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Re:
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Territorial Bancorp Inc.
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Common Stock, Par
Value $0.01 Per Share
Gentlemen:
You
have requested the opinion of this firm as to certain matters in connection with the offer and sale (the “Offering”) of Territorial Bancorp Inc. (the “Company”) Common Stock, par value $0.01 per share (“Common Stock”).
We have reviewed the Company’s Articles of Incorporation, Registration Statement on Form S-1 (the “Form S-1”), as well as applicable statutes and regulations governing the Company and the offer and sale of the Common Stock. The
opinion expressed below is limited to the Maryland General Corporation Law (which includes applicable provisions of the Maryland Constitution and reported judicial decisions interpreting the Maryland General Corporation Law and the Maryland
Constitution).
We are of the opinion that upon the declaration of effectiveness of the Form S-1, the Common Stock, when sold pursuant to
the Company’s prospectus and the Plan of Conversion and Reorganization of Territorial Mutual Holding Company, a federally-chartered mutual holding company, will be legally issued, fully paid and non-assessable.
This Opinion has been prepared in connection with the Form S-1. We hereby consent to our firm being referenced under the caption “Legal
Matters,” and for inclusion of this opinion as an exhibit to the Registration Statement on Form S-1.
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Very truly yours,
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/s/ Luse Gorman Pomerenk & Schick
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LUSE GORMAN POMERENK & SCHICK
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A PROFESSIONAL CORPORATION
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Exhibit 8
[Letterhead of Luse Gorman Pomerenk & Schick]
(202) 274-2000
November 14, 2008
Boards of Directors
Territorial Mutual Holding Company
Territorial Savings Group, Inc.
Territorial Bancorp Inc.
Territorial Savings Bank
1132 Bishop Street
Suite 2200
Honolulu, Hawaii 96813
Gentlemen:
You have requested our opinion regarding certain federal income tax consequences of the proposed conversion and reorganization of Territorial Mutual
Holding Company from a mutual holding company structure to a capital stock form of organization, pursuant to the Plan of Conversion and Reorganization (the “Plan”) of Territorial Mutual Holding Company, a federal mutual holding company
(“Mutual Holding Company”), dated as of November 4, 2008. Unless otherwise defined, all terms used in this letter have the meanings given to them in the Plan.
In providing our opinions expressed below, we have examined the Plan and certain other documents as we deemed necessary in order to provide our opinions.
In our examination, we assumed that original documents were authentic, copies were accurate and signatures were genuine. We assumed that all parties will comply with the terms and conditions of the Plan, and that the various representations and
warranties which have been provided to us are accurate, complete, true and correct. Accordingly, we express no opinion concerning the effect, if any, of variations from the foregoing. We specifically express no opinion concerning tax matters
relating to the Plan under state and local tax laws. In addition, we have assumed that (i) the factual statements and representations made by the Mutual Holding Company, the Mid-Tier Holding Company and Territorial Savings Bank in their
certificate delivered to us for purposes of this opinion are true, complete and correct and will remain true, complete and correct at all times up to and including the consummation of the Conversion and Reorganization, and (ii) the Mid-Tier
Merger and the MHC Merger (as defined below) will be completed in accordance with applicable federal and state laws. If any of the above described assumptions are untrue for any reason or if the Conversion and Reorganization is consummated in a
manner that is different from the manner described in the Plan, our opinion as expressed below may be adversely affected.
Boards of Directors
Territorial Mutual Holding Company
Territorial Savings Group, Inc.
Territorial Bancorp Inc.
Territorial Savings Bank
November 14, 2008
Page
2
Our opinion is based on current provisions of the Code, Treasury regulations promulgated thereunder,
published pronouncements of the Internal Revenue Service (the “Service”) and case law, any of which may be changed at any time with retroactive effect. Any change in applicable laws or the facts and circumstances surrounding the Conversion
and Reorganization, or any inaccuracy in the statements, facts, assumptions or representations upon which we have relied, may affect the continuing validity of our opinion as set forth herein. This opinion is as of the date hereof, and we disclaim
any obligation to advise you of any change in any matter considered herein after the date hereof.
We are furnishing this opinion in
connection with the transactions contemplated by the Plan. We emphasize that the outcome of litigation cannot be predicted with certainty and, although we have attempted in good faith to opine as to the probable outcome of the merits of each tax
issue with respect to which an opinion was requested, there can be no assurance that our conclusions are correct or that they would be adopted by the Internal Revenue Service or a court.
Description of Proposed Transactions
Based upon our review of the documents described above, and in
reliance upon such documents, we understand that the relevant facts are as follows. In January 1999, the Bank reorganized into the two-tier mutual holding company form of organization. Following the reorganization, the Mutual Holding Company owned
100% of the outstanding shares of the Mid-Tier Holding Company, and the Mid-Tier Holding Company owned 100% of the outstanding shares of the Bank.
On November 4, 2008, the Boards of Directors of the Mutual Holding Company, Mid-Tier Holding Company and the Bank adopted the Plan providing for the conversion of the Mutual Holding Company from a federal mutual holding company into
the capital stock form of organization. A new stock holding company, the Holding Company, will be established as part of the Conversion and will succeed to all the rights and obligations of the Mutual Holding Company and the Mid-Tier Holding Company
and issue Common Stock in the Conversion.
For valid business reasons, the present corporate structure of the Mutual Holding Company,
Mid-Tier Holding Company and the Bank will be changed pursuant to two mergers referred to as the “MHC Merger” and the “Mid-Tier Merger.” Pursuant to the Plan, the Conversion will be effected in the following steps, each of which
will be completed contemporaneously:
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(i)
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The Bank will establish the Holding Company as a stock corporation.
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Boards of Directors
Territorial Mutual Holding Company
Territorial Savings Group, Inc.
Territorial Bancorp Inc.
Territorial Savings Bank
November 14, 2008
Page
3
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(ii)
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The Mid-Tier Holding Company will convert to an interim stock savings bank and merge with and into the Bank with the Bank as the resulting entity (the “Mid-Tier Merger”),
whereby the Mutual Holding Company will receive shares of Bank common stock in exchange for its Mid-Tier Holding Company common stock.
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(iii)
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Immediately after the Mid-Tier Merger, the Mutual Holding Company will convert to an interim stock savings bank and will merge with and into the Bank with the Bank as the resulting
entity (the “MHC Merger”), whereby the shares of Bank common stock held by the Mutual Holding Company will be canceled and each Eligible Account Holder and Supplemental Eligible Account Holder will receive an interest in a Liquidation
Account of the Bank in exchange for such person’s interest in the Mutual Holding Company.
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(iv)
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Immediately after the MHC Merger, the Bank will issue one hundred (100) shares of its common stock to the Holding Company in exchange for at least fifty percent (50%) of
the net proceeds raised in the offering, and as a result the Bank will become a wholly-owned subsidiary of the Holding Company.
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(v)
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Immediately after the MHC Merger, the Holding Company will offer for sale its Common Stock in the Offering.
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At the time of the MHC Merger, a liquidation account will be established by the Bank for the benefit of Eligible Account Holders and Supplemental Account
Holders who continue to maintain their deposit accounts with the Bank. Pursuant to Section 19 of the Plan, the liquidation account will be equal to the Mutual Holding Company’s total equity as reflected in the latest statement of financial
condition contained in the final Prospectus used in the Offering.
After the Mid-Tier Merger, the MHC Merger and the Offering, the Holding
Company will (i) be a publicly held corporation, (ii) register the Holding Company Common Stock under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and (iii) become subject to
the rules and regulations thereunder and file periodic reports and proxy statements with the SEC. The Bank will become a wholly owned subsidiary of the Holding Company and will continue to carry on its business and activities as conducted
immediately prior to the Conversion.
The initial stockholders of the Holding Company will be those persons who purchase shares of Holding
Company Common Stock in the Offering. Nontransferable rights to subscribe for the Holding Company Common Stock have been granted, in order of priority, to depositors of the Bank who have account balances of $50.00 or more as of the close of business
on September 30, 2007 (“Eligible Account Holders”), the Bank’s tax-qualified employee plans (“Employee Plans”), depositors of the Bank who have account balances of $50.00 or more as of
Boards of Directors
Territorial Mutual Holding Company
Territorial Savings Group, Inc.
Territorial Bancorp Inc.
Territorial Savings Bank
November 14, 2008
Page
4
the close of business on December 31, 2008 (“Supplemental Eligible Account Holders”), depositors of the Bank as of the Voting Record Date,
other than Eligible Account Holders and Supplemental Eligible Account Holders (“Depositors”) and borrowers of the Bank as of September 18, 2002 whose borrowings remained outstanding as of the Voting Record Date (“Borrowers”)
(collectively, Eligible Account Holders, Employee Plans, Supplemental Eligible Account Holders, Depositors and Borrowers are referred to herein as “Other Members”). Subscription rights are nontransferable. The Holding Company will also
offer shares of Holding Company Common Stock not subscribed for in the subscription offering, if any, for sale in a community offering to certain members of the general public.
Opinions
Based on the foregoing description of the MHC Merger and the Mid-Tier Merger, and subject
to the qualifications and limitations set forth in this letter, we are of the opinion that:
1. The conversion of the Mid-Tier Holding
Company to an interim stock savings bank (which we shall continue to refer to as “Mid-Tier Holding Company”) and the conversion of the Mutual Holding Company to an interim stock savings bank (which we shall continue to refer to as
“Mutual Holding Company”) will each constitute a tax-free reorganization within the meaning of Section 368(a)(1)(F) of the Code.
2. The Mid-Tier Merger and the MHC Merger each qualify as a tax-free reorganization within the meaning of Section 368(a)(1)(A) of the Code. (Section 368(a)(1)(A) of the Code).
3. The Mid-Tier Holding Company will not recognize any gain or loss on the transfer of its assets to the Bank and the Bank’s assumption of its
liabilities in exchange for shares of common stock in the Bank or on the constructive distribution of such stock to the Mutual Holding Company. (Sections 361(a), 361(c) and 357(a) of the Code).
4. No gain or loss will be recognized by the Bank upon the receipt of the assets of Mid-Tier Holding Company and the Mutual Holding Company in the
Mid-Tier Merger and the MHC Merger, respectively. (Section 1032(a) of the Code).
5. The basis of the assets of the Mid-Tier Holding
Company and the Mutual Holding Company to be received by Bank (other than stock in the Bank) will be the same as the basis of such assets in the hands of Mid-Tier Holding Company and the Mutual Holding Company, respectively, immediately prior to the
transfer. (Section 362(b) of the Code).
6. The holding period of the assets of Mid-Tier Holding Company and the Mutual Holding
Company to be received by Bank (other than stock in the Bank) will include the holding period of those assets in the hands of Mid-Tier Holding Company and the Mutual Holding Company, respectively, immediately prior to the transfer.
(Section 1223(2) of the Code).
Boards of Directors
Territorial Mutual Holding Company
Territorial Savings Group, Inc.
Territorial Bancorp Inc.
Territorial Savings Bank
November 14, 2008
Page
5
7. The Mutual Holding Company will not recognize any gain or loss upon its constructive exchange of
Mid-Tier Holding Company common stock for Bank common stock. (Section 354(a)).
8. The exchange of the members’ equity interests in
the Mutual Holding Company for interests in a Liquidation Account established in the Bank in the MHC Merger will satisfy the continuity of interest requirement of Section 1.368-1(b) of the Income Tax Regulations (
cf.
Rev. Rul. 69-3,
1969-1 C.B. 103, and Rev. Rul. 69-646, 1969-2 C.B. 54).
9. The Mutual Holding Company will not recognize any gain or loss on the transfer
of its assets to the Bank and the Bank’s assumption of its liabilities, if any, in exchange for an interest in a Liquidation Account in the Bank or on the constructive distribution of such Liquidation Account to the Mutual Holding
Company’s members who remain depositors of the Bank. (Section 361(a), 361(c) and 357(a) of the Code).
10. No gain or loss will be
recognized by the Bank upon the receipt of the assets of the Mutual Holding Company in the MHC Merger in exchange for the transfer to the members of the Mutual Holding Company of an interest in the Liquidation Account in the Bank.
(Section 1032(a) of the Code.)
11. Persons who have an interest in the Mutual Holding Company will recognize no gain or loss upon the
receipt of an interest in the Liquidation Account in the Bank in exchange for their voting and liquidation rights in the Mutual Holding Company. (Section 354(a) of the Code).
12. It is more likely than not that the fair market value of the nontransferable subscription rights to purchase Holding Company Common Stock is zero.
Accordingly, no gain or loss will be recognized by Other Members upon distribution to them of nontransferable subscription rights to purchase shares of Holding Company Common Stock. (Section 356(a) of the Code). Other Members will not realize any
taxable income as the result of the exercise by them of the nontransferable subscriptions rights. (Section 305 and Rev. Rul. 56-572, 1956-2 C.B.182).
Boards of Directors
Territorial Mutual Holding Company
Territorial Savings Group, Inc.
Territorial Bancorp Inc.
Territorial Savings Bank
November 14, 2008
Page
6
13. The basis of the Holding Company Common Stock purchased in the Offering by the exercise of the
nontransferable subscription rights will be the purchase price thereof. (Section 1012 of the Code).
14. The holding period of the Holding
Company Common Stock purchased pursuant to the exercise of subscriptions rights shall commence on the date on which the right to acquire such stock was exercised. (Section 1223(6) of the Code).
15. No gain or loss will be recognized by Holding Company on the receipt of money in exchange for Holding Company Common Stock sold in the Offering.
(Section 1032 of the Code).
16. Neither the Holding Company nor the Bank will recognize any gain or loss upon the transfer of a portion of
the offering proceeds from the Holding Company to the Bank in exchange for shares of common stock of the Bank (Sections 305 and 1032(a) of the Code).
Our opinion under paragraph 12 above is predicated on the representation that no person shall receive any payment, whether in money or property, in lieu of the issuance of subscription rights. Our opinions under
paragraphs 12 and 13 are based on the position that the subscription rights to purchase shares of Common Stock received by Other Members have a fair market value of zero. We also note that FinPro, Inc. has issued a letter dated November 10,
2008 stating that the subscription rights will have no ascertainable market value. We understand that the subscription rights will be granted at no cost to the recipients, will be legally nontransferable and of short duration, and will provide the
recipient with the right only to purchase shares of Common Stock at the same price to be paid by members of the general public in any Community Offering. We also note that the Internal Revenue Service has not in the past concluded that subscription
rights have value.
If the subscription rights are subsequently found to have a fair market value, income may be recognized by various
recipients of the subscription rights (in certain cases, whether or not the rights are exercised) and the Holding Company may be taxable on the distribution of the subscription rights.
Boards of Directors
Territorial Mutual Holding Company
Territorial Savings Group, Inc.
Territorial Bancorp Inc.
Territorial Savings Bank
November 14, 2008
Page
7
Consent
We hereby consent to the filing of the opinion as an exhibit to the MHC’s Application for Conversion filed with the Office of Thrift Supervision and to the Holding Company’s Registration Statement on Form S-1 as filed with the
SEC. We also consent to the references to our firm in the Prospectus contained in the Application for Conversion and Form S-1 under the captions “The Conversion- Material Income Tax Consequences” and “Legal Matters.”
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Very truly yours,
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LUSE GORMAN POMERENK & SCHICK,
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A PROFESSIONAL CORPORATION
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/s/ Luse Gorman Pomerenk & Schick, P.C.
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Exhibit 10.1
TERRITORIAL BANCORP INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT
(the “Agreement”) is made and entered into this
th day of
, 2009, by and between Territorial Bancorp Inc., a corporation located at 1132 Bishop Street,
22
nd
Floor, Honolulu, Hawaii 96813 (the “Company”), and Allan S. Kitagawa (“Executive”).
WITNESSETH
WHEREAS,
Executive
is currently employed as Chief Executive Officer and President of Territorial Savings Bank (the “Bank”); and
WHEREAS,
the
Company desires to assure itself of the continued availability of the Executive’s services as provided in this Agreement; and
WHEREAS,
Executive is willing to serve the Company on the terms and conditions hereinafter set forth; and
WHEREAS,
Executive has previously entered into a separate employment agreement with the Bank.
NOW, THEREFORE,
in consideration of the mutual
covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows:
1. Employment.
During
the term of this Agreement, which is effective as of the date first set forth above (the “Commencement Date”), Executive shall serve in the capacity of Chief Executive Officer and President of the Company. Executive shall render such
administrative and management services to the Company as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. Executive shall promote the business of the Company. Executive’s other duties
shall be such as the Board of Directors of the Company (the “Board of Directors” or “Board”) may from time to time reasonably direct, including normal duties as an officer of the Company.
2. Service on the Board of Directors.
During the term of this Agreement, Executive will continue to serve on the Board of Directors of the Company as a director.
If at any time during the term of this Agreement Executive shall fail to be re-nominated to the Board of Directors or re-appointed as the Chairman of the Board other than for reasons of Just Cause (as defined in Section 9(d) of this Agreement),
Executive shall have “Good Reason” (as defined in Section 9(b) of this Agreement) to terminate his employment under this Agreement and Executive shall have no further obligations under this Agreement.
3. Base Compensation.
The Company agrees to pay Executive during the Term of this Agreement (as hereinafter
defined in Section 7) a base salary at the rate of $
per annum, payable in accordance with the customary payroll practices of the Company; provided, however, that
the rate of Executive’s base salary shall be reviewed by the Board of Directors not less often than annually, and Executive shall be entitled to receive annual increases at such percentage or in such an amount as the Board of Directors, in its
sole discretion, may decide.
4. Discretionary Bonus.
Executive shall be entitled to receive an annual bonus in an amount which is based on the
bonus program maintained by the Company as of the date of this Agreement and shall be eligible to participate in any future bonus program adopted by the Company in an equitable manner. No other compensation provided for in this Agreement shall be
deemed a substitute for Executive’s right to receive bonuses when and as declared by the Board of Directors or as provided for by any plan or program of the Company.
5. Expenses.
During the term of this Agreement, Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred (in accordance with the policies and procedures of the Company) in
performing services under this Agreement, provided that Executive properly accounts for expenses in accordance with the policies of the Company and provided further that all such reimbursements pursuant to this Section 5 shall be paid promptly
by the Company and in any event no later than March 15 of the year immediately following the year in which the expense was incurred.
6. Employee
Benefits.
(a)
Participation in Retirement and Executive Benefit Plans
. Executive shall be entitled, while employed under
the terms of this Agreement, to receive all benefits under any tax-qualified or non-qualified employee benefit plan or arrangement in effect as of the date of this Agreement or that the Company implements at any time during the term of this
Agreement. Executive shall be entitled to participate in such future plans or arrangements on the same terms as other employees of the Company or as established by the Company for Executive or other selected employees.
(b)
Fringe Benefits
. Executive shall be entitled to receive any benefits under any fringe benefit plan or policy that is in effect as of
the date of this Agreement, including any discount or reduced fee employee loan program, or that the Company implements at any time during the term of this Agreement, on the same terms as the Company’s senior management employees. Nothing paid
to Executive under any plan or arrangement presently in effect or made available in the future will be deemed to be in lieu of base salary or other compensation to Executive under this Agreement.
(c)
Automobile, Cellular Phone Use, Computer and Memberships
. The Company or the Bank shall provide Executive with the use of an automobile
in accordance with the Company’s or the Bank’s automobile policy for executive vice presidents and above, as in effect from time to time. The Company or the Bank shall annually include on Executive’s Form W-2 any amount attributable
to Executive’s personal use of such automobile. The Company or the Bank shall also provide Executive with the use of a cellular phone and shall pay (or reimburse Executive) for all reasonable expenses related to the use of such phone. The
Company or the
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Bank shall also provide Executive with the use of a personal digital assistant or similar device, and home, portable and office computers and shall pay (or
reimburse Executive) for all reasonable expenses related to the use of such computers or devices. In addition, the Company or the Bank shall reimburse or pay Executive amounts sufficient to establish or maintain membership in any club or
organization (business, social or otherwise) to which Executive is a member as of the date of this Agreement, including but not limited to the Waialae Country Club and Plaza Club (including such fees or dues relating to the use of the club or
organization).
(d)
Paid Leave Time
. Executive shall be entitled to leave time in accordance with the standard policies or
practices of the Company for senior executive officers, as in effect from time to time.
7. Term of Agreement.
Executive’s employment under
this Agreement shall be deemed to have commenced as of the Commencement Date and shall continue for a period of thirty-six (36) calendar months from the Commencement Date. Commencing on the first anniversary of the Commencement Date and
continuing on each anniversary thereafter (each an “Anniversary Date”), the disinterested members of the Board of Directors of the Company may extend the Agreement an additional year such that the remaining term of the Agreement shall be
thirty-six (36) months, unless Executive elects not to extend the term of this Agreement by giving written notice in accordance with Section 15 of this Agreement. The Board of Directors of the Company will review the Agreement and
Executive’s performance annually for purposes of determining whether to extend the Agreement and the rationale and results thereof shall be included in the minutes of the Board’s meeting. The Board of Directors of the Company shall give
written notice to Executive as soon as possible after such review as to whether the Agreement is to be extended; provided, however, if the Board fails to conduct such review or if written notice of nonrenewal is provided to Executive, then in such
case the term of this Agreement shall become fixed and shall cease at the end of thirty-six (36) full calendar months following the Anniversary Date.
8. Noncompetition and Confidentiality.
(a) Executive shall devote his full time and attention to the performance of his
employment under this Agreement. Upon any termination of Executive’s employment hereunder pursuant to Section 9(b) of this Agreement (other than a termination which occurs after the effective date of a Change in Control), Executive agrees
not to compete with the Company or any subsidiary of the Company for a period of one (1) year following such termination in any city, town or county in which Executive’s normal business office is located or in which the Company or any
subsidiary of the Company has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of
Directors. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the
depository, lending or other business activities of the Company or any subsidiary of the Company. The parties hereto, recognizing that irreparable injury will result to the Company or any subsidiary of the Company, and their business and property in
the event of Executive’s breach of this Section 8(a), agree that in the event of any such breach by Executive, the Company will be entitled, in addition to any other remedies and
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damages available, to an injunction to restrain the violation hereof by Executive, Executive’s partners, agents, servants, employees and all persons
acting for or under the direction of Executive. Executive represents and admits that in the event he terminates employment with the Company pursuant to Section 9(b) of this Agreement, Executive’s experience and capabilities are such that
Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Company, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will
be construed as prohibiting the Company from pursuing any other remedies available to the Company for breach or threatened breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Company is a valuable,
special and unique asset of the business of the Company. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Company to any person, firm,
corporation, or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived
from the business plans and activities of the Company. Further, Executive may disclose information regarding the business activities of the Company to the Office of Thrift Supervision (“OTS”) or other regulatory or judicial body pursuant
to a formal regulatory request or subpoena.
(c) Nothing contained in this Section 8 shall be deemed to prevent or limit the right of
Executive to invest in any entity which conducts business similar to that of the Company, solely as a passive or minority investor.
9. Termination.
Executive’s employment under this Agreement shall be terminated upon any of the following occurrences:
(a)
Death
. Executive’s employment under this Agreement shall terminate upon his death. Executive’s estate shall be entitled to
receive payments of base salary, payable in accordance with the regular payroll practices of the Company, for sixty (60) days immediately following the date of Executive’s death and any other compensation accrued as of the date of death.
(b)
Termination of Employment by the Board of Directors Without Just Cause or by the Executive for Good Reason
. In the event
that (i) the Board of Directors terminates Executive’s employment without “Just Cause” (as defined in Section 9(d)) or (ii) such employment is terminated by the Executive for “Good Reason” (as defined in
Section 9(b)(iii), Executive shall be entitled to:
(i) his base salary for the remaining term of the Agreement, including any renewals
or extensions thereof, at the current rate in effect pursuant to Section 3 of this Agreement, plus the amount of the annual cash bonus earned in the calendar year preceding the year of termination, and a cash equivalent amount equal to the
additional retirement benefits under any retirement program (whether
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tax-qualified or non-qualified) that Executive would have been entitled to had his employment continued through the remaining term of the Agreement (with the
amount of benefits determined by reference to the benefits received by the Executive or accrued on his behalf under such programs during the twelve (12) months preceding his termination).
(ii) coverage under the Company’s life insurance plans and non-taxable medical, health, and dental plans (each being a “Welfare Plan”) in
the same manner in which Executive received coverage on the last day of his employment with the Company. Executive and his covered dependents (if any) shall continue participating in such Welfare Plans, subject to the same premium contributions (if
any) on the part of Executive as were required immediately prior to his termination until the earlier of (i) his death; (ii) his employment by another employer other than one of which he is the majority owner; or (iii) three
(3) years from his termination date.
(iii) For purposes of this Agreement, termination of Executive’s employment hereunder for
“Good Reason” shall be limited to Executive’s voluntary termination of employment after the occurrence of any of the following events which have not been consented to in advance by Executive in writing; provided that Executive has
given written notice to the Company within ninety (90) days after the initial occurrence of such event and that the Company has been given at least thirty (30) days to cure the situation (but the Company may waive its right to cure):
(i) if Executive would be required to move his personal residence or perform his principal executive functions more than twenty-five (25) miles from Executive’s primary office as of the Commencement Date; (ii) if, in the
organizational structure of the Company, Executive would be required to report to a person or persons other than the Board of Directors; (iii) if the Company should fail to maintain Executive’s base compensation in effect pursuant to
Section 3 of this Agreement, or fail to maintain the existing employee benefit plans or arrangements in which Executive participates as of the date of this Agreement, including any material fringe benefit, bonus plan and/or retirement plan,
except to the extent that such reduction in compensation or benefit programs is part of an overall adjustment in compensation and benefits for all employees of the Company and the Executive is otherwise compensated for such an overall adjustment in
an equitable manner; (iv) if Executive would be assigned duties and responsibilities other than those normally associated with his position as referenced in Section 1 of this Agreement; (v) if Executive’s responsibilities or
authority have in any way been materially diminished or reduced other than for reasons of Just Cause; or (vi) if Executive is not re-elected to the Board of Directors or appointed as Chairman of the Board other than for reasons of Just Cause.
(iv) The sum due under Section 9(b)(i) shall be paid in one lump sum within thirty (30) calendar days after such termination.
Notwithstanding the foregoing, in the event Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid penalties under
5
Code Section 409A, payment shall be withheld and shall be paid to Executive on the first day of the seventh month following Executive’s termination
of employment by the Company without Just Cause.
(v) For purposes of Section 9(b), termination of employment as used herein shall mean
“Separation from Service” as defined in Code Section 409A and the Treasury Regulations promulgated thereunder.
(c)
Disability
.
(i) Termination by the Company of Executive’s employment based on “Disability” shall occur if:
(A) Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than twelve
(12) months; (B) by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for continuous period of not less than twelve (12) months, Executive is receiving income
replacement benefits for a period of not less than three (3) months under an accident and health plan covering employees of the Company; or (C) Executive is determined to be totally disabled by the Social Security Administration. Executive
shall be entitled to receive benefits under any short or long-term disability plan maintained by the Company.
(ii) The Company shall pay Executive, as disability pay, a monthly payment equal to three-quarters (
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) of Executive’s monthly rate of base salary, plus any bonus paid to Executive for the preceding year. These disability payments shall commence within thirty (30) days of the date of Executive’s termination due to
Disability and will end on the earlier of (A) the date Executive returns to the full-time employment of the Company in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between
Executive and the Company; (B) the date the Executive begins full-time employment with another employer; (C) the date Executive attains the normal age of retirement (as defined in the Company’s defined benefit pension plan) or begins
receiving benefits under any substitute retirement plan adopted by the Company; or (D) the date of Executive’s death. Notwithstanding any other provision to the contrary, the Company’s obligation for any payments required to be made
under this Section 9(c) shall be reduced by any proceeds received by Executive from disability income insurance or any other disability policy or plan maintained by the Company for Executive which was paid for by the Company as partial
satisfaction of its obligation under this Section 9(c).
(iii) The Company shall cause to be continued life insurance and
non-taxable medical and dental coverage substantially identical to the coverage maintained by the Company for Executive prior to his termination for Disability. This coverage shall cease upon the earlier of (A) the date Executive returns to the
full-time employment of the Company, in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between
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Executive and the Company; (B) the date Executive begins full-time employment with another employer; (C) the date Executive attains the normal age
of retirement or begins receiving benefits under the Company’s retirement plan; or (D) the date of Executive’s death.
(iv)
Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability.
(d)
Termination of Employment by the Board of Directors for Just Cause
. In the event Executive’s employment is terminated for
“Just Cause,” no continued payments or benefits shall be due under this Agreement. For purposes of this Agreement, termination for “Just Cause” shall be defined as termination due to 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 determination of “Just Cause” as defined by this Section 9(d) shall be determined by a majority vote of the entire membership of the Board of Directors
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 with counsel), of finding that in the good faith opinion of the Board, Executive committed
the conduct described above and specifying the particulars thereof.
(e)
Voluntary Termination of Employment by Executive Other Than
for Good Reason
. The voluntary termination of employment by Executive during the term of this Agreement, other than for Good Reason, with the delivery of no less than sixty (60) days written notice to the Board of Directors, entitles
Executive to receive only the base salary, vested rights, and all employee benefits up to Executive’s termination date.
(f)
Termination and Board Membership
. To the extent Executive is a member of the board of directors of the Company or the Bank or any of their affiliates on the date of an involuntary termination of employment with the Company or the Bank
or a termination of employment for Good Reason, Executive shall be deemed to have automatically resigned from all of the boards of directors immediately following such termination of employment with the Company or the Bank.
(g)
Termination and Release of Claims
. Any payments to be made under this Agreement shall be contingent on Executive’s execution and
non-revocation of a mutual release in a form acceptable to the Company and the Bank; provided, however, that if the Company or the Bank refuse to execute such mutual release, the Executive’s obligation to execute and not revoke the release as a
precondition to receiving such severance benefits shall terminate. The mutual release agreement shall release the Company and the Bank from any and all claims and other actions by Executive and it shall also release the Executive from any and all
claims and other actions by the Company and the Bank.
7
10. Change in Control.
(a) For purposes of this Agreement, a Change in Control of the Company or the Bank shall be deemed to have occurred if and when:
(i) there occurs a change in control of the Company or the Bank within the meaning of the Home Owners Loan Act of 1933 or 12 C.F.R. Part 574 as applied to the Company or the Bank as if it were a federally chartered
institution;
(ii) as a result of, or in connection with, any merger or other business combination, sale of assets or contested election,
wherein the persons who were non-employee directors of the Company or the Bank before such transaction or event cease to constitute a majority of the Board of Directors of the Company or the Bank or any successor to the Company or the Bank;
(iii) the Company or the Bank transfers substantially all of its assets to another corporation or entity which is not an affiliate of the
Company or the Bank; or
(iv) the Company or the Bank is merged or consolidated with another corporation or entity and, as a result of such
merger or consolidation, less than sixty percent (60%) of the equity interest in the surviving or resulting corporation is owned by the former shareholders or depositors of the Company or the Bank.
For purposes of Section 10 of this Agreement, a Change in Control shall not occur as a result of the Conversion.
(b) If Executive’s employment is terminated for any reason other than for Just Cause within twelve months following a Change in Control, Executive
shall be entitled to receive the greater of the following:
(i) the amount of the payment and benefits specified in
Section 9(b), or
(ii) the amount of the payment and benefits specified in Section 10(c).
Such payment shall be made in a lump sum within thirty (30) days following Executive’s termination of employment. For purposes
of this Section 10, termination of employment as used herein shall mean “Separation from Service” as defined in Code Section 409A and the Treasury Regulations promulgated thereunder. Notwithstanding the foregoing, in the event
Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid penalties under Code Section 409A, payment shall be withheld and shall be paid to Executive on the first
day of the seventh month following Executive’s termination of employment.
(c) For purposes of Section 10(b)(ii), the amount of
payment and benefits shall be equal to:
(i) an amount equal to three (3) times his “base amount,” as defined
in Code Section 280G(b)(3), less one (1) dollar; and
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(ii) coverage under the Company’s or Bank’s life insurance plan and non-taxable
medical, health and dental plans (each being a “Welfare Plan”) in the same manner in which Executive received coverage on the last day of his employment with the Company. Executive and his covered dependents (if any) shall continue
participating in such Welfare Plans, subject to the same premium contributions (if any) on the part of Executive as were required immediately prior to his termination until the earlier of (i) his death; (ii) his employment by another
employer other than one of which he is the majority owner; or (iii) three (3) years from his termination date.
11. Successors and
Assigns.
(a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company which
shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Company.
(b) Since the Company is contracting for the unique and personal skills of Executive, Executive shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Company.
12. Amendments.
No amendments or additions to this Agreement shall be binding upon the parties hereto unless made in writing and signed by both
parties, except as herein otherwise specifically provided.
13. Applicable Law.
This agreement shall be governed in all respects, whether as to
validity, construction, capacity, performance or otherwise, by the laws of the State of Hawaii, except to the extent that Federal law shall be deemed to apply.
14. Severability.
The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
15. Notices.
Any notices, requests, demands and other communications provided for or deemed necessary by this Agreement shall be sufficient if set forth in
writing and delivered in person or sent by registered or certified mail, postage prepaid, to, in the case of Executive, the last address filed in writing by Executive with the Company, or, in the case of the Company, to the Company at its main
office to the attention of the Board of Directors.
16. Indemnification.
The Company shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors’ and officers’ liability insurance policy at its expense, or in lieu thereof, shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted
under law and applicable regulation or under any existing indemnification agreement by and between Executive and the Company against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director or officer of the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities). Such expenses and liabilities
may include, but are not limited to, judgment, court costs and attorneys’ fees and the cost of reasonable settlements. The
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Company shall pay such expenses and liabilities in advance of a final judicial decision (hereinafter an “advancement of expenses”); provided,
however, that, an advancement of expenses incurred by Executive in his capacity as a director or executive officer of the Company (and not in any other capacity in which service was or is rendered by Executive including, without limitation, services
to an employee benefit plan) shall be made only upon delivery to the Company of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no
further right to appeal that Executive is not entitled to be indemnified for such expenses under this Section 16 or otherwise. Indemnification under this Section 16 shall be made in accordance with 12 C.F.R. §545.121 or any successor
thereto.
17. Entire Agreement.
This Agreement together with any understanding or modifications thereof as may be agreed to in writing by the
parties, shall constitute the entire agreement between the parties hereto.
18. Source of Payments.
Notwithstanding any provision in this Agreement
to the contrary, to the extent payments and benefits, as provided for under this Agreement, are paid or received by Executive under the employment agreement in effect between Executive and the Bank, the payments and benefits paid by the Bank will be
subtracted from any amount or benefit due simultaneously to Executive under similar provisions of this Agreement. Payments will be allocated in proportion to the level of activity and the time expended by Executive on activities related to the
Company and the Bank, respectively, as determined by the Company and the Bank.
19. Required Regulatory Provisions.
(a) The Company may terminate Executive’s employment at any time, but any termination by the Company, other than Termination for Just Cause, shall
not prejudice Executive’s right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Just Cause as defined in Section 9(d)
hereinabove.
(b) Notwithstanding any other provision of this Agreement to the contrary, any payments made to the Executive pursuant to
this Agreement, or otherwise, are subject to and conditioned upon their compliance with Section 12 U.S.C. Section 1828(k), FDIC regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments.
20. Arbitration.
(a) Any dispute or controversy
arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Company,
in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific
performance of his right to be paid until the date of termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.
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(b) In the event any dispute or controversy arising under or in connection with Executive’s
termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any
compensation and benefits due Executive under this Agreement.
21. Payment of Costs and Legal
Fees.
All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Company, if Executive is successful with respect to such
dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. Such reimbursements shall be paid to Executive within two and one-half (2
1
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) months after the dispute is settled or resolved in Executive’s favor.
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IN WITNESS WHEREOF,
the parties have executed this Agreement on the latest date set forth below.
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TERRITORIAL BANCORP INC.
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(in organization)
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By:
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Date
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Chairman of the Compensation Committee
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Date
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Allan S. Kitagawa
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Exhibit 10.2
TERRITORIAL SAVINGS BANK
EMPLOYMENT AGREEMENT
THIS AGREEMENT
(the “Agreement”) entered into this 29th day of October, 2008, by
and between Territorial Savings Bank located at 1132 Bishop Street, 22
nd
Floor, Honolulu, Hawaii 96813 (the “Bank”), and Allan S. Kitagawa
(“Executive”).
WHEREAS
, Executive and Bank entered into an agreement dated on March 27, 2002 (the “Prior
Agreement”), pursuant to which Executive serves as Chairman, Chief Executive Officer and President of the Bank; and
WHEREAS
,
Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), effective January 1, 2005, requires deferred compensation arrangements, including those set forth in employment agreements, to comply with its provisions
and restrictions and limitations on payments of deferred compensation; and
WHEREAS
, Code Section 409A and the Treasury
Regulations issued thereunder necessitate changes to the Prior Agreement; and
WHEREAS
, Executive has agreed to such changes; and
WHEREAS
, the parties hereto desire to set forth the terms of the revised Agreement and the continuing employment relationship
between the Bank and Executive, and the Prior Agreement is hereby replaced in its entirety by this Agreement.
NOW, THEREFORE
, in
consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows:
1. Employment
. During the term of this Agreement, which is effective as of October 29, 2008 (the “Commencement Date”), Executive shall serve in the capacity of Chief Executive Officer and President of the Bank.
Executive shall render such administrative and management services to the Bank as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. Executive shall promote the business of the Bank.
Executive’s other duties shall be such as the Board of Directors of the Bank (the “Board of Directors” or “Board”) may from time to time reasonably direct, including normal duties as an officer of the Bank.
2. Service on the Board of Directors
. During the term of this Agreement, Executive will continue to serve on the Board of Directors of the Bank as a director. If
at any time during the term of this Agreement Executive shall fail to be re-nominated to the Board of Directors or re-appointed as the Chairman of the Board other than for reasons of Just Cause (as defined in Section 9(d) of this Agreement),
Executive shall have “Good Reason” (as defined in Section 9(e) of this Agreement) to terminate his employment under this Agreement and Executive shall have no further obligations under this Agreement.
3. Base Compensation
. The Bank agrees to pay Executive during the Term of this Agreement (as hereinafter defined in Section 7) a base salary at the rate of
$753,480 per annum,
payable in accordance with the customary payroll practices of the Bank; provided, however, that the rate of Executive’s base salary shall be reviewed by
the Board of Directors not less often than annually, and Executive shall be entitled to receive annual increases at such percentage or in such an amount as the Board of Directors, in its sole discretion, may decide.
4. Discretionary Bonus
. Executive shall be entitled to receive an annual bonus in an amount which is based on the bonus program maintained by the Bank as of the
date of this Agreement and shall be eligible to participate in any future bonus program adopted by the Bank in an equitable manner. No other compensation provided for in this Agreement shall be deemed a substitute for Executive’s right to
receive bonuses when and as declared by the Board of Directors or as provided for by any plan or program of the Bank.
5. Expenses
. During the term
of this Agreement, Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred (in accordance with the policies and procedures of the Bank) in performing services under this Agreement, provided that Executive
properly accounts for expenses in accordance with the policies of the Bank and provided further that all such reimbursements pursuant to this Section 5 shall be paid promptly by the Bank and in any event no later than March 15 of the year
immediately following the year in which the expense was incurred.
6. Employee Benefits.
(a)
Participation in Retirement and Executive Benefit Plans
. Executive shall be entitled, while employed under the terms of this Agreement,
to receive all benefits under any tax-qualified or non-qualified employee benefit plan or arrangement in effect as of the date of this Agreement or that the Bank implements at any time during the term of this Agreement. Executive shall be entitled
to participate in such future plans or arrangements on the same terms as other employees of the Bank or as established by the Bank for Executive or other selected employees.
(b)
Fringe Benefits
. Executive shall be entitled to receive any benefits under any fringe benefit plan or policy that is in effect as of
the date of this Agreement, including any discount or reduced fee employee loan program, or that the Bank implements at any time during the term of this Agreement, on the same terms as the Bank’s senior management employees. Nothing paid to
Executive under any plan or arrangement presently in effect or made available in the future will be deemed to be in lieu of base salary or other compensation to Executive under this Agreement.
(c)
Automobile, Cellular Phone Use, Computer and Memberships
. The Bank shall provide Executive with the use of an automobile in accordance
with the Bank’s automobile policy for executive vice presidents and above, as in effect from time to time. The Bank shall annually include on Executive’s Form W-2 any amount attributable to Executive’s personal use of such automobile.
The Bank shall also provide Executive with the use of a cellular phone and shall pay (or reimburse Executive) for all reasonable expenses related to the use of such phone. The Bank shall also provide Executive with the use of a personal digital
assistant or similar device, and home, portable and office computers and shall pay (or reimburse Executive) for all reasonable expenses related to the use of such computers or devices. In addition, the Bank shall
2
reimburse or pay Executive amounts sufficient to establish or maintain membership in any club or organization (business, social or otherwise) to which
Executive is a member as of the date of this Agreement, including but not limited to the Waialae Country Club and Plaza Club (including such fees or dues relating to the use of the club or organization).
(d)
Paid Leave Time
. Executive shall be entitled to leave time in accordance with the standard policies or practices of the Bank for senior
executive officers, as in effect from time to time.
7. Term of Agreement
. Executive’s employment under this Agreement shall be deemed to have
commenced as of the Commencement Date and shall continue for a period of thirty-six (36) calendar months from the Commencement Date. Commencing on the first anniversary of the Commencement Date and continuing on each anniversary thereafter
(each an “Anniversary Date”), the disinterested members of the Board of Directors of the Bank may extend the Agreement an additional year such that the remaining term of the Agreement shall be thirty-six (36) months, unless Executive
elects not to extend the term of this Agreement by giving written notice in accordance with Section 16 of this Agreement. The Board of Directors of the Bank will review the Agreement and Executive’s performance annually for purposes of
determining whether to extend the Agreement and the rationale and results thereof shall be included in the minutes of the Board’s meeting. The Board of Directors of the Bank shall give written notice to Executive as soon as possible after such
review as to whether the Agreement is to be extended; provided, however, if the Board fails to conduct such review or if written notice of nonrenewal is provided to Executive, then in such case the term of this Agreement shall become fixed and shall
cease at the end of thirty-six (36) full calendar months following the Anniversary Date.
8. Noncompetition and Confidentiality.
(a) Executive shall devote his full time and attention to the performance of his employment under this Agreement. Upon any termination of Executive’s
employment hereunder pursuant to Section 9(b) of this Agreement (other than a termination which occurs after the effective date of a Change in Control), Executive agrees not to compete with the Bank for a period of one (1) year following
such termination in any city, town or county in which Executive’s normal business office is located or in which the Bank has an office or has filed an application for regulatory approval to establish an office, determined as of the effective
date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of Directors. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or
otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business activities of the Bank. The parties hereto, recognizing that irreparable injury will result to the Bank, and
their business and property in the event of Executive’s breach of this Section 8(a), agree that in the event of any such breach by Executive, the Bank will be entitled, in addition to any other remedies and damages available, to an
injunction to restrain the violation hereof by Executive, Executive’s partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event he terminates
employment with the Bank pursuant to Section 9(b) of this Agreement, Executive’s experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Bank, and
that the enforcement of a remedy by way of
3
injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies
available to the Bank for breach or threatened breach, including the recovery of damages from Executive.
(b) Executive recognizes and
acknowledges that the knowledge of the business activities and plans for business activities of the Bank is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose
any knowledge of the past, present, planned or considered business activities of the Bank to any person, firm, corporation, or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, Executive may disclose any knowledge of
banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank. Further, Executive may disclose information regarding the business activities of the
Bank to the Office of Thrift Supervision (“OTS”) or other regulatory or judicial body pursuant to a formal regulatory request or subpoena.
(c) Nothing contained in this Section 8 shall be deemed to prevent or limit the right of Executive to invest in any entity which conducts business similar to that of the Bank, solely as a passive or minority
investor.
9. Termination.
Executive’s employment under this Agreement shall be terminated upon any of the following occurrences:
(a)
Death
. Executive’s employment under this Agreement shall terminate upon his death. Executive’s estate shall be entitled to receive payments of base salary, payable in accordance with the regular payroll practices of the Bank,
for sixty (60) days immediately following the date of Executive’s death and any other compensation accrued as of the date of death.
(b)
Termination of Employment by the Board of Directors Without Just Cause or by the Executive for Good Reason
. In the event that (i) the Board of Directors terminates Executive’s employment without “Just
Cause” (as defined in Section 9(d)) or (ii) such employment is terminated by the Executive for “Good Reason” (as defined in Section 9(b)(iii), Executive shall be entitled to:
(i) his base salary for the remaining term of the Agreement, including any renewals or extensions thereof, at the current rate in effect pursuant to
Section 3 of this Agreement, plus the amount of the annual cash bonus earned in the calendar year preceding the year of termination, and a cash equivalent amount equal to the additional retirement benefits under any retirement program (whether
tax-qualified or non-qualified) that Executive would have been entitled to had his employment continued through the remaining term of the Agreement (with the amount of benefits determined by reference to the benefits received by the Executive or
accrued on his behalf under such programs during the twelve (12) months preceding his termination).
4
(ii) coverage under the Bank’s life insurance plans and non-taxable medical, health, and dental
plans (each being a “Welfare Plan”) in the same manner in which Executive received coverage on the last day of his employment with the Bank. Executive and his covered dependents (if any) shall continue participating in such Welfare Plans,
subject to the same premium contributions (if any) on the part of Executive as were required immediately prior to his termination until the earlier of (i) his death; (ii) his employment by another employer other than one of which he is the
majority owner; or (iii) three (3) years from his termination date.
(iii) For purposes of this Agreement, termination of
Executive’s employment hereunder for “Good Reason” shall be limited to Executive’s voluntary termination of employment after the occurrence of any of the following events which have not been consented to in advance by Executive
in writing; provided that Executive has given written notice to the Bank within ninety (90) days after the initial occurrence of such event and that the Bank has been given at least thirty (30) days to cure the situation (but the Bank may
waive its right to cure): (i) if Executive would be required to move his personal residence or perform his principal executive functions more than twenty-five (25) miles from Executive’s primary office as of the Commencement Date;
(ii) if, in the organizational structure of the Bank, Executive would be required to report to a person or persons other than the Board of Directors; (iii) if the Bank should fail to maintain Executive’s base compensation in effect
pursuant to Section 3 of this Agreement, or fail to maintain the existing employee benefit plans or arrangements in which Executive participates as of the date of this Agreement, including any material fringe benefit, bonus plan and/or
retirement plan, except to the extent that such reduction in compensation or benefit programs is part of an overall adjustment in compensation and benefits for all employees of the Bank and the Executive is otherwise compensated for such an overall
adjustment in an equitable manner; (iv) if Executive would be assigned duties and responsibilities other than those normally associated with his position as referenced in Section 1 of this Agreement; (v) if Executive’s
responsibilities or authority have in any way been materially diminished or reduced other than for reasons of Just Cause; or (vi) if Executive is not re-elected to the Board of Directors or appointed as Chairman of the Board other than for
reasons of Just Cause.
(iv) The sum due under Section 9(b)(i) shall be paid in one lump sum within thirty (30) calendar days
after such termination. Notwithstanding the foregoing, in the event Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid penalties under Code Section 409A,
payment shall be withheld and shall be paid to Executive on the first day of the seventh month following Executive’s termination of employment by the Bank without Just Cause.
(v) For purposes of Section 9(b), termination of employment as used herein shall mean “Separation from Service” as defined in Code
Section 409A and the Treasury Regulations promulgated thereunder.
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(c)
Disability
.
(i) Termination by the Bank of Executive’s employment based on “Disability” shall occur if: (A) Executive is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than twelve (12) months; (B) by reason of any medically
determinable physical or mental impairment that can be expected to result in death, or last for continuous period of not less than twelve (12) months, Executive is receiving income replacement benefits for a period of not less than three
(3) months under an accident and health plan covering employees of the Bank; or (C) Executive is determined to be totally disabled by the Social Security Administration. Executive shall be entitled to receive benefits under any short or
long-term disability plan maintained by the Bank.
(ii) The Bank shall pay Executive,
as disability pay, a monthly payment equal to three-quarters (
3
/
4
) of Executive’s monthly rate of base salary, plus
any bonus paid to Executive for the preceding year. These disability payments shall commence within thirty (30) days of the date of Executive’s termination due to Disability and will end on the earlier of (A) the date Executive
returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (B) the date the Executive begins full-time
employment with another employer; (C) the date Executive attains the normal age of retirement (as defined in the Bank’s defined benefit pension plan) or begins receiving benefits under any substitute retirement plan adopted by the Bank; or
(D) the date of Executive’s death. Notwithstanding any other provision to the contrary, the Bank’s obligation for any payments required to be made under this Section 9(c) shall be reduced by any proceeds received by Executive
from disability income insurance or any other disability policy or plan maintained by the Bank for Executive which was paid for by the Bank as partial satisfaction of its obligation under this Section 9(c).
(iii) The Bank shall cause to be continued life insurance and non-taxable medical and dental coverage substantially identical to the coverage maintained
by the Bank for Executive prior to his termination for Disability. This coverage shall cease upon the earlier of (A) the date Executive returns to the full-time employment of the Bank, in the same capacity as he was employed prior to his
termination for Disability and pursuant to an employment agreement between Executive and the Bank; (B) the date Executive begins full-time employment with another employer; (C) the date Executive attains the normal age of retirement or
begins receiving benefits under the Bank’s retirement plan; or (D) the date of Executive’s death.
(iv) Notwithstanding the
foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability.
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(d)
Termination of Employment by the Board of Directors for Just Cause
. In the event
Executive’s employment is terminated for “Just Cause,” no continued payments or benefits shall be due under this Agreement. For purposes of this Agreement, termination for “Just Cause” shall be defined as termination due to
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 determination of “Just Cause” as defined by this Section 9(d) shall be determined by a majority vote of the entire
membership of the Board of Directors 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 with counsel), of finding that in the good faith
opinion of the Board, Executive committed the conduct described above and specifying the particulars thereof.
(e)
Voluntary
Termination of Employment by Executive Other Than for Good Reason
. The voluntary termination of employment by Executive during the term of this Agreement, other than for Good Reason, with the delivery of no less than sixty (60) days
written notice to the Board of Directors, entitles Executive to receive only the base salary, vested rights, and all employee benefits up to Executive’s termination date.
(f)
Termination and Board Membership
. To the extent Executive is a member of the board of directors of Territorial Bancorp Inc. (the
“Company”) or the Bank or any of their affiliates on the date of an involuntary termination of employment with the Company or the Bank or a termination of employment for Good Reason, Executive shall be deemed to have automatically resigned
from all of the boards of directors immediately following such termination of employment with the Company or the Bank.
(g)
Termination and Release of Claims
. Any payments to be made under this Agreement shall be contingent on Executive’s execution and non-revocation of a mutual release in a form acceptable to the Company and the Bank; provided,
however, that if the Company or the Bank refuse to execute such mutual release, the Executive’s obligation to execute and not revoke the release as a precondition to receiving such severance benefits shall terminate. The mutual release
agreement shall release the Company and the Bank from any and all claims and other actions by Executive and it shall also release the Executive from any and all claims and other actions by the Company and the Bank.
10. Change in Control.
(a) For purposes of this
Agreement, a Change in Control of the Company or the Bank shall be deemed to have occurred if and when:
(i) there occurs a change in
control of the Company or the Bank within the meaning of the Home Owners Loan Act of 1933 or 12 C.F.R. Part 574 as applied to the Company or the Bank as if it were a federally chartered institution;
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(ii) as a result of, or in connection with, any merger or other business combination, sale of assets or
contested election, wherein the persons who were non-employee directors of the Company or the Bank before such transaction or event cease to constitute a majority of the Board of Directors of the Company or the Bank or any successor to the Company
or the Bank;
(iii) the Company or the Bank transfers substantially all of its assets to another corporation or entity which is not an
affiliate of the Company or the Bank; or
(iv) the Company or the Bank is merged or consolidated with another corporation or entity and, as
a result of such merger or consolidation, less than sixty percent (60%) of the equity interest in the surviving or resulting corporation is owned by the former shareholders or depositors of the Company or the Bank.
For purposes of Section 10 of this Agreement, a Change in Control shall not occur as a result of a conversion of the Bank from the mutual to stock
form of organization (“Conversion”). Upon a Conversion, the resulting bank and holding company shall be subject to this Agreement and the obligations of the Bank set forth herein.
(b) If Executive’s employment is terminated for any reason other than for Just Cause within twelve months following a Change in Control, Executive
shall be entitled to receive the greater of the following:
(i) the amount of the payment and benefits specified in Section 9(b), or
(ii) the amount of the payment and benefits specified in Section 10(c).
Such payment shall be made in a lump sum within thirty (30) days following Executive’s termination of employment. For purposes
of this Section 10, termination of employment as used herein shall mean “Separation from Service” as defined in Code Section 409A and the Treasury Regulations promulgated thereunder. Notwithstanding the foregoing, in the event
Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid penalties under Code Section 409A, payment shall be withheld and shall be paid to Executive on the first
day of the seventh month following Executive’s termination of employment.
(c) For purposes of Section 10(b)(ii), the amount of
payment and benefits shall be equal to:
(i) an amount equal to three (3) times his “base amount,” as defined
in Code Section 280G(b)(3), less one (1) dollar; and
(ii) coverage under the Bank’s life insurance plan and
non-taxable medical, health and dental plans (each being a “Welfare Plan”) in the same manner in which Executive received coverage on the last day of his employment with the Bank. Executive and his covered dependents (if any) shall
continue participating in such Welfare Plans, subject to the same premium contributions (if any) on the part of Executive as were required immediately prior to his termination until the earlier of (i) his death; (ii) his employment by
another employer other than one of which he is the majority owner; or (iii) three (3) years from his termination date.
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11. Limitation of Benefits under Certain Circumstances.
(a) In no event shall the payments and benefits received by Executive exceed three times Executive’s average compensation over the past five years,
in accordance with the OTS regulations.
(b) If the payments and benefits pursuant to Section 10 of this Agreement, either alone or
together with other payments and benefits which the Executive has the right to receive from the Bank, would constitute a “parachute payment” under Section 280G of the Code, the cash severance payable by the Bank pursuant to
Section 10 shall be reduced by the amount, if any, which is the minimum amount necessary to result in no portion of the payments and benefits under Section 10 being non-deductible to the Bank pursuant to Section 280G of the Code and
subject to the excise tax imposed under Section 4999 of the Code. The determination of any reduction in the payments and benefits shall be based upon the opinion of the Bank’s independent public accountants and paid for by the Bank. In the
event that the Bank and/or the Executive do not agree with the opinion of such accountants, (i) the Bank shall pay to the Executive the maximum amount of payments and benefits as selected by the Executive, which such opinion indicates there is
a high probability do not result in any of such payments and benefits being non-deductible to the Bank and subject to the imposition of the excise tax imposed under Section 4999 of the Code and (ii) the Bank may request, and the Executive
shall have the right to demand that they request, a ruling from the IRS as to whether the disputed payments and benefits have such consequences. Any such request for a ruling from the IRS shall be promptly prepared and filed by the Bank, but in no
event later than thirty (30) days from the date of the accountant’s opinion referred to above, and shall be subject to the Executive’s approval prior to filing, which shall not be unreasonably withheld. The Bank and the Executive
agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any such rulings, together with interest at the applicable federal rate.
12. Successors and Assigns.
(a) This Agreement shall inure to the benefit of and be binding upon any
corporate or other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Bank.
(b) Since the Bank is contracting for the unique and personal skills of Executive, Executive shall be precluded from assigning or delegating his rights
or duties hereunder without first obtaining the written consent of the Bank.
13. Amendments
. No amendments or additions to this Agreement shall be
binding upon the parties hereto unless made in writing and signed by both parties, except as herein otherwise specifically provided.
14. Applicable
Law
. This agreement shall be governed in all respects, whether as to validity, construction, capacity, performance or otherwise, by the laws of the State of Hawaii, except to the extent that Federal law shall be deemed to apply.
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15. Severability
. The provisions of this Agreement shall be deemed severable and the invalidity or
unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
16. Notices
. Any notices,
requests, demands and other communications provided for or deemed necessary by this Agreement shall be sufficient if set forth in writing and delivered in person or sent by registered or certified mail, postage prepaid, to, in the case of Executive,
the last address filed in writing by Executive with the Bank, or, in the case of the Bank, to the Bank at its main office to the attention of the Board of Directors.
17. Indemnification
. The Bank shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at its
expense, or in lieu thereof, shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under law and applicable regulation or under any existing indemnification agreement by and between Executive and the
Bank against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he
continues to be a director or officer at the time of incurring such expenses or liabilities). Such expenses and liabilities may include, but are not limited to, judgment, court costs and attorneys’ fees and the cost of reasonable settlements.
The Bank shall pay such expenses and liabilities in advance of a final judicial decision (hereinafter an “advancement of expenses”); provided, however, that, an advancement of expenses incurred by Executive in his capacity as a director or
executive officer of the Bank (and not in any other capacity in which service was or is rendered by Executive including, without limitation, services to an employee benefit plan) shall be made only upon delivery to the Bank of an undertaking, by or
on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that Executive is not entitled to be indemnified for such expenses under this
Section 17 or otherwise. Indemnification under this Section 17 shall be made in accordance with 12 C.F.R. §545.121 or any successor thereto.
18. Entire Agreement
. This Agreement together with any understanding or modifications thereof as may be agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto.
19. Required Regulatory Provisions.
In the event any
of the provisions of this Section 19 are in conflict with the terms of this Agreement, this Section 19 shall prevail.
(a) The
Bank may terminate Executive’s employment at any time, but any termination by the Bank, other than Termination for Just Cause, shall not prejudice Executive’s right to compensation or other benefits under this Agreement. Executive shall
not have the right to receive compensation or other benefits for any period after Termination for Just Cause as defined in Section 9(d) hereinabove.
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(b) If Executive is suspended from office and/or temporarily prohibited from participating in the conduct
of the Bank’s affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e)(3) or (g)(1); the Bank’s obligations under this contract shall be suspended as of the date of
service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion: (i) pay Executive all or part of the compensation withheld while their contract obligations were suspended; and
(ii) reinstate (in whole or in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently
prohibited from participating in the conduct of the Bank’s affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e)(4) or (g)(1), all obligations of the Bank under this
contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.
(d) If
the Bank is in default as defined in Section 3(x)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1813(x)(1) all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect
any vested rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated, except to the
extent determined that continuation of the contract is necessary for the continued operation of the institution: (i) by the Director of the OTS (or his designee) or the FDIC, at the time the FDIC enters into an agreement to provide assistance
to or on behalf of the Bank under authority contained in Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C. §1823(c); or (ii) by the Director of the OTS (or his designee) at the time the Director of the OTS (or his
designee) approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the Director of the OTS to be in an unsafe or unsound condition. Any rights of the parties that have already vested,
however, shall not be affected by such action.
(f) Any payments made to Executive pursuant to this Agreement or otherwise, are subject to
and conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
20. Arbitration.
(a) Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel
of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the
arbitrator’s award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the date of termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
(b) In the event any dispute or controversy arising under or in connection with
Executive’s termination is resolved in favor of Executive, whether by judgment, arbitration or
11
settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any
compensation and benefits due Executive under this Agreement.
21. Payment of Costs and Legal
Fees
. All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, if Executive is successful with respect to such
dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. Such reimbursements shall be paid to Executive within two and one-half (2
1
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2
) months after the dispute is settled or resolved in Executive’s favor.
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IN WITNESS WHEREOF
, the parties have executed this Agreement on the latest date set forth below.
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TERRITORIAL SAVINGS BANK
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November 10, 2008
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By:
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/s/ Harold H. Ohama
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Date
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Chairman of the Compensation Committee
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November 10, 2008
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/s/ Allan S. Kitagawa
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Date
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Allan S. Kitagawa
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Exhibit 10.3
TERRITORIAL BANCORP INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT
(the “Agreement”) is made and entered into this
th day of
, 2009, by and between Territorial Bancorp Inc., a corporation located at 1132
Bishop Street, 22
nd
Floor, Honolulu, Hawaii 96813 (the “Company”), and Vernon Hirata (“Executive”).
WITNESSETH
WHEREAS
,
Executive is currently employed as Co-Chief Operating Officer, General Counsel and Corporate Secretary of Territorial Savings Bank (the “Bank”); and
WHEREAS
, the Company desires to assure itself of the continued availability of the Executive’s services as provided in this Agreement; and
WHEREAS
, Executive is willing to serve the Company on the terms and conditions hereinafter set forth; and
WHEREAS
, Executive has previously entered into a separate employment agreement with the Bank.
NOW, THEREFORE
, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the
parties hereby agree as follows:
1. Employment
. During the term of this Agreement, which is effective as of the date first set forth above (the
“Commencement Date”), Executive shall serve in the capacity of Co-Chief Operating Officer, General Counsel and Corporate Secretary of the Company. Executive shall render such administrative and management services to the Company as are
currently rendered and as are customarily performed by persons situated in a similar executive capacity. Executive shall promote the business of the Company. Executive’s other duties shall be such as the Board of Directors of the Company (the
“Board of Directors” or “Board”) may from time to time reasonably direct, including normal duties as an officer of the Company.
2.
Base Compensation
. The Company agrees to pay Executive during the Term of this Agreement (as hereinafter defined in Section 6) a base salary at the rate of $
per
annum, payable in accordance with the customary payroll practices of the Company; provided, however, that the rate of Executive’s base salary shall be reviewed by the Board of Directors not less often than annually, and Executive shall be
entitled to receive annual increases at such percentage or in such an amount as the Board of Directors, in its sole discretion, may decide.
3.
Discretionary Bonus
. Executive shall be entitled to receive an annual bonus in an amount which is based on the bonus program maintained by the Company as of the date of this Agreement and shall be eligible to participate in any future bonus
program adopted by the
Company in an equitable manner. No other compensation provided for in this Agreement shall be deemed a substitute for Executive’s right to receive
bonuses when and as declared by the Board of Directors or as provided for by any plan or program of the Company.
4. Expenses
. During the term of
this Agreement, Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred (in accordance with the policies and procedures of the Company) in performing services under this Agreement, provided that Executive
properly accounts for expenses in accordance with the policies of the Company and provided further that all such reimbursements pursuant to this Section 4 shall be paid promptly by the Company and in any event no later than March 15 of the
year immediately following the year in which the expense was incurred.
(a)
Participation in
Retirement and Executive Benefit Plans
. Executive shall be entitled, while employed under the terms of this Agreement, to receive all benefits under any tax-qualified or non-qualified employee benefit plan or arrangement in effect as of the
date of this Agreement or that the Company implements at any time during the term of this Agreement. Executive shall be entitled to participate in such future plans or arrangements on the same terms as other employees of the Company or as
established by the Company for Executive or other selected employees.
(b)
Fringe Benefits
. Executive shall be entitled to
receive any benefits under any fringe benefit plan or policy that is in effect as of the date of this Agreement, including any discount or reduced fee employee loan program, or that the Company implements at any time during the term of this
Agreement, on the same terms as the Company’s senior management employees. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future will be deemed to be in lieu of base salary or other
compensation to Executive under this Agreement.
(c)
Automobile, Cellular Phone Use, Computer and Memberships
. The Company or
the Bank shall provide Executive with the use of an automobile in accordance with the Company’s or the Bank’s automobile policy for executive vice presidents and above, as in effect from time to time. The Company or the Bank shall annually
include on Executive’s Form W-2 any amount attributable to Executive’s personal use of such automobile. The Company or the Bank shall also provide Executive with the use of a cellular phone and shall pay (or reimburse Executive) for all
reasonable expenses related to the use of such phone. The Company or the Bank shall also provide Executive with the use of a personal digital assistant or similar device, and home, portable and office computers and shall pay (or reimburse Executive)
for all reasonable expenses related to the use of such computers or devices. In addition, the Company or the Bank shall reimburse or pay Executive amounts sufficient to establish or maintain membership in any club or organization (business, social
or otherwise) which will benefit the Company or the Bank or is related to the practice of law (including such fees or dues relating to the use of the club or organization).
2
(d)
Paid Leave Time
. Executive shall be entitled to leave time in accordance with the
standard policies or practices of the Company for senior executive officers, as in effect from time to time.
6. Term of Agreement
. Executive’s
employment under this Agreement shall be deemed to have commenced as of the Commencement Date and shall continue for a period of thirty-six (36) calendar months from the Commencement Date. Commencing on the first anniversary of the Commencement
Date and continuing on each anniversary thereafter (each an “Anniversary Date”), the disinterested members of the Board of Directors of the Company may extend the Agreement an additional year such that the remaining term of the Agreement
shall be thirty-six (36) months, unless Executive elects not to extend the term of this Agreement by giving written notice in accordance with Section 14 of this Agreement. The Board of Directors of the Company will review the Agreement and
Executive’s performance annually for purposes of determining whether to extend the Agreement and the rationale and results thereof shall be included in the minutes of the Board’s meeting. The Board of Directors of the Company shall give
written notice to Executive as soon as possible after such review as to whether the Agreement is to be extended; provided, however, if the Board fails to conduct such review or if written notice of nonrenewal is provided to Executive, then in such
case the term of this Agreement shall become fixed and shall cease at the end of thirty-six (36) full calendar months following the Anniversary Date.
7. Noncompetition and Confidentiality
.
(a) Executive shall devote his full time and attention to the performance of his
employment under this Agreement. Upon any termination of Executive’s employment hereunder pursuant to Section 8(b) of this Agreement (other than a termination which occurs after the effective date of a Change in Control), Executive agrees
not to compete with the Company or any subsidiary of the Company for a period of one (1) year following such termination in any city, town or county in which Executive’s normal business office is located or in which the Company or any
subsidiary of the Company has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of
Directors. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the
depository, lending or other business activities of the Company or any subsidiary of the Company. The parties hereto, recognizing that irreparable injury will result to the Company or any subsidiary of the Company, and their business and property in
the event of Executive’s breach of this Section 7(a), agree that in the event of any such breach by Executive, the Company will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the
violation hereof by Executive, Executive’s partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event he terminates employment with the Company
pursuant to Section 8(b) of this Agreement, Executive’s experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Company, and that the enforcement
of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Company from pursuing any other remedies available to the Company for breach or threatened breach, including
the recovery of damages from Executive.
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(b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for
business activities of the Company is a valuable, special and unique asset of the business of the Company. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business
activities of the Company to any person, firm, corporation, or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas
which are not solely and exclusively derived from the business plans and activities of the Company. Further, Executive may disclose information regarding the business activities of the Company to the Office of Thrift Supervision (“OTS”) or
other regulatory or judicial body pursuant to a formal regulatory request or subpoena.
(c) Nothing contained in this Section 7 shall
be deemed to prevent or limit the right of Executive to invest in any entity which conducts business similar to that of the Company, solely as a passive or minority investor.
8. Termination.
Executive’s employment under this Agreement shall be terminated upon any of the
following occurrences:
(a)
Death
. Executive’s employment under this Agreement shall terminate upon his death.
Executive’s estate shall be entitled to receive payments of base salary, payable in accordance with the regular payroll practices of the Company, for sixty (60) days immediately following the date of Executive’s death and any other
compensation accrued as of the date of death.
(b)
Termination of Employment by the Board of Directors Without Just Cause or by the
Executive for Good Reason
. In the event that (i) the Board of Directors terminates Executive’s employment without “Just Cause” (as defined in Section 8(d)) or (ii) such employment is terminated by the Executive
for “Good Reason” (as defined in Section 8(b)(iii), Executive shall be entitled to:
(i) his base salary for the remaining
term of the Agreement, including any renewals or extensions thereof, at the current rate in effect pursuant to Section 2 of this Agreement, plus the amount of the annual cash bonus earned in the calendar year preceding the year of termination,
and a cash equivalent amount equal to the additional retirement benefits under any retirement program (whether tax-qualified or non-qualified) that Executive would have been entitled to had his employment continued through the remaining term of the
Agreement (with the amount of benefits determined by reference to the benefits received by the Executive or accrued on his behalf under such programs during the twelve (12) months preceding his termination).
(ii) coverage under the Company’s life insurance plans and non-taxable medical, health, and dental plans (each being a “Welfare Plan”) in
the same
4
manner in which Executive received coverage on the last day of his employment with the Company. Executive and his covered dependents (if any) shall continue
participating in such Welfare Plans, subject to the same premium contributions (if any) on the part of Executive as were required immediately prior to his termination until the earlier of (i) his death; (ii) his employment by another
employer other than one of which he is the majority owner; or (iii) three (3) years from his termination date.
(iii) For purposes
of this Agreement, termination of Executive’s employment hereunder for “Good Reason” shall be limited to Executive’s voluntary termination of employment after the occurrence of any of the following events which have not been
consented to in advance by Executive in writing; provided that Executive has given written notice to the Company within ninety (90) days after the initial occurrence of such event and that the Company has been given at least thirty
(30) days to cure the situation (but the Company may waive its right to cure): (i) if Executive would be required to move his personal residence or perform his principal executive functions more than twenty-five (25) miles from
Executive’s primary office as of the Commencement Date; (ii) if, in the organizational structure of the Company, Executive would be required to report to a person or persons other than the Chief Executive Officer; (iii) if the Company
should fail to maintain Executive’s base compensation in effect pursuant to Section 2 of this Agreement, or fail to maintain the existing employee benefit plans or arrangements in which Executive participates as of the date of this
Agreement, including any material fringe benefit, bonus plan and/or retirement plan, except to the extent that such reduction in compensation or benefit programs is part of an overall adjustment in compensation and benefits for all employees of the
Company and the Executive is otherwise compensated for such an overall adjustment in an equitable manner; (iv) if Executive would be assigned duties and responsibilities other than those normally associated with his position as referenced in
Section 1 of this Agreement; (v) if Executive’s responsibilities or authority have in any way been materially diminished or reduced other than for reasons of Just Cause; or (vi) if Executive is not annually reappointed as
Co-Chief Operating Officer other than for reasons of Just Cause.
(iv) The sum due under Section 8(b)(i) shall be paid in one lump sum
within thirty (30) calendar days after such termination. Notwithstanding the foregoing, in the event Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid
penalties under Code Section 409A, payment shall be withheld and shall be paid to Executive on the first day of the seventh month following Executive’s termination of employment by the Company without Just Cause.
(v) For purposes of Section 8(b), termination of employment as used herein shall mean “Separation from Service” as defined in Code
Section 409A and the Treasury Regulations promulgated thereunder.
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(c)
Disability
.
(i) Termination by the Company of Executive’s employment based on “Disability” shall occur if: (A) Executive is unable to engage in
any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than twelve (12) months; (B) by reason of any
medically determinable physical or mental impairment that can be expected to result in death, or last for continuous period of not less than twelve (12) months, Executive is receiving income replacement benefits for a period of not less than
three (3) months under an accident and health plan covering employees of the Company; or (C) Executive is determined to be totally disabled by the Social Security Administration. Executive shall be entitled to receive benefits under any
short or long-term disability plan maintained by the Company.
(ii) The Company shall
pay Executive, as disability pay, a monthly payment equal to three-quarters (
3
/
4
) of Executive’s monthly rate of base
salary, plus any bonus paid to Executive for the preceding year. These disability payments shall commence within thirty (30) days of the date of Executive’s termination due to Disability and will end on the earlier of (A) the date
Executive returns to the full-time employment of the Company in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Company; (B) the date the Executive
begins full-time employment with another employer; (C) the date Executive attains the normal age of retirement (as defined in the Company’s defined benefit pension plan) or begins receiving benefits under any substitute retirement plan
adopted by the Company; or (D) the date of Executive’s death. Notwithstanding any other provision to the contrary, the Company’s obligation for any payments required to be made under this Section 8(c) shall be reduced by any
proceeds received by Executive from disability income insurance or any other disability policy or plan maintained by the Company for Executive which was paid for by the Company as partial satisfaction of its obligation under this Section 8(c).
(iii) The Company shall cause to be continued life insurance and non-taxable medical and dental coverage substantially identical to
the coverage maintained by the Company for Executive prior to his termination for Disability. This coverage shall cease upon the earlier of (A) the date Executive returns to the full-time employment of the Company, in the same capacity as he
was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Company; (B) the date Executive begins full-time employment with another employer; (C) the date Executive attains the
normal age of retirement or begins receiving benefits under the Company’s retirement plan; or (D) the date of Executive’s death.
(iv) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability.
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(d)
Termination of Employment by the Board of Directors for Just Cause
. In the event
Executive’s employment is terminated for “Just Cause,” no continued payments or benefits shall be due under this Agreement. For purposes of this Agreement, termination for “Just Cause” shall be defined as termination due to
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 determination of “Just Cause” as defined by this Section 8(d) shall be determined by a majority vote of the entire
membership of the Board of Directors 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 with counsel), of finding that in the good faith
opinion of the Board, Executive committed the conduct described above and specifying the particulars thereof.
(e)
Voluntary
Termination of Employment by Executive Other Than for Good Reason
. The voluntary termination of employment by Executive during the term of this Agreement, other than for Good Reason, with the delivery of no less than sixty (60) days
written notice to the Board of Directors, entitles Executive to receive only the base salary, vested rights, and all employee benefits up to Executive’s termination date.
(f)
Termination and Board Membership
. To the extent Executive is a member of the board of directors of the Company or the Bank or any of
their affiliates on the date of an involuntary termination of employment with the Company or the Bank or a termination of employment for Good Reason, Executive shall be deemed to have automatically resigned from all of the boards of directors
immediately following such termination of employment with the Company or the Bank.
(g)
Termination and Release of Claims
.
Any payments to be made under this Agreement shall be contingent on Executive’s execution and non-revocation of a mutual release in a form acceptable to the Company and the Bank; provided, however, that if the Company or the Bank refuse to
execute such mutual release, the Executive’s obligation to execute and not revoke the release as a precondition to receiving such severance benefits shall terminate. The mutual release agreement shall release the Company and the Bank from any
and all claims and other actions by Executive and it shall also release the Executive from any and all claims and other actions by the Company and the Bank.
9. Change in Control
.
(a) For purposes of this Agreement, a Change in Control of the Company or the Bank shall be deemed to
have occurred if and when:
(i) there occurs a change in control of the Company or the Bank within the meaning of the Home Owners Loan Act
of 1933 or 12 C.F.R. Part 574 as applied to the Company or the Bank as if it were a federally chartered institution;
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(ii) as a result of, or in connection with, any merger or other business combination, sale of assets or
contested election, wherein the persons who were non-employee directors of the Company or the Bank before such transaction or event cease to constitute a majority of the Board of Directors of the Company or the Bank or any successor to the Company
or the Bank;
(iii) the Company or the Bank transfers substantially all of its assets to another corporation or entity which is not an
affiliate of the Company or the Bank; or
(iv) the Company or the Bank is merged or consolidated with another corporation or entity and, as
a result of such merger or consolidation, less than sixty percent (60%) of the equity interest in the surviving or resulting corporation is owned by the former shareholders or depositors of the Company or the Bank.
For purposes of Section 9 of this Agreement, a Change in Control shall not occur as a result of the Conversion.
(b) If Executive’s employment is terminated for any reason other than for Just Cause within twelve months following a Change in Control, Executive
shall be entitled to receive the greater of the following:
(i) the amount of the payment and benefits specified in Section 8(b), or
(ii) the amount of the payment and benefits specified in Section 9(c).
Such payment shall be made in a lump sum within thirty (30) days following Executive’s termination of employment. For purposes
of this Section 9, termination of employment as used herein shall mean “Separation from Service” as defined in Code Section 409A and the Treasury Regulations promulgated thereunder. Notwithstanding the foregoing, in the event
Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid penalties under Code Section 409A, payment shall be withheld and shall be paid to Executive on the first
day of the seventh month following Executive’s termination of employment.
(c) For purposes of Section 9(b)(ii), the amount of
payment and benefits shall be equal to:
(i) an amount equal to three (3) times his “base amount,” as defined
in Code Section 280G(b)(3), less one (1) dollar; and
(ii) coverage under the Company’s or Bank’s life
insurance plan and non-taxable medical, health and dental plans (each being a “Welfare Plan”) in the same manner in which Executive received coverage on the last day of his employment with the Company. Executive and his covered dependents
(if any) shall continue participating in such Welfare Plans, subject to the same premium contributions (if any) on the part of Executive as were required immediately prior to his termination until the earlier of (i) his death; (ii) his
employment by another employer other than one of which he is the majority owner; or (iii) three (3) years from his termination date.
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10. Successors and Assigns
.
(a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets of the Company.
(b) Since the Company is contracting for the unique and personal skills of Executive,
Executive shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Company.
11. Amendments
. No amendments or additions to this Agreement shall be binding upon the parties hereto unless made in writing and signed by both parties, except as herein otherwise specifically provided.
12. Applicable Law
. This agreement shall be governed in all respects, whether as to validity, construction, capacity, performance or otherwise, by the laws of the
State of Hawaii, except to the extent that Federal law shall be deemed to apply.
13. Severability
. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
14.
Notices
. Any notices, requests, demands and other communications provided for or deemed necessary by this Agreement shall be sufficient if set forth in writing and delivered in person or sent by registered or certified mail, postage prepaid, to,
in the case of Executive, the last address filed in writing by Executive with the Company, or, in the case of the Company, to the Company at its main office to the attention of the Board of Directors.
15. Indemnification
. The Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors’ and
officers’ liability insurance policy at its expense, or in lieu thereof, shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under law and applicable regulation or under any existing
indemnification agreement by and between Executive and the Company against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his
having been a director or officer of the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities). Such expenses and liabilities may include, but are not limited to, judgment, court
costs and attorneys’ fees and the cost of reasonable settlements. The Company shall pay such expenses and liabilities in advance of a final judicial decision (hereinafter an “advancement of expenses”); provided, however, that, an
advancement of expenses incurred by Executive in his capacity as a director or executive officer of the Company (and not in any other capacity in which service was or is rendered by Executive including, without limitation, services to an employee
benefit plan) shall be made only upon delivery to the Company of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to
appeal that Executive is not entitled to be indemnified for such expenses under this Section 15 or otherwise. Indemnification under this Section 15 shall be made in accordance with 12 C.F.R. §545.121 or any successor thereto.
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16. Entire Agreement
. This Agreement together with any understanding or modifications thereof as may be agreed to
in writing by the parties, shall constitute the entire agreement between the parties hereto.
17. Source of Payments.
Notwithstanding any provision
in this Agreement to the contrary, to the extent payments and benefits, as provided for under this Agreement, are paid or received by Executive under the employment agreement in effect between Executive and the Bank, the payments and benefits paid
by the Bank will be subtracted from any amount or benefit due simultaneously to Executive under similar provisions of this Agreement. Payments will be allocated in proportion to the level of activity and the time expended by Executive on activities
related to the Company and the Bank, respectively, as determined by the Company and the Bank.
18. Required Regulatory Provisions
.
(a) The Company may terminate Executive’s employment at any time, but any termination by the Company, other than Termination for Just Cause, shall
not prejudice Executive’s right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Just Cause as defined in Section 8(d)
hereinabove.
(b) Notwithstanding any other provision of this Agreement to the contrary, any payments made to the Executive pursuant to
this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 12 U.S.C. Section 1828(k), FDIC regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments.
19. Arbitration
.
(a) Any dispute or controversy
arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Company,
in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific
performance of his right to be paid until the date of termination during the pendency of any dispute or controversy arising under or in connection with this Agreement.
(b) In the event any dispute or controversy arising under or in connection with Executive’s termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be
entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due Executive under this Agreement.
20. Payment of Costs and Legal Fees
. All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or
reimbursed by the Company, if Executive is successful with respect to such
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dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. Such reimbursements shall be paid to Executive within two and
one-half (2
1
/
2
) months after the dispute is settled or resolved in Executive’s favor.
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IN WITNESS WHEREOF
, the parties have executed this Agreement on the latest date set forth below.
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TERRITORIAL BANCORP INC.
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(in organization)
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By:
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Date
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Chairman of the Compensation Committee
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Date
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Vernon Hirata
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Exhibit 10.4
TERRITORIAL SAVINGS BANK
EMPLOYMENT AGREEMENT
THIS AGREEMENT
is entered into this 29th day of October, 2008, by and between Territorial
Savings Bank, located at 1132 Bishop Street, 22
nd
Floor, Honolulu, Hawaii 96813 (the “Bank”), and Vernon Hirata (“Executive”).
WHEREAS
, Executive and the Bank entered into an agreement dated on January 1, 2003 (the “Predecessor Agreement”),
pursuant to which Executive served as Executive Vice President and General Counsel of the Bank; and
WHEREAS
, Section 409A of
the Internal Revenue Code of 1986, as amended (the “Code”), effective January 1, 2005, requires deferred compensation arrangements, including those set forth in employment agreements, to comply with its provisions and restrictions and
limitations on payments of deferred compensation; and
WHEREAS
, Code Section 409A and the Treasury Regulations issued
thereunder necessitate changes to the Agreement; and
WHEREAS
, Executive has agreed to such changes; and
WHEREAS
, the parties hereto desire to set forth the terms of the revised Agreement and the continuing employment relationship between the Bank and
Executive, and the Prior Agreement is hereby replaced in its entirety by this Agreement.
NOW, THEREFORE
, in consideration of the
mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows:
1. Employment.
During the term of this Agreement, which is effective as of October 29, 2008 (the “Commencement Date”), Executive shall serve in the capacity of Co-Chief Operating Officer, General Counsel and Corporate Secretary of the Bank.
Executive shall render such administrative and management services to the Bank as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. Executive shall promote the business of the Bank.
Executive’s other duties shall be such as the Board of Directors of the Bank (the “Board of Directors” or “Board”) may from time to time reasonably direct, including normal duties as an officer of the Bank.
2. Base Compensation.
The Bank agrees to pay Executive during the Term of this Agreement (as hereinafter defined in Section 6) a base salary at the rate of
$269,100 per annum, payable in accordance with the customary payroll practices of the Bank; provided, however, that the rate of Executive’s base salary shall be reviewed by the Board of Directors not less often than annually, and Executive
shall be entitled to receive annual increases at such percentage or in such an amount as the Board of Directors, in its sole discretion, may decide.
3.
Discretionary Bonus.
Executive shall be entitled to receive an annual bonus in an amount which is based on the bonus program maintained by the Bank as of the date of this Agreement and shall be eligible to participate in any future bonus program
adopted by the Bank
in an equitable manner. No other compensation provided for in this Agreement shall be deemed a substitute for Executive’s right to receive bonuses when
and as declared by the Board of Directors or as provided for by any plan or program of the Bank.
4. Expenses.
During the term of this Agreement,
Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred (in accordance with the policies and procedures of the Bank) in performing services under this Agreement, provided that Executive properly accounts for
expenses in accordance with the policies of the Bank.
5. Employee Benefits.
(a)
Participation in Retirement and Executive Benefit Plans.
Executive shall be entitled, while employed under the terms of this Agreement,
to receive all benefits under any tax-qualified or nontax-qualified employee benefit plan or arrangement in effect as of the date of this Agreement or that the Bank implements at any time during the term of this Agreement. Executive shall be
entitled to participate in such future plans or arrangements on the same terms as other employees of the Bank or as established by the Bank for Executive or other selected employees.
(b)
Fringe Benefits.
Executive shall be entitled to receive any benefits under any fringe benefit plan or policy that is in effect as of
the date of this Agreement, including any discount or reduced fee employee loan program, or that the Bank implements at any time during the term of this Agreement, on the same terms as the Bank’s senior management employees. Nothing paid to
Executive under any plan or arrangement presently in effect or made available in the future will be deemed to be in lieu of base salary or other compensation to Executive under this Agreement.
(c)
Automobile, Cellular Phone Use, Computer and Memberships.
The Bank shall provide Executive with the use of an automobile in accordance
with the Bank’s automobile policy forexecutive vice presidents and above, as in effect from time to time. The Bank shall annually include on Executive’s Form W-2 any amount attributable to Executive’s personal use of such automobile.
The Bank shall also provide Executive with the use of a cellular phone and shall pay (or reimburse Executive) for all reasonable expenses related to the use of such phone. The Bank shall also provide Executive with the use of a personal digital
assistant or similar device, and home, portable and office computers and shall pay (or reimburse Executive) for all reasonable expenses related to the use of such computers or devices. In addition, the Bank shall reimburse or pay amounts sufficient
to establish or maintain Executive’s membership in any approved club or organization (business, social or otherwise) which will benefit the Bank or is related to the practice of law (including such fees or dues relating to the use of the club
or organization).
(d)
Paid Leave Time.
Executive shall be entitled to leave time in accordance with the policies or
practices of the Bank for senior executive officers, as in effect from time to time.
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6. Term of Agreement.
Executive’s employment under this Agreement shall be deemed to have commenced as of the
Commencement Date and shall continue for a period of thirty-six (36) calendar months from the Commencement Date. Commencing on the first anniversary of the Commencement Date and continuing on each anniversary thereafter, the Board of Directors
of the Bank may extend the Agreement an additional year such that the remaining term of the Agreement shall be thirty-six (36) months, unless Executive elects not to extend the term of this Agreement by giving written notice in accordance with
Section 15 of this Agreement. The Board of Directors of the Bank will review the Agreement and Executive’s performance annually for purposes of determining whether to extend the Agreement annually and the rationale and results thereof
shall be included in the minutes of the Board’s meeting. The Board of Directors of the Bank shall give notice to Executive as soon as possible after such review as to whether the Agreement is to be extended.
7. Noncompetition and Confidentiality.
(a) Executive
shall devote his full time and attention to the performance of his employment under this Agreement. Upon any termination of Executive’s employment hereunder pursuant to Sections 8(b) or (e) of this Agreement (other than a termination which
occurs after the effective date of a Change in Control), Executive agrees not to compete with the Bank for a period of one (1) year following such termination in any city, town or county in which Executive’s normal business office is
located or in which the Bank has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of
Directors. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the
depository, lending or other business activities of the Bank. The parties hereto, recognizing that irreparable injury will result to the Bank, and their business and property in the event of Executive’s breach of this Section 7(a), agree
that in the event of any such breach by Executive, the Bank will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive’s partners, agents, servants,
employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event he terminates employment with the Bank pursuant to Sections 8(b) or (e) of this Agreement, Executive’s experience
and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Bank, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a
livelihood. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for breach or threatened breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank is a valuable,
special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank to any person, firm,
corporation, or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial
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and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank. Further,
Executive may disclose information regarding the business activities of the Bank to the Office of Thrift Supervision (“OTS”) or other regulatory or judicial body pursuant to a formal regulatory request or subpoena.
(c) Nothing contained in this Section 7 shall be deemed to prevent or limit the right of Executive to invest in any entity which conducts business
similar to that of the Bank, solely as a passive or minority investor.
8. Termination.
Executive’s employment under this Agreement shall be terminated upon any of the following occurrences:
(a)
Death.
Executive’s employment under this Agreement shall terminate upon his death. Executive’s estate shall be entitled to
receive payments of base salary, payable in accordance with the regular payroll practices of the Bank, for sixty (60) days immediately following the date of Executive’s death and any other compensation accrued as of the date of death.
(b)
Termination of Employment by the Board of Directors Without Just Cause.
In the event the Board of Directors terminates
Executive’s employment without “Just Cause” (as defined in Section 8(d)), Executive shall be entitled to:
(i) his base
salary for the remaining term of the Agreement, including any renewals or extensions thereof, at the highest annual rate in effect pursuant to Section 2 of this Agreement for any of the twelve (12) months immediately preceding the date of
such termination, plus annual cash bonuses for each year (prorated in the event of partial years) remaining under such term at the highest annual amount received by the Employee in any of the three (3) calendar years preceding the termination,
and shall also receive a cash equivalent amount equal to the additional retirement benefits under any retirement program (whether tax-qualified or non-qualified) that Executive would have been entitled to had his employment continued through the
remaining term of the Agreement (with the amount of benefits determined by reference to the benefits received by the Executive or accrued on his behalf under such programs during the twelve (12) months preceding his termination).
(ii) coverage under the Bank’s life insurance plans and non-taxable medical, health, and dental plans (each being a “Welfare Plan”) in the
same manner in which Executive received coverage on the last day of his employment with the Bank. Executive and his covered dependents (if any) shall continue participating in such Welfare Plans, subject to the same premium contributions (if any) on
the part of Executive as were required immediately prior to his termination until the earlier of (i) his death; (ii) his employment by another employer other than one of which he is the majority owner; or (iii) three (3) years
from his termination date.
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The sum due under Section 8(b)(i) shall be paid in one lump sum within thirty (30) calendar
days following such termination. Notwithstanding the foregoing, in the event Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid penalties under Code
Section 409A, payment shall be withheld and shall be paid to Executive on the first day of the seventh month following Executive’s termination of employment by the Bank without Just Cause.
For purposes of Section 8(b), termination of employment as used herein shall mean “Separation from Service” as defined in Code
Section 409A and the Treasury Regulations promulgated thereunder.
(c)
Disability.
(i) Termination by the Bank of Executive’s employment based on “Disability” shall occur if: (A) Executive is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than twelve (12) months; (B) by reason of any medically
determinable physical or mental impairment that can be expected to result in death, or last for continuous period of not less than twelve (12) months, Executive is receiving income replacement benefits for a period of not less than 3 months
under an accident and health plan covering employees of the Bank; or (C) Executive is determined to be totally disabled by the Social Security Administration. Executive shall be entitled to receive benefits under any short or long-term
disability plan maintained by the Bank.
(ii) The Bank shall pay Executive, as
disability pay, a monthly payment equal to three-quarters (
3
/
4
) of Executive’s monthly rate of base salary, plus any
bonus paid to Executive for the preceding year. These disability payments shall commence within thirty (30) days of the date of Executive’s termination due to Disability and will end on the earlier of (A) the date Executive returns to
the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (B) the date the Executive begins full-time employment
with another employer; (C) the date Executive attains the normal age of retirement (as defined in the Bank’s defined benefit pension plan) or begins receiving benefits under any substitute retirement plan adopted by the Bank; or
(D) the date of Executive’s death. Notwithstanding any other provision to the contrary, the Bank’s obligation for any payments required to be made under this Section 8(c) shall be reduced by any proceeds received by Executive
from disability income insurance or any other disability policy or plan maintained by the Bank for Executive which was paid for by the Bank as partial satisfaction of its obligation under this Section 8(c).
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(iii) The Bank shall cause to be continued life insurance and non-taxable medical and dental coverage
substantially identical to the coverage maintained by the Bank for Executive prior to his termination for Disability. This coverage shall cease upon the earlier of (A) the date Executive returns to the full-time employment of the Bank, in the
same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (B) the date Executive begins full-time employment with another employer; (C) the date
Executive attains the normal age of retirement or begins receiving benefits under the Bank’s retirement plan; or (D) the date of Executive’s death.
(iv) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of
temporary disability.
(d)
Termination of Employment by the Board of Directors for Just Cause.
In the event Executive’s
employment is terminated for “Just Cause,” no continued payments or benefits shall be due under this Agreement. For purposes of this Agreement, termination for “Just Cause” shall be defined as termination due to 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 determination of “Just Cause” as defined by this Section 8(d) shall be determined by a majority vote of the entire membership of the
Board of Directors at a meeting of such Board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board with counsel), of finding that in the good faith opinion of the
Board the Executive committed the conduct described above and specifying the particulars thereof.
(e)
Termination by Executive.
In the event Executive’s employment under this Agreement is terminated by Executive for “Good Reason,” the Executive shall be entitled to:
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(i)
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a payment equal to three (3) times Executive’s highest annual Compensation for the five (5) most recent complete tax years. “Compensation”
shall include base salary and any other taxable income paid to the Executive in consideration of employment, including, but not limited to, amounts related to the granting, vesting or exercise of restricted stock or stock option awards, commissions,
bonuses, severance payments, retirement benefits, director or committee fees and fringe benefits paid or to be paid to Executive or paid for Executive’s benefit during any such year, as well as profit sharing, employee stock ownership
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plan and/or other retirement contributions or benefits under any tax-qualified or non-tax-qualified plan or arrangement (whether or not taxable) made or
accrued on behalf of Executive for such year.
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(ii)
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coverage under the Bank’s life insurance plan and non-taxable medical, health, and dental plans (each being a “Welfare Plan”) in the same manner in which Executive
received coverage on the last day of his employment with the Bank. Executive and his covered dependents (if any) shall continue participating in such Welfare Plans, subject to the same premium contributions (if any) on the part of Executive as were
required immediately prior to his termination until the earlier of (i) his death; (ii) his employment by another employer other than one of which he is the majority owner; or (iii) three (3) years from his termination date.
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Such payment shall be made in a lump sum within thirty (30) days of Executive’s termination for “Good
Reason.” Notwithstanding the foregoing, in the event Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid penalties under Code Section 409A, payment shall
be withheld and shall be paid to Executive on the first day of the seventh month following Executive’s termination of employment by the Bank without Just Cause.
For purposes of this Agreement, termination of Executive’s employment hereunder for “Good Reason” shall be limited to Executive’s voluntary termination of employment within one-hundred twenty
(120) days after the occurrence of any of the following events which have not been consented to in advance by Executive in writing; provided that Executive has given written notice to the Bank within ninety (90) days after the initial
occurrence of such event and that the Bank has been given at least thirty (30) days to cure the situation (but the Bank may waive its right to cure): (i) if Executive would be required to move his personal residence or perform his
principal executive functions more than twenty-five (25) miles from Executive’s primary office as of the Commencement Date; (ii) if, in the organizational structure of the Bank, Executive would be required to report to a person or
persons other than the Chief Executive Officer; (iii) if the Bank should fail to maintain Executive’s base compensation in effect pursuant to Section 2 of this Agreement, or fail to maintain the existing employee benefit plans or
arrangements in which Executive participates as of the date of this Agreement, including any material fringe benefit, bonus plan and/or retirement plan, except to the extent that such reduction in compensation or benefit programs is part of an
overall adjustment in compensation and benefits for all employees of the Bank and the Executive is otherwise compensated for such an overall adjustment in an equitable manner; (iv) if Executive would be assigned duties and responsibilities
other than those normally associated with his position as referenced in Section 1 of this Agreement; (v) if Executive’s responsibilities or authority have in any way been materially diminished or reduced other than for reasons of Just
Cause; or (vi) if Executive is not annually reappointed as Co-Chief Operating Officer other than for reasons of Just Cause.
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For purposes of Section 8(e), termination of employment for “Good Reason” as used herein
shall mean “Separation from Service” as defined in Code Section 409A and the Treasury Regulations promulgated thereunder.
(f)
Voluntary Termination of Employment by Executive Other Than for Good Reason.
The voluntary termination of employment by Executive during the term of this Agreement, other than for Good Reason, with the delivery of no less
than 60 days written notice to the Board of Directors, entitles Executive to receive only the base salary, vested rights, and all employee benefits up to Executive’s termination date.
9. Change in Control.
(a) If Executive terminates
his employment for any reason other than for Just Cause subsequent to a Change in Control, Executive shall receive a payment and continued coverage under the Welfare Plans described above in accordance with Section 8(e). Such payment shall be
made in the time and manner described above in Section 8(e).
(b) For purposes of this Agreement, a Change in Control of the Bank
shall be deemed to have occurred if and when:
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(i)
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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;
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(ii)
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as a result of, or in connection with, any merger or other business combination, sale of assets or contested election, wherein the persons 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;
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(iii)
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the Bank transfers substantially all of its assets to another corporation or entity which is not an affiliate of the Bank; or
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(iv)
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the Bank is merged or consolidated with another corporation or entity and, as a result of such merger or consolidation, less than sixty percent (60%) of the equity interest in
the surviving or resulting corporation is owned by the former shareholders or depositors of the Bank.
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For purposes of
Section 9 of this Agreement, a Change in Control shall not occur as a result of a conversion of the Bank from the mutual to stock form of organization (including without limitation, through the formation of a stock holding company)
(“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 Executive providing for at least the same benefits provided under this Agreement.
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For purposes of Section 9, termination of employment as used herein shall mean “Separation from
Service” as defined in Code Section 409A and the Treasury Regulations promulgated thereunder.
10. Limitation of Benefits Under Certain
Circumstances.
(a) In no event shall the payments and benefits received by Executive exceed three times Executive’s average
compensation over the past five years, in accordance with the OTS regulations.
(b) If the payments and benefits pursuant to Section 9
of this Agreement, either alone or together with other payments and benefits which the Executive has the right to receive from the Bank, would constitute a “parachute payment” under Section 280G of the Code, the payments and benefits
pursuant to Section 9 shall be reduced or revised, in the manner determined by the Executive, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits being non-deductible to the Bank pursuant
to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The determination of any reduction in the payments and benefits to be made shall be based upon the opinion of the Bank’s independent
public accountants and paid for by the Bank. In the event that the Bank and/or the Executive do not agree with the opinion of such accountants, (i) the Bank shall pay to the Executive the maximum amount of payments and benefits, as selected by
the Executive, which such opinion indicates there is a high probability do not result in any of such payments and benefits being non-deductible to the Bank and subject to the imposition of the excise tax imposed under Section 4999 of the Code
and (ii) the Bank may request, and the Executive shall have the right to demand that they request, a ruling from the IRS as to whether the disputed payments and benefits have such consequences. Any such request for a ruling from the IRS shall
be promptly prepared and filed by the Bank, but in no event later than thirty (30) days from the date of the accountant’s opinion referred to above, and shall be subject to the Executive’s approval prior to filing, which shall not be
unreasonably withheld. The Bank and the Executive agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any such rulings, together with interest at the applicable federal rate.
11. Successors and Assigns.
(a) This Agreement shall
inure to the benefit of and be binding upon any corporate or other successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Bank.
(b) Since the Bank is contracting for the unique and personal skills of Executive, Executive shall be precluded from assigning or delegating his rights
or duties hereunder without first obtaining the written consent of the Bank.
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12. Amendments.
No amendments or additions to this Agreement shall be binding upon the parties hereto unless made
in writing and signed by both parties, except as herein otherwise specifically provided.
13. Applicable Law.
This agreement shall be governed in
all respects, whether as to validity, construction, capacity, performance or otherwise, by the laws of the State of Hawaii, except to the extent that Federal law shall be deemed to apply.
14. Severability.
The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity
or enforceability of the other provisions hereof.
15. Notices.
Any notices, requests, demands and other communications provided for or deemed
necessary by this Agreement shall be sufficient if set forth in writing and delivered in person or sent by registered or certified mail, postage prepaid, to, in the case of Executive, the last address filed in writing by Executive with the Bank, or,
in the case of the Bank, to the Bank at its main office to the attention of the Board of Directors.
16. Indemnification.
The Bank shall provide
Executive (including his heirs, executors and administrators) with coverage under a standard directors’ and officers’ liability insurance policy at its expense, or in lieu thereof, shall indemnify Executive (and his heirs, executors and
administrators) to the fullest extent permitted under law and applicable regulation or under any existing indemnification agreement by and between Executive and the Bank against all expenses and liabilities reasonably incurred by him in connection
with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such expenses or
liabilities). Such expenses and liabilities may include, but are not limited to, judgment, court costs and attorneys’ fees and the cost of reasonable settlements. The Bank shall pay such expenses and liabilities in advance of a final judicial
decision (hereinafter an “advancement of expenses”); provided, however, that, an advancement of expenses incurred by Executive in his capacity as a director or executive officer of the Bank (and not in any other capacity in which service
was or is rendered by Executive including, without limitation, services to an employee benefit plan) shall be made only upon delivery to the Bank of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no further right to appeal that Executive is not entitled to be indemnified for such expenses under this Section 16 or otherwise. Indemnification under this Section 16
shall be made in accordance with 12 C.F.R. §545.121 or any successor thereto.
17. Entire Agreement.
This Agreement together with any
understanding or modifications thereof as may be agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto.
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18. Required Regulatory Provisions.
In the event any of the provisions of this Section 18 are in conflict with the terms of this Agreement, this Section 18 shall prevail.
(a) The Bank may terminate Executive’s employment at any time, but any termination by the Bank, other than Termination for Just Cause, shall not
prejudice Executive’s right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Just Cause as defined in Section 8(d)
hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank’s
affairs by a notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e)(3) or (g)(1); the Bank’s obligations under this contract shall be suspended as of the date of service, unless stayed
by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion: (i) pay Executive all or part of the compensation withheld while their contract obligations were suspended; and (ii) reinstate (in
whole or in part) any of the obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank’s affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected.
(d) If the Bank is in
default as defined in Section 3(x)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1813(x)(1) all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested
rights of the contracting parties.
(e) All obligations of the Bank under this contract shall be terminated, except to the extent
determined that continuation of the contract is necessary for the continued operation of the institution: (i) by the Director of the OTS (or his designee) or the FDIC, at the time the FDIC enters into an agreement to provide assistance to or on
behalf of the Bank under authority contained in Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C. §1823(c); or (ii) by the Director of the OTS (or their designee) at the time the Director of the OTS (or their designee)
approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the Director of the OTS (or their designee) to be in an unsafe or unsound condition. Any rights of the parties that have
already vested, however, shall not be affected by such action.
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(f) Any payments made to Executive pursuant to this Agreement or otherwise, are subject to and
conditioned upon their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
19. Arbitration.
(a) Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of
three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the
arbitrator’s award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the date of termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
(b) In the event any dispute or controversy arising under or in connection with
Executive’s termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits
and any compensation and benefits due Executive under this Agreement.
20. Payment of Costs and
Legal Fees.
All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, if Executive is successful with respect to
such dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. Such reimbursements shall be paid to Executive within 2
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months after the dispute is settled or resolved in Executive’s favor.
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IN WITNESS WHEREOF
, the parties have executed this amended and restated Agreement on the latest date set forth
below.
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TERRITORIAL SAVINGS BANK
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November 10, 2008
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By:
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/s/ Harold H. Ohama
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Date
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Chairman of the Compensation Committee
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November 10, 2008
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/s/ Vernon Hirata
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Date
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Vernon Hirata
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13
Exhibit 10.5
TERRITORIAL BANCORP INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT
(the “Agreement”) is made and entered into this
th day of
, 2009, by and between Territorial Bancorp Inc., a corporation located at 1132 Bishop Street,
22
nd
Floor, Honolulu, Hawaii 96813 (the “Company”), and Ralph Nakatsuka (“Executive”).
WITNESSETH
WHEREAS
,
Executive is currently employed as Co-Chief Operating Officer of Territorial Savings Bank (the “Bank”); and
WHEREAS
, the
Company desires to assure itself of the continued availability of the Executive’s services as provided in this Agreement; and
WHEREAS
, Executive is willing to serve the Company on the terms and conditions hereinafter set forth; and
WHEREAS
,
Executive has previously entered into a separate employment agreement with the Bank.
NOW, THEREFORE
, in consideration of the mutual
covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows:
1. Employment
.
During the term of this Agreement, which is effective as of the date first set forth above (the “Commencement Date”), Executive shall serve in the capacity of Co-Chief Operating Officer of the Company. Executive shall render such
administrative and management services to the Company as are currently rendered and as are customarily performed by persons situated in a similar executive capacity. Executive shall promote the business of the Company. Executive’s other duties
shall be such as the Board of Directors of the Company (the “Board of Directors” or “Board”) may from time to time reasonably direct, including normal duties as an officer of the Company.
2. Base Compensation
. The Company agrees to pay Executive during the Term of this Agreement (as hereinafter defined in Section 6) a base salary at the rate
of $
per annum, payable in accordance with the customary payroll practices of the Company; provided, however, that the rate of Executive’s base salary shall be
reviewed by the Board of Directors not less often than annually, and Executive shall be entitled to receive annual increases at such percentage or in such an amount as the Board of Directors, in its sole discretion, may decide.
3. Discretionary Bonus
. Executive shall be entitled to receive an annual bonus in an amount which is based on the bonus program maintained by the Company as of
the date of this
Agreement and shall be eligible to participate in any future bonus program adopted by the Company in an equitable manner. No other compensation provided for
in this Agreement shall be deemed a substitute for Executive’s right to receive bonuses when and as declared by the Board of Directors or as provided for by any plan or program of the Company.
4. Expenses
. During the term of this Agreement, Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred (in accordance
with the policies and procedures of the Company) in performing services under this Agreement, provided that Executive properly accounts for expenses in accordance with the policies of the Company and provided further that all such reimbursements
pursuant to this Section 4 shall be paid promptly by the Company and in any event no later than March 15 of the year immediately following the year in which the expense was incurred.
5. Employee Benefits
.
(a)
Participation in
Retirement and Executive Benefit Plans
. Executive shall be entitled, while employed under the terms of this Agreement, to receive all benefits under any tax-qualified or non-qualified employee benefit plan or arrangement in effect as of the
date of this Agreement or that the Company implements at any time during the term of this Agreement. Executive shall be entitled to participate in such future plans or arrangements on the same terms as other employees of the Company or as
established by the Company for Executive or other selected employees.
(b)
Fringe Benefits
. Executive shall be entitled to
receive any benefits under any fringe benefit plan or policy that is in effect as of the date of this Agreement, including any discount or reduced fee employee loan program, or that the Company implements at any time during the term of this
Agreement, on the same terms as the Company’s senior management employees. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future will be deemed to be in lieu of base salary or other
compensation to Executive under this Agreement.
(c)
Automobile, Cellular Phone Use, Computer and Memberships
. The Company or
the Bank shall provide Executive with the use of an automobile in accordance with the Company’s or the Bank’s automobile policy for executive vice presidents and above, as in effect from time to time. The Company or the Bank shall annually
include on Executive’s Form W-2 any amount attributable to Executive’s personal use of such automobile. The Company or the Bank shall also provide Executive with the use of a cellular phone and shall pay (or reimburse Executive) for all
reasonable expenses related to the use of such phone. The Company or the Bank shall also provide Executive with the use of a personal digital assistant or similar device, and home, portable and office computers and shall pay (or reimburse Executive)
for all reasonable expenses related to the use of such computers or devices. In addition, the Company or the Bank shall reimburse or pay Executive amounts sufficient to establish or maintain membership in any club or organization (business, social
or otherwise) which will benefit the Company or the Bank (including such fees or dues relating to the use of the club or organization).
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(d)
Paid Leave Time
. Executive shall be entitled to leave time in accordance with the
standard policies or practices of the Company for senior executive officers, as in effect from time to time.
6. Term of Agreement
. Executive’s
employment under this Agreement shall be deemed to have commenced as of the Commencement Date and shall continue for a period of thirty-six (36) calendar months from the Commencement Date. Commencing on the first anniversary of the Commencement
Date and continuing on each anniversary thereafter (each an “Anniversary Date”), the disinterested members of the Board of Directors of the Company may extend the Agreement an additional year such that the remaining term of the Agreement
shall be thirty-six (36) months, unless Executive elects not to extend the term of this Agreement by giving written notice in accordance with Section 14 of this Agreement. The Board of Directors of the Company will review the Agreement and
Executive’s performance annually for purposes of determining whether to extend the Agreement and the rationale and results thereof shall be included in the minutes of the Board’s meeting. The Board of Directors of the Company shall give
written notice to Executive as soon as possible after such review as to whether the Agreement is to be extended; provided, however, if the Board fails to conduct such review or if written notice of nonrenewal is provided to Executive, then in such
case the term of this Agreement shall become fixed and shall cease at the end of thirty-six (36) full calendar months following the Anniversary Date.
7. Noncompetition and Confidentiality
.
(a) Executive shall devote his full time and attention to the performance of his
employment under this Agreement. Upon any termination of Executive’s employment hereunder pursuant to Section 8(b) of this Agreement (other than a termination which occurs after the effective date of a Change in Control), Executive agrees
not to compete with the Company or any subsidiary of the Company for a period of one (1) year following such termination in any city, town or county in which Executive’s normal business office is located or in which the Company or any
subsidiary of the Company has an office or has filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of
Directors. Executive agrees that during such period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the
depository, lending or other business activities of the Company or any subsidiary of the Company. The parties hereto, recognizing that irreparable injury will result to the Company or any subsidiary of the Company, and their business and property in
the event of Executive’s breach of this Section 7(a), agree that in the event of any such breach by Executive, the Company will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the
violation hereof by Executive, Executive’s partners, agents, servants, employees and all persons acting for or under the direction of Executive. Executive represents and admits that in the event he terminates employment with the Company
pursuant to Section 8(b) of this Agreement, Executive’s experience and capabilities are such that Executive can obtain employment in a business engaged in other lines and/or of a different nature than the Company, and that the enforcement
of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as prohibiting the Company from pursuing any other remedies available to the Company for breach or threatened breach, including
the recovery of damages from Executive.
3
(b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for
business activities of the Company is a valuable, special and unique asset of the business of the Company. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business
activities of the Company to any person, firm, corporation, or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas
which are not solely and exclusively derived from the business plans and activities of the Company. Further, Executive may disclose information regarding the business activities of the Company to the Office of Thrift Supervision (“OTS”) or
other regulatory or judicial body pursuant to a formal regulatory request or subpoena.
(c) Nothing contained in this Section 7 shall
be deemed to prevent or limit the right of Executive to invest in any entity which conducts business similar to that of the Company, solely as a passive or minority investor.
8. Termination
.
Executive’s employment under this Agreement shall be terminated upon any of the
following occurrences:
(a)
Death
. Executive’s employment under this Agreement shall terminate upon his death.
Executive’s estate shall be entitled to receive payments of base salary, payable in accordance with the regular payroll practices of the Company, for sixty (60) days immediately following the date of Executive’s death and any other
compensation accrued as of the date of death.
(b)
Termination of Employment by the Board of Directors Without Just Cause or by the
Executive for Good Reason
. In the event that (i) the Board of Directors terminates Executive’s employment without “Just Cause” (as defined in Section 8(d)) or (ii) such employment is terminated by the Executive
for “Good Reason” (as defined in Section 8(b)(iii), Executive shall be entitled to:
(i) his base salary for the remaining
term of the Agreement, including any renewals or extensions thereof, at the current rate in effect pursuant to Section 2 of this Agreement, plus the amount of the annual cash bonus earned in the calendar year preceding the year of termination,
and a cash equivalent amount equal to the additional retirement benefits under any retirement program (whether tax-qualified or non-qualified) that Executive would have been entitled to had his employment continued through the remaining term of the
Agreement (with the amount of benefits determined by reference to the benefits received by the Executive or accrued on his behalf under such programs during the twelve (12) months preceding his termination).
(ii) coverage under the Company’s life insurance plans and non-taxable medical, health, and dental plans (each being a “Welfare Plan”) in
the same
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manner in which Executive received coverage on the last day of his employment with the Company. Executive and his covered dependents (if any) shall continue
participating in such Welfare Plans, subject to the same premium contributions (if any) on the part of Executive as were required immediately prior to his termination until the earlier of (i) his death; (ii) his employment by another
employer other than one of which he is the majority owner; or (iii) three (3) years from his termination date.
(iii) For purposes
of this Agreement, termination of Executive’s employment hereunder for “Good Reason” shall be limited to Executive’s voluntary termination of employment after the occurrence of any of the following events which have not been
consented to in advance by Executive in writing; provided that Executive has given written notice to the Company within ninety (90) days after the initial occurrence of such event and that the Company has been given at least thirty
(30) days to cure the situation (but the Company may waive its right to cure): (i) if Executive would be required to move his personal residence or perform his principal executive functions more than twenty-five (25) miles from
Executive’s primary office as of the Commencement Date; (ii) if, in the organizational structure of the Company, Executive would be required to report to a person or persons other than the Chief Executive Officer; (iii) if the Company
should fail to maintain Executive’s base compensation in effect pursuant to Section 2 of this Agreement, or fail to maintain the existing employee benefit plans or arrangements in which Executive participates as of the date of this
Agreement, including any material fringe benefit, bonus plan and/or retirement plan, except to the extent that such reduction in compensation or benefit programs is part of an overall adjustment in compensation and benefits for all employees of the
Company and the Executive is otherwise compensated for such an overall adjustment in an equitable manner; (iv) if Executive would be assigned duties and responsibilities other than those normally associated with his position as referenced in
Section 1 of this Agreement; (v) if Executive’s responsibilities or authority have in any way been materially diminished or reduced other than for reasons of Just Cause; or (vi) if Executive is not annually reappointed as
Co-Chief Operating Officer other than for reasons of Just Cause.
(iv) The sum due under Section 8(b)(i) shall be paid in one lump sum
within thirty (30) calendar days after such termination. Notwithstanding the foregoing, in the event Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid
penalties under Code Section 409A, payment shall be withheld and shall be paid to Executive on the first day of the seventh month following Executive’s termination of employment by the Company without Just Cause.
(v) For purposes of Section 8(b), termination of employment as used herein shall mean “Separation from Service” as defined in Code
Section 409A and the Treasury Regulations promulgated thereunder.
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(c)
Disability
.
(i) Termination by the Company of Executive’s employment based on “Disability” shall occur if: (A) Executive is unable to engage in
any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than twelve (12) months; (B) by reason of any
medically determinable physical or mental impairment that can be expected to result in death, or last for continuous period of not less than twelve (12) months, Executive is receiving income replacement benefits for a period of not less than
three (3) months under an accident and health plan covering employees of the Company; or (C) Executive is determined to be totally disabled by the Social Security Administration. Executive shall be entitled to receive benefits under any
short or long-term disability plan maintained by the Company.
(ii) The Company shall
pay Executive, as disability pay, a monthly payment equal to three-quarters (
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) of Executive’s monthly rate of base
salary, plus any bonus paid to Executive for the preceding year. These disability payments shall commence within thirty (30) days of the date of Executive’s termination due to Disability and will end on the earlier of (A) the date
Executive returns to the full-time employment of the Company in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Company; (B) the date the Executive
begins full-time employment with another employer; (C) the date Executive attains the normal age of retirement (as defined in the Company’s defined benefit pension plan) or begins receiving benefits under any substitute retirement plan
adopted by the Company; or (D) the date of Executive’s death. Notwithstanding any other provision to the contrary, the Company’s obligation for any payments required to be made under this Section 8(c) shall be reduced by any
proceeds received by Executive from disability income insurance or any other disability policy or plan maintained by the Company for Executive which was paid for by the Company as partial satisfaction of its obligation under this Section 8(c).
(iii) The Company shall cause to be continued life insurance and non-taxable medical and dental coverage substantially identical to
the coverage maintained by the Company for Executive prior to his termination for Disability. This coverage shall cease upon the earlier of (A) the date Executive returns to the full-time employment of the Company, in the same capacity as he
was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Company; (B) the date Executive begins full-time employment with another employer; (C) the date Executive attains the
normal age of retirement or begins receiving benefits under the Company’s retirement plan; or (D) the date of Executive’s death.
(iv) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability.
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(d)
Termination of Employment by the Board of Directors for Just Cause
. In the event
Executive’s employment is terminated for “Just Cause,” no continued payments or benefits shall be due under this Agreement. For purposes of this Agreement, termination for “Just Cause” shall be defined as termination due to
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 determination of “Just Cause” as defined by this Section 8(d) shall be determined by a majority vote of the entire
membership of the Board of Directors 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 with counsel), of finding that in the good faith
opinion of the Board, Executive committed the conduct described above and specifying the particulars thereof.
(e)
Voluntary
Termination of Employment by Executive Other Than for Good Reason
. The voluntary termination of employment by Executive during the term of this Agreement, other than for Good Reason, with the delivery of no less than sixty (60) days
written notice to the Board of Directors, entitles Executive to receive only the base salary, vested rights, and all employee benefits up to Executive’s termination date.
(f)
Termination and Board Membership
. To the extent Executive is a member of the board of directors of the Company or the Bank or any of
their affiliates on the date of an involuntary termination of employment with the Company or the Bank or a termination of employment for Good Reason, Executive shall be deemed to have automatically resigned from all of the boards of directors
immediately following such termination of employment with the Company or the Bank.
(g)
Termination and Release of Claims
.
Any payments to be made under this Agreement shall be contingent on Executive’s execution and non-revocation of a mutual release in a form acceptable to the Company and the Bank; provided, however, that if the Company or the Bank refuse to
execute such mutual release, the Executive’s obligation to execute and not revoke the release as a precondition to receiving such severance benefits shall terminate. The mutual release agreement shall release the Company and the Bank from any
and all claims and other actions by Executive and it shall also release the Executive from any and all claims and other actions by the Company and the Bank.
9. Change in Control
.
(a) For purposes of this Agreement, a Change in Control of the Company or the Bank shall be deemed to
have occurred if and when:
(i) there occurs a change in control of the Company or the Bank within the meaning of the Home Owners Loan Act
of 1933 or 12 C.F.R. Part 574 as applied to the Company or the Bank as if it were a federally chartered institution;
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(ii) as a result of, or in connection with, any merger or other business combination, sale of assets or
contested election, wherein the persons who were non-employee directors of the Company or the Bank before such transaction or event cease to constitute a majority of the Board of Directors of the Company or the Bank or any successor to the Company
or the Bank;
(iii) the Company or the Bank transfers substantially all of its assets to another corporation or entity which is not an
affiliate of the Company or the Bank; or
(iv) the Company or the Bank is merged or consolidated with another corporation or entity and, as
a result of such merger or consolidation, less than sixty percent (60%) of the equity interest in the surviving or resulting corporation is owned by the former shareholders or depositors of the Company or the Bank.
For purposes of Section 9 of this Agreement, a Change in Control shall not occur as a result of the Conversion.
(b) If Executive’s employment is terminated for any reason other than for Just Cause within twelve months following a Change in Control, Executive
shall be entitled to receive the greater of the following:
(i) the amount of the payment and benefits specified in Section 8(b), or
(ii) the amount of the payment and benefits specified in Section 9(c).
Such payment shall be made in a lump sum within thirty (30) days following Executive’s termination of employment. For purposes
of this Section 9, termination of employment as used herein shall mean “Separation from Service” as defined in Code Section 409A and the Treasury Regulations promulgated thereunder. Notwithstanding the foregoing, in the event
Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid penalties under Code Section 409A, payment shall be withheld and shall be paid to Executive on the first
day of the seventh month following Executive’s termination of employment.
(c) For purposes of Section 9(b)(ii), the amount of
payment and benefits shall be equal to:
(i) an amount equal to three (3) times his “base amount,” as defined
in Code Section 280G(b)(3), less one (1) dollar; and
(ii) coverage under the Company’s or Bank’s life
insurance plan and non-taxable medical, health and dental plans (each being a “Welfare Plan”) in the same manner in which Executive received coverage on the last day of his employment with the Company. Executive and his covered dependents
(if any) shall continue participating in such Welfare Plans, subject to the same premium contributions (if any) on the part of Executive as were required immediately prior to his termination until the earlier of (i) his death; (ii) his
employment by another employer other than one of which he is the majority owner; or (iii) three (3) years from his termination date.
8
10. Successors and Assigns
.
(a) This Agreement shall inure to the benefit of and be binding upon any corporate or other successor of the Company which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or
substantially all of the assets of the Company.
(b) Since the Company is contracting for the unique and personal skills of Executive,
Executive shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent of the Company.
11. Amendments
. No amendments or additions to this Agreement shall be binding upon the parties hereto unless made in writing and signed by both parties, except as herein otherwise specifically provided.
12. Applicable Law
. This agreement shall be governed in all respects, whether as to validity, construction, capacity, performance or otherwise, by the laws of the
State of Hawaii, except to the extent that Federal law shall be deemed to apply.
13. Severability
. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof.
14.
Notices
. Any notices, requests, demands and other communications provided for or deemed necessary by this Agreement shall be sufficient if set forth in writing and delivered in person or sent by registered or certified mail, postage prepaid, to,
in the case of Executive, the last address filed in writing by Executive with the Company, or, in the case of the Company, to the Company at its main office to the attention of the Board of Directors.
15. Indemnification
. The Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors’ and
officers’ liability insurance policy at its expense, or in lieu thereof, shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under law and applicable regulation or under any existing
indemnification agreement by and between Executive and the Company against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his
having been a director or officer of the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities). Such expenses and liabilities may include, but are not limited to, judgment, court
costs and attorneys’ fees and the cost of reasonable settlements. The Company shall pay such expenses and liabilities in advance of a final judicial decision (hereinafter an “advancement of expenses”); provided, however, that, an
advancement of expenses incurred by Executive in his capacity as a director or executive officer of the Company (and not in any other capacity in which service was or is rendered by Executive including, without limitation, services to an employee
benefit plan) shall be made only upon delivery to the Company of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to
appeal that Executive is not entitled to be indemnified for such expenses under this Section 15 or otherwise. Indemnification under this Section 15 shall be made in accordance with 12 C.F.R. §545.121 or any successor thereto.
9
16. Entire Agreement
. This Agreement together with any understanding or modifications thereof as may be agreed to
in writing by the parties, shall constitute the entire agreement between the parties hereto.
17. Source of Payments
. Notwithstanding any provision
in this Agreement to the contrary, to the extent payments and benefits, as provided for under this Agreement, are paid or received by Executive under the employment agreement in effect between Executive and the Bank, the payments and benefits paid
by the Bank will be subtracted from any amount or benefit due simultaneously to Executive under similar provisions of this Agreement. Payments will be allocated in proportion to the level of activity and the time expended by Executive on activities
related to the Company and the Bank, respectively, as determined by the Company and the Bank.
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18.
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Required Regulatory Provisions
.
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(a) The Company
may terminate Executive’s employment at any time, but any termination by the Company, other than Termination for Just Cause, shall not prejudice Executive’s right to compensation or other benefits under this Agreement. Executive shall not
have the right to receive compensation or other benefits for any period after Termination for Just Cause as defined in Section 8(d) hereinabove.
(b) Notwithstanding any other provision of this Agreement to the contrary, any payments made to the Executive pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with
Section 12 U.S.C. Section 1828(k), FDIC regulation 12 C.F.R. Part 359, Golden Parachute and Indemnification Payments.
19. Arbitration
.
(a) Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted
before a panel of three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Company, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be
entered on the arbitrator’s award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the date of termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement.
(b) In the event any dispute or controversy arising under or in connection
with Executive’s termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe
benefits and any compensation and benefits due Executive under this Agreement.
20. Payment of Costs and Legal Fees
. All reasonable costs and legal
fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Company, if Executive is successful with respect to such
10
dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. Such reimbursements shall be paid to Executive within two and
one-half (2
1
/
2
) months after the dispute is settled or resolved in Executive’s favor.
11
IN WITNESS WHEREOF
, the parties have executed this Agreement on the latest date set forth below.
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TERRITORIAL BANCORP INC.
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(in organization)
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By:
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Date
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Chairman of the Compensation Committee
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Date
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Ralph Nakatsuka
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12
Exhibit 10.6
TERRITORIAL SAVINGS BANK
EMPLOYMENT AGREEMENT
THIS AGREEMENT
(the “Agreement”) entered into this 29th day of October, 2008, by
and between Territorial Savings Bank located at 1132 Bishop Street, 22
nd
Floor, Honolulu, Hawaii 96813 (the “Bank”), and Ralph Nakatsuka
(“Executive”).
WHEREAS
, the Bank wishes to assure itself of the continued services of Executive for the period provided
in this Agreement; and
WHEREAS
, Executive is willing to continue to serve in the employ of the Bank on a full-time basis for the
term of this Agreement; and
WHEREAS
, the parties desire by this writing to set forth the terms and conditions of the employment
relationship of the Bank and Executive.
NOW, THEREFORE
, in consideration of the mutual covenants herein contained, and upon the
other terms and conditions hereinafter provided, the parties hereby agree as follows:
1. Employment
. During the term of this Agreement, which is
effective as of October 29, 2008 (the “Commencement Date”), Executive shall serve in the capacity of Co-Chief Operating Officer of the Bank. Executive shall render such administrative and management services to the Bank as are
currently rendered and as are customarily performed by persons situated in a similar executive capacity. Executive shall promote the business of the Bank. Executive’s other duties shall be such as the Board of Directors of the Bank (the
“Board of Directors” or “Board”) may from time to time reasonably direct, including normal duties as an officer of the Bank.
2.
Base Compensation
. The Bank agrees to pay Executive during the Term of this Agreement (as hereinafter defined in Section 6) a base salary at the rate of $269,100 per annum, payable in accordance with the customary payroll practices of the
Bank; provided, however, that the rate of Executive’s base salary shall be reviewed by the Board of Directors not less often than annually, and Executive shall be entitled to receive annual increases at such percentage or in such an amount as
the Board of Directors, in its sole discretion, may decide.
3. Discretionary Bonus
. Executive shall be entitled to receive an annual bonus in an
amount which is based on the bonus program maintained by the Bank as of the date of this Agreement and shall be eligible to participate in any future bonus program adopted by the Bank in an equitable manner. No other compensation provided for in
this Agreement shall be deemed a substitute for Executive’s right to receive bonuses when and as declared by the Board of Directors or as provided for by any plan or program of the Bank.
4. Expenses
. During the term of this Agreement, Executive shall be entitled to receive prompt reimbursement of all reasonable expenses incurred (in accordance
with the policies and procedures of the Bank) in performing services under this Agreement, provided that Executive properly accounts for expenses in accordance with the policies of the Bank and provided further that all such reimbursements pursuant
to this Section 4 shall be paid promptly by the Bank and in any event no later than March 15 of the year immediately following the year in which the expense was incurred.
5. Employee Benefits
.
(a)
Participation in Retirement and Executive Benefit Plans
. Executive shall be entitled, while employed under the terms of this Agreement, to receive all benefits under any tax-qualified or
non-qualified employee benefit plan or arrangement in effect as of the date of this Agreement or that the Bank implements at any time during the term of this Agreement. Executive shall be entitled to participate in such future plans or arrangements
on the same terms as other employees of the Bank or as established by the Bank for Executive or other selected employees.
(b)
Fringe
Benefits
. Executive shall be entitled to receive any benefits under any fringe benefit plan or policy that is in effect as of the date of this Agreement, including any discount or reduced fee employee loan program, or that the Bank
implements at any time during the term of this Agreement, on the same terms as the Bank’s senior management employees. Nothing paid to Executive under any plan or arrangement presently in effect or made available in the future will be deemed to
be in lieu of base salary or other compensation to Executive under this Agreement.
(c)
Automobile, Cellular Phone Use, Computer and
Memberships
. The Bank shall provide Executive with the use of an automobile in accordance with the Bank’s automobile policy for executive vice presidents and above, as in effect from time to time. The Bank shall annually include on
Executive’s Form W-2 any amount attributable to Executive’s personal use of such automobile. The Bank shall also provide Executive with the use of a cellular phone and shall pay (or reimburse Executive) for all reasonable expenses related
to the use of such phone. The Bank shall also provide Executive with the use of a personal digital assistant or similar device, and home, portable and office computers and shall pay (or reimburse Executive) for all reasonable expenses related to the
use of such computers or devices. In addition, the Bank shall reimburse or pay Executive amounts sufficient to establish or maintain membership in any club or organization (business, social or otherwise) to which will benefit the Bank (including
such fees or dues relating to the use of the club or organization).
(d)
Paid Leave Time
. Executive shall be entitled to
leave time in accordance with the standard policies or practices of the Bank for senior executive officers, as in effect from time to time.
6. Term of
Agreement
. Executive’s employment under this Agreement shall be deemed to have commenced as of the Commencement Date and shall continue for a period of thirty-six (36) calendar months from the Commencement Date. Commencing on the first
anniversary of the Commencement Date and continuing on each anniversary thereafter (each an “Anniversary Date”), the disinterested members of the Board of Directors of the Bank may extend the Agreement an additional year such that the
remaining term of the Agreement shall be thirty-six (36) months, unless Executive elects not to extend the term of this Agreement by giving written notice in accordance with Section 15 of this Agreement. The Board of Directors of the Bank
will review the Agreement and Executive’s performance annually for purposes of determining
2
whether to extend the Agreement and the rationale and results thereof shall be included in the minutes of the Board’s meeting. The Board of Directors of
the Bank shall give written notice to Executive as soon as possible after such review as to whether the Agreement is to be extended; provided, however, if the Board fails to conduct such review or if written notice of nonrenewal is provided to
Executive, then in such case the term of this Agreement shall become fixed and shall cease at the end of thirty-six (36) full calendar months following the Anniversary Date.
7. Noncompetition and Confidentiality
.
(a) Executive shall devote his full time and attention to the
performance of his employment under this Agreement. Upon any termination of Executive’s employment hereunder pursuant to Section 8(b) of this Agreement (other than a termination which occurs after the effective date of a Change in
Control), Executive agrees not to compete with the Bank for a period of one (1) year following such termination in any city, town or county in which Executive’s normal business office is located or in which the Bank has an office or has
filed an application for regulatory approval to establish an office, determined as of the effective date of such termination, except as agreed to pursuant to a resolution duly adopted by the Board of Directors. Executive agrees that during such
period and within said cities, towns and counties, Executive shall not work for or advise, consult or otherwise serve with, directly or indirectly, any entity whose business materially competes with the depository, lending or other business
activities of the Bank. The parties hereto, recognizing that irreparable injury will result to the Bank, and their business and property in the event of Executive’s breach of this Section 7(a), agree that in the event of any such breach by
Executive, the Bank will be entitled, in addition to any other remedies and damages available, to an injunction to restrain the violation hereof by Executive, Executive’s partners, agents, servants, employees and all persons acting for or under
the direction of Executive. Executive represents and admits that in the event he terminates employment with the Bank pursuant to Section 8(b) of this Agreement, Executive’s experience and capabilities are such that Executive can obtain
employment in a business engaged in other lines and/or of a different nature than the Bank, and that the enforcement of a remedy by way of injunction will not prevent Executive from earning a livelihood. Nothing herein will be construed as
prohibiting the Bank from pursuing any other remedies available to the Bank for breach or threatened breach, including the recovery of damages from Executive.
(b) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank is a valuable, special and unique asset of the business of the Bank. Executive will
not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank to any person, firm, corporation, or other entity for any reason or purpose whatsoever.
Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank. Further,
Executive may disclose information regarding the business activities of the Bank to the Office of Thrift Supervision (“OTS”) or other regulatory or judicial body pursuant to a formal regulatory request or subpoena.
(c) Nothing contained in this Section 7 shall be deemed to prevent or limit the right of Executive to invest in any entity which conducts business
similar to that of the Bank, solely as a passive or minority investor.
3
8. Termination
.
Executive’s employment under this Agreement shall be terminated upon any of the following occurrences:
(a)
Death
. Executive’s employment under this Agreement shall terminate upon his death. Executive’s estate shall be entitled to receive payments of base salary, payable in accordance with the regular payroll practices
of the Bank, for sixty (60) days immediately following the date of Executive’s death and any other compensation accrued as of the date of death.
(b)
Termination of Employment by the Board of Directors Without Just Cause or by the Executive for Good Reason
. In the event that (i) the Board of Directors terminates Executive’s employment
without “Just Cause” (as defined in Section 8(d)) or (ii) such employment is terminated by the Executive for “Good Reason” (as defined in Section 8(b)(iii), Executive shall be entitled to:
(i) his base salary for the remaining term of the Agreement, including any renewals or extensions thereof, at the current rate in effect pursuant to
Section 2 of this Agreement, plus the amount of the annual cash bonus earned in the calendar year preceding the year of termination, and a cash equivalent amount equal to the additional retirement benefits under any retirement program (whether
tax-qualified or non-qualified) that Executive would have been entitled to had his employment continued through the remaining term of the Agreement (with the amount of benefits determined by reference to the benefits received by the Executive or
accrued on his behalf under such programs during the twelve (12) months preceding his termination).
(ii) coverage under the
Bank’s life insurance plans and non-taxable medical, health, and dental plans (each being a “Welfare Plan”) in the same manner in which Executive received coverage on the last day of his employment with the Bank. Executive and his
covered dependents (if any) shall continue participating in such Welfare Plans, subject to the same premium contributions (if any) on the part of Executive as were required immediately prior to his termination until the earlier of (i) his
death; (ii) his employment by another employer other than one of which he is the majority owner; or (iii) three (3) years from his termination date.
(iii) For purposes of this Agreement, termination of Executive’s employment hereunder for “Good Reason” shall be limited to Executive’s voluntary termination of employment after the occurrence of
any of the following events which have not been consented to in advance by Executive in writing; provided that Executive has given written notice to the Bank within ninety (90) days after the initial occurrence of such event and that the Bank
has been given at least thirty (30) days to cure the situation (but the Bank may waive its right to cure): (i) if Executive would be required to move his personal residence or perform his principal executive functions more than twenty-five
(25) miles from Executive’s primary office as of the Commencement Date; (ii) if, in the organizational
4
structure of the Bank, Executive would be required to report to a person or persons other than the Chief Executive Officer; (iii) if the Bank should
fail to maintain Executive’s base compensation in effect pursuant to Section 2 of this Agreement, or fail to maintain the existing employee benefit plans or arrangements in which Executive participates as of the date of this Agreement,
including any material fringe benefit, bonus plan and/or retirement plan, except to the extent that such reduction in compensation or benefit programs is part of an overall adjustment in compensation and benefits for all employees of the Bank and
the Executive is otherwise compensated for such an overall adjustment in an equitable manner; (iv) if Executive would be assigned duties and responsibilities other than those normally associated with his position as referenced in Section 1
of this Agreement; (v) if Executive’s responsibilities or authority have in any way been materially diminished or reduced other than for reasons of Just Cause; or (vi) if Executive is not annually reappointed as Co-Chief Operating
Officer other than for reasons of Just Cause.
(iv) The sum due under Section 8(b)(i) shall be paid in one lump sum within thirty
(30) calendar days after such termination. Notwithstanding the foregoing, in the event Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid penalties under Code
Section 409A, payment shall be withheld and shall be paid to Executive on the first day of the seventh month following Executive’s termination of employment by the Bank without Just Cause.
(v) For purposes of Section 8(b), termination of employment as used herein shall mean “Separation from Service” as defined in Code
Section 409A and the Treasury Regulations promulgated thereunder.
(c)
Disability
.
(i) Termination by the Bank of Executive’s employment based on “Disability” shall occur if: (A) Executive is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death, or last for a continuous period of not less than twelve (12) months; (B) by reason of any medically
determinable physical or mental impairment that can be expected to result in death, or last for continuous period of not less than twelve (12) months, Executive is receiving income replacement benefits for a period of not less than three
(3) months under an accident and health plan covering employees of the Bank; or (C) Executive is determined to be totally disabled by the Social Security Administration. Executive shall be entitled to receive benefits under any short or
long-term disability plan maintained by the Bank.
(ii) The Bank shall pay Executive,
as disability pay, a monthly payment equal to three-quarters (
3
/
4
) of Executive’s monthly rate of base salary, plus
any bonus paid to Executive for the preceding year. These disability payments shall commence within thirty (30) days of the date of Executive’s termination due to
5
Disability and will end on the earlier of (A) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed
prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (B) the date the Executive begins full-time employment with another employer; (C) the date Executive attains the normal age of
retirement (as defined in the Bank’s defined benefit pension plan) or begins receiving benefits under any substitute retirement plan adopted by the Bank; or (D) the date of Executive’s death. Notwithstanding any other provision to the
contrary, the Bank’s obligation for any payments required to be made under this Section 8(c) shall be reduced by any proceeds received by Executive from disability income insurance or any other disability policy or plan maintained by the
Bank for Executive which was paid for by the Bank as partial satisfaction of its obligation under this Section 8(c).
(iii) The Bank
shall cause to be continued life insurance and non-taxable medical and dental coverage substantially identical to the coverage maintained by the Bank for Executive prior to his termination for Disability. This coverage shall cease upon the earlier
of (A) the date Executive returns to the full-time employment of the Bank, in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (B) the date
Executive begins full-time employment with another employer; (C) the date Executive attains the normal age of retirement or begins receiving benefits under the Bank’s retirement plan; or (D) the date of Executive’s death.
(iv) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during
which Executive is incapable of performing his duties hereunder by reason of temporary disability.
(d)
Termination of Employment by
the Board of Directors for Just Cause
. In the event Executive’s employment is terminated for “Just Cause,” no continued payments or benefits shall be due under this Agreement. For purposes of this Agreement, termination for
“Just Cause” shall be defined as termination due to 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 determination of “Just Cause” as defined by this
Section 8(d) shall be determined by a majority vote of the entire membership of the Board of Directors 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 with counsel), of finding that in the good faith opinion of the Board, Executive committed the conduct described above and specifying the particulars thereof.
(e)
Voluntary Termination of Employment by Executive Other Than for Good Reason
. The voluntary termination of employment by Executive
during the term of this Agreement, other than for Good Reason, with the delivery of no less than sixty (60) days written notice to the Board of Directors, entitles Executive to receive only the base salary, vested rights, and all employee
benefits up to Executive’s termination date.
6
(f)
Termination and Board Membership
. To the extent Executive is a member of the board of
directors of Territorial Bancorp Inc. (the “Company”) or the Bank or any of their affiliates on the date of an involuntary termination of employment with the Company or the Bank or a termination of employment for Good Reason, Executive
shall be deemed to have automatically resigned from all of the boards of directors immediately following such termination of employment with the Company or the Bank.
(g)
Termination and Release of Claims
. Any payments to be made under this Agreement shall be contingent on Executive’s execution and non-revocation of a mutual release in a form acceptable to the
Company and the Bank; provided, however, that if the Company or the Bank refuse to execute such mutual release, the Executive’s obligation to execute and not revoke the release as a precondition to receiving such severance benefits shall
terminate. The mutual release agreement shall release the Company and the Bank from any and all claims and other actions by Executive and it shall also release the Executive from any and all claims and other actions by the Company and the Bank.
9. Change in Control
.
(a) For
purposes of this Agreement, a Change in Control of the Company or the Bank shall be deemed to have occurred if and when:
(i) there occurs a
change in control of the Company or the Bank within the meaning of the Home Owners Loan Act of 1933 or 12 C.F.R. Part 574 as applied to the Company or the Bank as if it were a federally chartered institution;
(ii) as a result of, or in connection with, any merger or other business combination, sale of assets or contested election, wherein the persons who were
non-employee directors of the Company or the Bank before such transaction or event cease to constitute a majority of the Board of Directors of the Company or the Bank or any successor to the Company or the Bank;
(iii) the Company or the Bank transfers substantially all of its assets to another corporation or entity which is not an affiliate of the Company or the
Bank; or
(iv) the Company or the Bank is merged or consolidated with another corporation or entity and, as a result of such merger or
consolidation, less than sixty percent (60%) of the equity interest in the surviving or resulting corporation is owned by the former shareholders or depositors of the Company or the Bank.
For purposes of Section 9 of this Agreement, a Change in Control shall not occur as a result of a conversion of the Bank from the mutual to stock
form of organization (“Conversion”). Upon a Conversion, the resulting bank and holding company shall be subject to this Agreement and the obligations of the Bank set forth herein.
7
(b) If Executive’s employment is terminated for any reason other than for Just Cause within twelve
months following a Change in Control, Executive shall be entitled to receive the greater of the following:
(i) the amount
of the payment and benefits specified in Section 8(b), or
(ii) the amount of the payment and benefits specified in
Section 9(c).
Such payment shall be made in a lump sum within thirty (30) days following Executive’s
termination of employment. For purposes of this Section 9, termination of employment as used herein shall mean “Separation from Service” as defined in Code Section 409A and the Treasury Regulations promulgated thereunder.
Notwithstanding the foregoing, in the event Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid penalties under Code Section 409A, payment shall be withheld
and shall be paid to Executive on the first day of the seventh month following Executive’s termination of employment.
(c) For
purposes of Section 9(b)(ii), the amount of payment and benefits shall be equal to:
(i) an amount equal to three
(3) times his “base amount,” as defined in Code Section 280G(b)(3), less one (1) dollar; and
(ii)
coverage under the Bank’s life insurance plan and non-taxable medical, health and dental plans (each being a “Welfare Plan”) in the same manner in which Executive received coverage on the last day of his employment with the Bank.
Executive and his covered dependents (if any) shall continue participating in such Welfare Plans, subject to the same premium contributions (if any) on the part of Executive as were required immediately prior to his termination until the earlier of
(i) his death; (ii) his employment by another employer other than one of which he is the majority owner; or (iii) three (3) years from his termination date.
10. Limitation of Benefits under Certain Circumstances
.
(a) In no event shall the payments and
benefits received by Executive exceed three times Executive’s average compensation over the past five years, in accordance with the OTS regulations.
(b) If the payments and benefits pursuant to Section 9 of this Agreement, either alone or together with other payments and benefits which the Executive has the right to receive from the Bank, would constitute a
“parachute payment” under Section 280G of the Code, the cash severance payable by the Bank pursuant to Section 9 shall be reduced by the amount, if any, which is the minimum amount necessary to result in no portion of the
payments and benefits under Section 9 being non-deductible to the Bank pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The determination of any reduction in the payments and
benefits shall be based upon the opinion of the Bank’s independent public accountants and paid for by the Bank. In the event that the Bank and/or the Executive do not agree with the opinion of such accountants, (i) the Bank shall pay to
the
8
Executive the maximum amount of payments and benefits as selected by the Executive, which such opinion indicates there is a high probability do not result in
any of such payments and benefits being non-deductible to the Bank and subject to the imposition of the excise tax imposed under Section 4999 of the Code and (ii) the Bank may request, and the Executive shall have the right to demand that
they request, a ruling from the IRS as to whether the disputed payments and benefits have such consequences. Any such request for a ruling from the IRS shall be promptly prepared and filed by the Bank, but in no event later than thirty
(30) days from the date of the accountant’s opinion referred to above, and shall be subject to the Executive’s approval prior to filing, which shall not be unreasonably withheld. The Bank and the Executive agree to be bound by any
ruling received from the IRS and to make appropriate payments to each other to reflect any such rulings, together with interest at the applicable federal rate.
11. Successors and Assigns
.
(a) This Agreement shall inure to the benefit of and be binding upon any corporate or other
successor of the Bank which shall acquire, directly or indirectly, by merger, consolidation, purchase or otherwise, all or substantially all of the assets of the Bank.
(b) Since the Bank is contracting for the unique and personal skills of Executive, Executive shall be precluded from assigning or delegating his rights or duties hereunder without first obtaining the written consent
of the Bank.
12. Amendments
. No amendments or additions to this Agreement shall be binding upon the parties hereto unless made in writing and
signed by both parties, except as herein otherwise specifically provided.
13. Applicable Law
. This agreement shall be governed in all respects,
whether as to validity, construction, capacity, performance or otherwise, by the laws of the State of Hawaii, except to the extent that Federal law shall be deemed to apply.
14. Severability
. The provisions of this Agreement shall be deemed severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions
hereof.
15. Notices
. Any notices, requests, demands and other communications provided for or deemed necessary by this Agreement shall be sufficient
if set forth in writing and delivered in person or sent by registered or certified mail, postage prepaid, to, in the case of Executive, the last address filed in writing by Executive with the Bank, or, in the case of the Bank, to the Bank at its
main office to the attention of the Board of Directors.
16. Indemnification
. The Bank shall provide Executive (including his heirs, executors and
administrators) with coverage under a standard directors’ and officers’ liability insurance policy at its expense, or in lieu thereof, shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted
under law and applicable regulation or under any existing indemnification agreement by and between Executive and the Bank against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or
proceeding in which he may be involved by reason of his having been a director or officer of the Bank (whether or not he continues to be a director or officer at the time of incurring such
9
expenses or liabilities). Such expenses and liabilities may include, but are not limited to, judgment, court costs and attorneys’ fees and the cost of
reasonable settlements. The Bank shall pay such expenses and liabilities in advance of a final judicial decision (hereinafter an “advancement of expenses”); provided, however, that, an advancement of expenses incurred by Executive in his
capacity as a director or executive officer of the Bank (and not in any other capacity in which service was or is rendered by Executive including, without limitation, services to an employee benefit plan) shall be made only upon delivery to the Bank
of an undertaking, by or on behalf of Executive, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal that Executive is not entitled to be indemnified for
such expenses under this Section 16 or otherwise. Indemnification under this Section 16 shall be made in accordance with 12 C.F.R. §545.121 or any successor thereto.
17. Entire Agreement
. This Agreement together with any understanding or modifications thereof as may be agreed to in writing by the parties, shall constitute the entire agreement between the parties hereto.
18. Required Regulatory Provisions
.
In the event any of the provisions of this Section 18 are in conflict with the terms of this Agreement, this Section 18 shall prevail.
(a) The Bank may terminate Executive’s employment at any time, but any termination by the Bank, other than Termination for Just Cause, shall not prejudice Executive’s right to compensation or other benefits
under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Just Cause as defined in Section 8(d) hereinabove.
(b) If Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank’s affairs by a notice served
under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e)(3) or (g)(1); the Bank’s obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings.
If the charges in the notice are dismissed, the Bank may in its discretion: (i) pay Executive all or part of the compensation withheld while their contract obligations were suspended; and (ii) reinstate (in whole or in part) any of the
obligations which were suspended.
(c) If Executive is removed and/or permanently prohibited from participating in the conduct of the
Bank’s affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall terminate as of the effective date of the
order, but vested rights of the contracting parties shall not be affected.
(d) If the Bank is in default as defined in
Section 3(x)(1) of the Federal Deposit Insurance Act, 12 U.S.C. §1813(x)(1) all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting
parties.
10
(e) All obligations of the Bank under this contract shall be terminated, except to the extent determined
that continuation of the contract is necessary for the continued operation of the institution: (i) by the Director of the OTS (or his designee) or the FDIC, at the time the FDIC enters into an agreement to provide assistance to or on behalf of
the Bank under authority contained in Section 13(c) of the Federal Deposit Insurance Act, 12 U.S.C. §1823(c); or (ii) by the Director of the OTS (or his designee) at the time the Director of the OTS (or his designee) approves a
supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the Director of the OTS to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be
affected by such action.
(f) Any payments made to Executive pursuant to this Agreement or otherwise, are subject to and conditioned upon
their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder.
19. Arbitration
.
(a) Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of
three arbitrators sitting in a location selected by Executive within fifty (50) miles from the location of the Bank, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the
arbitrator’s award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the date of termination during the pendency of any dispute or controversy
arising under or in connection with this Agreement.
(b) In the event any dispute or controversy arising under or in connection with
Executive’s termination is resolved in favor of Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of all back-pay, including salary, bonuses and any other cash compensation, fringe benefits
and any compensation and benefits due Executive under this Agreement.
20. Payment of Costs and
Legal Fees
. All reasonable costs and legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, if Executive is successful with respect to
such dispute or question of interpretation pursuant to a legal judgment, arbitration or settlement. Such reimbursements shall be paid to Executive within two and one-half (2
1
/
2
) months after the dispute is settled or resolved in Executive’s favor.
11
IN WITNESS WHEREOF
, the parties have executed this Agreement on the latest date set forth below.
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TERRITORIAL SAVINGS BANK
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November 10, 2008
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By:
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/s/ Harold H. Ohama
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Date
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Chairman of the Compensation Committee
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November 10, 2008
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/s/ Ralph Nakatsuka
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Date
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Ralph Nakatsuka
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12
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.
2
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.
3
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.
4
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 harmless, on an after-tax basis, for an Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses.
Without limitation on the foregoing provisions of this Section 2.4.3(c), the Bank shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings,
hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees
to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Bank shall determine; provided, however, that if the Bank directs the Executive to pay
such claim and sue for a refund, the Bank shall advance the amount of such payment to the Executive, on an interest-free basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such
advance or with respect to any imputed income with respect to such advance; and further provided with respect to any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which
such contested amount. Furthermore, the Bank’s control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be,
any other issues raised by the Internal Revenue service or any other taxing authority.
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(d)
Adjustments to the Gross-Up Payment
. If, after the receipt by the Executive of an amount
advanced by the Bank pursuant to Section 2.4.3(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Bank’s complying with the requirements of Section 2.4.3(c) pay to
the Bank the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto within 30 days). If, after the receipt by the Executive of an amount advanced by the Bank pursuant to Section 2.4.3(c), a
determination is made that the Executive shall not be entitled to any refund with respect to such claim and such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be
required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid.
2.5
Restriction on Timing of Payment
. Notwithstanding any provision of this Agreement to the contrary, in the event the Executive is a Specified Employee, then, to the extent necessary to avoid penalties under Code Section 409A,
any payments under Sections 2.2 and 2.4 to which Executive is entitled for the first six months shall be withheld and shall be paid to the Executive in a single cash lump-sum distribution on the first day of the seventh month following the
Executive’s Termination of Employment.
ARTICLE 3
DEATH BENEFITS
3.1
Death During Active Service
. If the Executive dies while in the
active service of the Bank, the Bank shall pay to the Executive’s Beneficiary the “Preretirement Death Benefit” described in this Section 3.1 in lieu of any other benefit under this Agreement. The Bank shall not pay any
Preretirement Death Benefit under this Section 3.1 if the Executive has received any of lifetime benefit payment provided under Article 2.
3.1.1
Amount of Benefit
. The Preretirement Death Benefit under this Section 3.1 shall be 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, starting at what would have been the Executive’s Normal Retirement Age.
3.1.2
Payment of Benefit
. Upon the Executive’s death, the Bank shall pay the Preretirement Death Benefit to the Executive’s Beneficiary in a single cash lump-sum distribution within 30 days following
the Executive’s death.
3.2
Death During Payment of a Lifetime Benefit
. If the Executive dies after any lifetime benefit
payments have commenced under Article 2 but before receiving all such payments, the Bank shall pay the remaining benefit payments to the Executive’s Beneficiary at the same time and in the same amounts they would have been paid to the Executive
had the Executive survived.
7
3.3
Death After Termination of Employment But Before Payment of a Lifetime Benefit Commences
. If
the Executive is entitled to the commencement of any lifetime benefit payments under Article 2, but dies prior to the commencement of such benefit payments, the Bank shall pay the same benefit payments to the Executive’s Beneficiary that the
Executive was entitled to prior to death except that the benefit payments shall commence on the first day of the month following the date of the Executive’s death.
ARTICLE 4
BENEFICIARIES
The Executive shall designate a Beneficiary by filing a written designation (as attached hereto) with the Bank. The Executive may revoke or modify the
designation at any time by filing a new designation. However, a designation shall only be effective if signed by the Executive and received by the Bank during the Executive’s lifetime. The Executive’s Beneficiary designation shall be
deemed automatically revoked if the Beneficiary predeceases the Executive, or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments
shall be made to the personal representative of the Executive’s estate.
ARTICLE 5
VESTING
5.1
Full
Vesting
. Except as otherwise provided in this Article 5, the Executive shall maintain a 100% vested and nonforfeitable interest in the benefits provided under this Agreement.
5.2
Termination for Cause
. However, notwithstanding the above Section 5.1 or any other provision of this Agreement to the contrary, the Bank
shall not pay, and the Executive shall not be entitled to, any benefit under this Agreement due to the Executive’s Termination for Cause.
5.3
Suicide or Misstatement
. The Bank shall not pay, and the Executive shall not be entitled to, any benefit under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the
Bank shall not pay, and the Executive shall not be entitled to, any benefit under this Agreement if the Executive has made any material misstatement of fact on any application for any benefits provided by the Bank to the Executive.
ARTICLE 6
ADMINISTRATION
6.1
Authority of Board
. The Board of Directors shall maintain the authority and discretion to control and manage the
operation and administration of the Agreement. In its discretion, the Board of Directors shall make such rules, interpretations, and computations and take such other actions to administer the Agreement, as it may deem appropriate. The rules,
interpretations, computations, and other actions of the Board of Directors shall be binding and conclusive on all persons. In administering the Agreement, the Board of Directors shall have the authority to: (a) require, as a condition to
receiving benefits under the Agreement, such information as it may reasonably require for the proper administration of the Agreement; (b)
8
make and enforce such rules and regulations as it deems to be necessary for the administration of the Agreement; (c) interpret the Agreement;
(d) determine the amount and timing of benefits payable to any person in accordance with the provisions of the Agreement; and (e) direct all payments to be made pursuant to the Agreement.
The Board of Directors is granted the authority to name an individual or individuals from time to time to carry out one or more of the duties described
above. The expenses of the Board of Directors, or the individual or individuals described in the preceding sentence, shall be paid directly by the Bank.
6.2
Incapacity
. If a benefit is payable to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian,
legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank may require proof of incompetence, minority, or guardianship as it may deem appropriate prior to distribution of the benefit.
Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
ARTICLE 7
FUNDING
7.1
Unfunded
Plan
. All amounts payable in accordance with the Agreement shall be paid in cash from the general funds of the Bank and no special or separate fund, other than a “rabbi trust” established pursuant to Section 7.2 below, shall be
established, and no other segregation of assets shall be made to assure the payment of any amounts payable in accordance with the Agreement. The Executive shall have no right, title, or interest whatsoever in or to any investment that the Bank may
make to aid it in meeting its obligations hereunder, including, but not limited to, deemed investments. Nothing contained in the Agreement, and no action taken pursuant to its provisions shall create or be construed to create a trust of any kind, or
a fiduciary relationship between the Bank and the Executive or any other person. To the extent that any person acquires a right to receive payments from the Bank hereunder, such right shall be no greater than the right of an unsecured creditor.
7.2
Rabbi Trust Allowed
. The Bank may, for administrative reasons, establish a “rabbi trust” for the benefit of Executive
under the Agreement. If such a trust is established, its assets shall be used exclusively for the purposes set forth in the Agreement and the applicable trust agreement, subject to the following conditions:
(a) The creation of said trust shall not cause the Agreement to be other than “unfunded” for purposes of Title I of ERISA;
(b) The Bank shall be treated as the “grantor” of said trust for purposes of Code Section 677; and
(c) The trust agreement shall provide that its assets may be used to satisfy claims of the Bank’s general creditors in the event of insolvency, and
the rights of such general creditors in such circumstances are enforceable by them under federal and state law.
9
It is intended that such a trust be consistent with tax law requirements preventing inclusion in income
for income tax purposes prior to actual payment of benefits under the Agreement. If such a trust is established, then prior to the payment of benefits to the Executive, there shall be no actual transfer of assets to the Executive under the Agreement
and trust, and the Agreement and trust shall confer no current benefit that would be immediately taxable to the Executive under the constructive receipt rule or economic benefit doctrine under the tax laws.
ARTICLE 8
AMENDMENT AND
TERMINATION
8.1
Amendment and Termination.
(a) The Bank reserves the right to amend this Agreement at any time. However, to the extent any such amendment would adversely impact the accrued benefits of the Executive, the amendment shall require the written
consent of the Executive, even if the Executive is no longer employed by the Bank.
(b) The Bank reserves the right to terminate the
Agreement at any time. Upon termination of the Agreement, the Bank shall determine whether all payments of benefits shall be made in accordance with the normal distribution schedule set forth under the Agreement or if payment of benefits shall be
accelerated in order to wind down the Agreement. To the extent any benefits under the Agreement are subject to Code Section 409A, any acceleration of the payment of such benefits due to terminating the Agreement shall comply with the following:
(i) the Bank may terminate the Agreement provided that: (A) all arrangements sponsored by the Bank that would be
aggregated with this Agreement under Treasury Regulations Section 1.409A-1(c)(2) if the Executive covered by this Agreement was also covered by any of those other arrangements are also terminated; (B) no payments other than payments that
would be payable under the terms of the arrangement if the termination had not occurred are made within 12 months of the termination of the arrangement; (C) all payments are made within 24 months of the termination of the arrangements; and
(D) the Bank does not adopt a new arrangement that would be aggregated with any terminated arrangement under Treasury Regulations Section 1.409A-1(c)(2) if the same Executive participated in both arrangements, at any time within three
years following the date of termination of the arrangement.
(ii) The Bank may terminate the Agreement within the 30 days
preceding a Change in Control (but not following a Change in Control), provided that the Agreement shall only be treated as terminated if all substantially similar arrangements sponsored by the Bank are terminated so that the Executive and all
executives under substantially similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within 12 months of the date of the termination of the arrangements. For these purposes, “Change
in Control” shall be defined in accordance with the Treasury Regulations under Code Section 409A.
(iii) The Bank
may terminate the Agreement within 12 months of a corporate dissolution taxed under Code Section 331, or with approval of a bankruptcy
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court pursuant to 11 U.S.C. §503(b)(1)(A), provided that the amounts deferred under the Agreement are included in the Executive’s gross income in
the latest of (A) the calendar year in which the Agreement terminates; (B) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (C) the first calendar year in which the payment is
administratively practicable.
8.2
Reorganization of the Bank
. In the event of a merger or consolidation of the Bank, or the
transfer of substantially all of the assets of the Bank to another corporation, such continuing, resulting, or transferee corporation shall have the right to continue and carry the Agreement and to assume all liabilities of the Bank without
obtaining the consent of the Executive. If such successor shall assume the liabilities of the Bank hereunder, the Bank shall be relieved of all such liability, and the Executive shall have the right to assert any claim against the Bank for benefits
under or in connection with this Agreement.
8.3
Protected Benefits
. If the Agreement is terminated, or if liabilities accrued
hereunder up to the date of an event specified in Section 8.2 are not assumed by the successor to the Bank, then the dollar amount of benefits of Executive or Beneficiary receiving benefits under the Agreement, and the dollar amount of benefits
of the Executive or Beneficiary who is entitled to benefits under the Agreement, shall be guaranteed and shall not thereafter be reduced without the Executive’s or Beneficiary’s consent.
ARTICLE 9
CLAIMS AND REVIEW
PROCEDURES
9.1
Claims Procedure
. An Executive or Beneficiary (the “Claimant”) who has not received benefits under
the Agreement that he or she believes should be paid may make a claim for such benefits as follows:
9.1.1
Initiation
– Written Claim
. The Claimant may initiate a claim by submitting to the Bank a written claim for benefits.
9.1.2
Timing of Bank Response
. The Bank shall respond to such Claimant within 90 days after receiving the claim. If the Bank determines that special circumstances require additional time for processing the claim, the Bank may extend the response
period by an additional 90 days by notifying the Claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension shall set forth the special circumstances and the date by which the
Bank expects to render its decision.
9.1.3
Notice of Decision
. If the Bank denies part or all of the claim, the Bank
shall notify the Claimant in writing of such denial. The Bank shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth: (a) the specific reasons for the denial; (b) a reference
to the specific provisions of the Agreement on which the denial is based; (c) description of any additional information or material necessary for the Claimant to perfect the claim and an explanation of why it is needed; (d) an explanation
of the Agreement’s review procedures and the time limits applicable to such procedures; (e) and a statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on
review.
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9.2
Review Procedure
. If the Bank denies part or all of the claim, the Claimant shall have the
opportunity for a full and fair review by the Bank of the denial, as follows:
9.2.1
Initiation – Written
Request
. In order to initiate the review, the Claimant, within 60 days after receiving the Bank’s notice of denial, may file with the Bank a written request for review.
9.2.2
Additional Submissions – Information Access
. The Claimant shall then have the opportunity to submit written comments,
documents, records, and other information relating to the claim. The Bank shall also provide the Claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in
applicable ERISA regulations) to the Claimant’s claim for benefits.
9.2.3
Considerations on Review
. In
considering the review, the Bank shall take into account all materials and information the Claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.
9.2.4
Timing of Bank Response
. The Bank shall respond in writing to such claimant within 60 days after receiving the
request for review. If the Bank determines that special circumstances require additional time for processing the claim, the Bank can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the
initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Bank expects to render its decision.
9.2.5
Notice of Decision
. The Bank shall notify the Claimant in writing of its decision on review. The Bank shall write the
notification in a manner calculated to be understood by the Claimant. The notification shall set forth: (a) the specific reasons for the denial; (b) a reference to the specific provisions of the Agreement on which the denial is based;
(c) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the
Claimant’s claim for benefits; and (d) a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).
ARTICLE 10
LEGAL STATUS
This Agreement is intended to constitute a nonqualified deferred compensation agreement which is not subject to the qualification requirements of Code Section 401(a). Further, this Agreement is intended to
constitute a “top hat” arrangement within the meaning of ERISA 201(2) and is not subject to the coverage, funding, and fiduciary requirements of ERISA. Finally, until the occurrence of a distribution event and the actual payment to the
Executive of a benefit hereunder, it is intended that there has been no transfer of any benefit to the Executive under Code Section 83 and no benefit is subject to inclusion for income tax purposes.
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ARTICLE 11
MISCELLANEOUS
11.1
Binding Effect
. This Agreement shall bind the Executive and the
Bank, and their beneficiaries, survivors, executors, successors, administrators and transferees.
11.2
No Guarantee of Employment
.
This Agreement is not an employment policy or contract. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank’s right to discharge the Executive. It also does not require the Executive
to remain an employee nor interfere with the Executive’s right to terminate employment at any time.
11.3
Nontransferability
.
Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached, or encumbered in any manner.
11.4
Notice
.
Any notice, consent, or demand required or permitted to be given under the provisions of this Agreement by one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by delivering the
same to such other party personally, or by mailing the same, by United States certified mail, postage prepaid, to such party, addressed to their last known address as shown on the records of the Bank. The date of such mailing shall be deemed the
date of such mailed notice, consent, or demand.
11.5
Tax Withholding and Code Section 409A Taxes
. Any distribution under this
Agreement shall be reduced by the amount of any taxes required to be withheld from such distribution. This Agreement shall permit the acceleration of the time or schedule of a payment to pay employment related taxes as permitted under Treasury
regulation Section 1.409A-3(j) or to pay any taxes that may become due at any time that the arrangement fails to meet the requirements of Code Section 409A and the regulations and other guidance promulgated thereunder. In the latter case,
such payments shall not exceed the amount required to be included in income as the result of the failure to comply with the requirements of Code Section 409A.
11.6
Applicable Law
. The Agreement and all rights hereunder shall be governed by the laws of the State of Hawaii, except to the extent preempted by the laws of the United States of America.
11.7
Entire Agreement
. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No
rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.
11.8
Named
Fiduciary
. The Bank shall be the named fiduciary and plan administrator under this Agreement. It may delegate to others certain aspects of the management and operational responsibilities including the employment of advisors and the delegation of
ministerial duties to qualified individuals.
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11.9
Construction
. The headings of the Articles in this Agreement is provided for convenience only
and will not affect its construction or interpretation. All references to “Article” or “Articles” refer to the corresponding Article or Articles of this Agreement. Wherever any words are used under the Agreement in the masculine,
feminine, or neuter gender, they shall be construed as though they were also used in another gender in all cases where they would so apply.
11.10
Acceleration of Payments
. Except as specifically permitted herein or in other sections of this Agreement, no acceleration of the time or schedule of any payment may be made hereunder. Notwithstanding the foregoing, payments may
be accelerated hereunder by the Bank, in accordance with the provisions of Treasury Regulation Section 1.409A-3(j)(4) and any subsequent guidance issued by the United States Treasury Department. Accordingly, payments may be accelerated, in
accordance with requirements and conditions of the Treasury Regulations (or subsequent guidance) in the following circumstances: (i) as a result of certain domestic relations orders; (ii) in compliance with ethics agreements with the
Federal government; (iii) in compliance with ethics laws or conflicts of interest laws; (iv) in limited cash-outs (but not in excess of the limit under Code Section 402(g)(1)(B)); (v) in the case of certain distributions to avoid
a non-allocation year under Code Section 409(p); (vi) to apply certain offsets in satisfaction of a debt of the Executive to the Bank; (vii) in satisfaction of certain bona fide disputes between the Executive and the Bank; or
(viii) for any other purpose set forth in the Treasury Regulations and subsequent guidance.
11.11
Required Provision
. Any
payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. § 1828(k) and any regulations promulgated thereunder.
14
IN WITNESS WHEREOF
, the Executive and the Bank have signed this Agreement on the dates set forth
below.
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TERRITORIAL SAVINGS BANK
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November 10, 2008
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By:
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/s/ Harold H. Ohama
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Date
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Chairman, Compensation Committee of the Board
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November 10, 2008
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/s/ Allan S. Kitagawa
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Date
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Allan S. Kitagawa
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Exhibit 10.8
TERRITORIAL SAVINGS BANK
AMENDED AND RESTATED
SUPPLEMENTAL EMPLOYEE RETIREMENT AGREEMENT
FOR VERNON HIRATA
THIS AGREEMENT is adopted as of October 29, 2008, by and between
TERRITORIAL SAVINGS Bank (the “Bank”), and Vernon Hirata, Executive Vice President and General Counsel of the Bank (the “Executive”).
RECITALS
The Bank and the Executive entered into the Supplemental Employee Retirement Agreement
effective January 1, 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 “
Beneficiary
” means such term as described in Article 4.
1.2 “
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.
1.3
“
Code
” means the Internal Revenue Code of 1986, as amended.
1.4 “
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.
1.5 “
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.
1.6 “
Effective Date
” means January 1, 2005.
1.7 “
Final Average
Compensation
” means the average of the three calendar years of compensation of the Executive immediately preceding the Executive’s Termination of Employment. For this purpose, the term “Compensation” shall mean the Internal
Revenue Service Form W-2 compensation that is subject to tax, excluding any amounts paid on or after Termination of Employment (e.g., severance pay, unused sick leave, unused vacation) and any bonus. The term “Compensation” shall include
salary reduction amounts contributed by the Bank and not includible in the Executive’s income pursuant to Code Sections 125 and 401(k).
1.8 “
Normal Retirement Date
” means the Executive’s 66th birthday.
2
1.9 “
Pension Offset
” means the Executive’s aggregate annual accrued benefit under
all qualified defined benefit plans maintained by the Bank payable in the form of a single life annuity.
1.10 “
Social Security
Benefit
” means the annual social security benefit to which the Executive is entitled under the Social Security Act. For purposes of determining the Executive’s projected Social Security Benefit, the Bank shall estimate the Social
Security Benefit from the regular pay rate assuming a 5% annual pay increase adjustment. For purposes of determining a Disability Benefit under Section 2.3, the Social Security Benefit offset used in the Normal Retirement Benefit formula shall
be equal to the Executive’s actual disability benefit payment under the Social Security Act due to the Executive’s Disability and, if the Executive is not entitled to an actual disability benefit payment under the Social Security Act, the
Social Security Benefit offset shall be determined as otherwise provided hereunder.
1.11 “
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.
1.12 “
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.
1.13 “
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
3
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.
1.14 “
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.
1.15
“
Projected Final Average Compensation
” means the Final Average Compensation, increased by 5% annually from (i) for purposes of Section 2.3, the date of the Executive’s Disability; (ii) for purposes of
Section 2.4, the date of the Executive’s Termination of Employment, and (iii) for purposes of Section 3.1.1, the date of the Executive’s death, until what would have been the Executive’s Normal Retirement Date had the
Executive remained in continuous employ of the Bank through his Normal Retirement Date.
ARTICLE 2
LIFETIME BENEFITS
2.1
Normal Retirement Benefit
. Upon the Executive’s Termination of Employment on or after his Normal Retirement Date for reasons other than death, 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 following annual amount payable for a term certain of 15 years: 65% of Final Average Compensation minus Social Security Benefit minus Pension Offset.
2.1.2
Payment of Benefit
. The Bank shall pay the Normal Retirement Benefit to the Executive in 12 equal monthly installments
commencing as of the first day of the month following the Executive’s Termination of Employment for a period of 15 years.
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
annual amount equal to 65% of the Executive’s Final Average Compensation multiplied by a fraction not exceeding one, the numerator of which is the Executive’s completed Years of Service and the denominator of which is the Executive’s
potential Years of Service determined as if the Executive remained employed by the Bank until the Executive’s Normal Retirement Date. The Early Termination Benefit shall be paid for a term of certain of 15 years.
4
2.2.2
Payment of Benefit
. The Bank shall pay the Early Retirement Benefit to the
Executive in 12 equal monthly installments commencing within 30 days following the date of the Executive’s Termination of Employment, and shall be payable each month thereafter for a period of 15 years.
2.3
Disability Benefit
. If the Executive incurs a Disability prior to his 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 following annual amount payable for a term certain of 15 years: 65% of the Executive’s Projected Final Average Compensation.
2.3.2
Payment of Benefit
. The Bank shall pay the Disability Benefit to the Executive in 12 equal monthly installments commencing
within 30 days following the Executive’s Disability, and shall be payable each month thereafter for a period of 15 years.
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.
2.4.1
Amount of Benefit
. The Change of Control
Benefit under this Section 2.4 is the annual amount payable for a term certain of 15 years: 65% of the Executive’s Projected Final Average Compensation.
2.4.2
Payment of Benefit
. The Bank shall pay the Change in Control Benefit to the Executive in 12 equal monthly installments
commencing within 30 days following the Executive’s Termination of Employment, and shall be payable each month thereafter for a period of 15 years.
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.
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(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.
(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
6
(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 harmless, on an after-tax basis, for an Excise Tax
or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 2.4.3(c), the Bank shall control
all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole
option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Bank shall determine; provided, however, that if the Bank directs the Executive to pay such claim and sue for a refund, the Bank shall advance the amount of such payment to the
Executive, on an interest-free basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further
provided with respect to any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount. Furthermore, the Bank’s control of the contest shall be limited
to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or any other taxing authority.
(d)
Adjustments to the Gross-Up Payment
. If, after the receipt by the Executive of an amount advanced by the Bank
pursuant to Section 2.4.3(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Bank’s complying with the requirements of Section 2.4.3(c) pay to the Bank the amount
of such refund (together with any interest paid or credited thereon after taxes applicable thereto within 30 days). If, after the receipt by the Executive of an amount advanced by the Bank pursuant to Section 2.4.3(c), a determination is made
that the Executive shall not be entitled to any refund with respect to such claim and such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid.
2.5
Restriction
on Timing of Payment
. Notwithstanding any provision of this Agreement to the contrary, in the event the Executive is a Specified Employee, then, to the extent necessary to avoid penalties under Code Section 409A, any payments under Sections
2.2 and 2.4 to which Executive is entitled for the first six months shall be withheld and shall be paid to the Executive in a lump-sum on the first day of the seventh month following the Executive’s Termination of Employment. All subsequent
distributions shall be paid in the manner specified.
7
ARTICLE 3
DEATH BENEFITS
3.1
Death During Active Service
. If the Executive dies while in the
active service of the Bank, the Bank shall pay to the Executive’s Beneficiary the “Preretirement Death Benefit” described in this Section 3.1 in lieu of any other benefit under this Agreement. The Bank shall not pay any
Preretirement Death Benefit under this Section 3.1 if the Executive has received any of lifetime benefit payment provided under Article 2.
3.1.1
Amount of Benefit
. The Preretirement Death Benefit under this Section 3.1 is the following annual amount payable for a term certain of 15 years: 100% of the Executive’s Projected Final Average
Compensation.
3.1.2
Payment of Benefit
. The Bank shall pay the Preretirement Death Benefit to the Executive in 12
equal monthly installments commencing within 30 days following the Executive’s death, and shall be payable each month thereafter for a period of 15 years.
3.2
Death During Payment of a Lifetime Benefit
. If the Executive dies after any lifetime benefit payments have commenced under Article 2 but before receiving all such payments, the Bank shall pay the remaining
benefit payments to the Executive’s Beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived.
3.3
Death After Termination of Employment But Before Payment of a Lifetime Benefit Commences
. If the Executive is entitled to the commencement of any lifetime benefit payments under Article 2, but dies prior to
the commencement of such benefit payments, the Bank shall pay the same benefit payments to the Executive’s Beneficiary that the Executive was entitled to prior to death except that the benefit payments shall commence within 30 days following
the date of the Executive’s death.
ARTICLE 4
BENEFICIARIES
The Executive shall designate a Beneficiary by filing a written designation
(as attached hereto) with the Bank. The Executive may revoke or modify the designation at any time by filing a new designation. However, a designation shall only be effective if signed by the Executive and received by the Bank during the
Executive’s lifetime. The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive, or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved.
If the Executive dies without a valid beneficiary designation, all payments shall be made to the personal representative of the Executive’s estate.
8
ARTICLE 5
VESTING
5.1
Full Vesting
. Except as otherwise provided in this Article 5, the
Executive shall maintain a 100% vested and nonforfeitable interest in the benefits provided under this Agreement.
5.2
Termination for
Cause
. However, notwithstanding the above Section 5.1 or any other provision of this Agreement to the contrary, the Bank shall not pay, and the Executive shall not be entitled to, any benefit under this Agreement due to the Executive’s
Termination for Cause.
5.3
Suicide or Misstatement
. The Bank shall not pay, and the Executive shall not be entitled to, any benefit
under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Bank shall not pay, and the Executive shall not be entitled to, any benefit under this Agreement if the Executive has made
any material misstatement of fact on any application for any benefits provided by the Bank to the Executive.
ARTICLE 6
ADMINISTRATION
6.1
Authority of Board
. The Board of Directors shall maintain the authority and discretion to control and manage the operation and administration of the Agreement. In its discretion, the Board of Directors shall make such rules, interpretations,
and computations and take such other actions to administer the Agreement, as it may deem appropriate. The rules, interpretations, computations, and other actions of the Board of Directors shall be binding and conclusive on all persons. In
administering the Agreement, the Board of Directors shall have the authority to: (a) require, as a condition to receiving benefits under the Agreement, such information as it may reasonably require for the proper administration of the
Agreement; (b) make and enforce such rules and regulations as it deems to be necessary for the administration of the Agreement; (c) interpret the Agreement; (d) determine the amount and timing of benefits payable to any person in
accordance with the provisions of the Agreement; and (e) direct all payments to be made pursuant to the Agreement.
The Board of
Directors is granted the authority to name an individual or individuals from time to time to carry out one or more of the duties described above. The expenses of the Board of Directors, or the individual or individuals described in the preceding
sentence, shall be paid directly by the Bank.
6.2
Incapacity
. If a benefit is payable to a minor, to a person declared incompetent,
or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank
may require proof of incompetence, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
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ARTICLE 7
FUNDING
7.1
Unfunded Plan
. All amounts payable in accordance with the Agreement shall
be paid in cash from the general funds of the Bank and no special or separate fund, other than a “rabbi trust” established pursuant to Section 7.2 below, shall be established, and no other segregation of assets shall be made to assure
the payment of any amounts payable in accordance with the Agreement. The Executive shall have no right, title, or interest whatsoever in or to any investment that the Bank may make to aid it in meeting its obligations hereunder, including, but not
limited to, deemed investments. Nothing contained in the Agreement, and no action taken pursuant to its provisions shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Bank and the Executive or any
other person. To the extent that any person acquires a right to receive payments from the Bank hereunder, such right shall be no greater than the right of an unsecured creditor.
7.2
Rabbi Trust Allowed
. The Bank may, for administrative reasons, establish a “rabbi trust” for the benefit of Executive under the
Agreement. If such a trust is established, its assets shall be used exclusively for the purposes set forth in the Agreement and the applicable trust agreement, subject to the following conditions:
(a) The creation of said trust shall not cause the Agreement to be other than “unfunded” for purposes of Title I of ERISA;
(b) The Bank shall be treated as the “grantor” of said trust for purposes of Code Section 677; and
(c) The trust agreement shall provide that its assets may be used to satisfy claims of the Bank’s general creditors in
the event of insolvency, and the rights of such general creditors in such circumstances are enforceable by them under federal and state law.
It is intended that such a trust be consistent with tax law requirements preventing inclusion in income for income tax purposes prior to actual payment of benefits under the Agreement. If such a trust is established, then prior to the
payment of benefits to the Executive, there shall be no actual transfer of assets to the Executive under the Agreement and trust, and the Agreement and trust shall confer no current benefit that would be immediately taxable to the Executive under
the constructive receipt rule or economic benefit doctrine under the tax laws.
ARTICLE 8
AMENDMENT AND TERMINATION
8.1
Amendment or Termination
.
(a) The Bank reserves the right to amend this Agreement at any time. However, to the extent any such
amendment would adversely impact the accrued benefits of the Executive, the amendment shall require the written consent of the Executive, even if the Executive is no longer employed by the Bank.
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(b) The Bank reserves the right to terminate the Agreement at any time. Upon termination of the
Agreement, the Bank shall determine whether all payments of benefits shall be made in accordance with the normal distribution schedule set forth under the Agreement or if payment of benefits shall be accelerated in order to wind down the Agreement.
To the extent any benefits under the Agreement are subject to Code Section 409A, any acceleration of the payment of such benefits due to terminating the Agreement shall comply with the following:
(i) the Bank may terminate the Agreement provided that: (A) all arrangements sponsored by the Bank that would be aggregated with this
Agreement under Treasury Regulations Section 1.409A-1(c)(2) if the Executive covered by this Agreement was also covered by any of those other arrangements are also terminated; (B) no payments other than payments that would be payable under
the terms of the arrangement if the termination had not occurred are made within 12 months of the termination of the arrangement; (C) all payments are made within 24 months of the termination of the arrangements; and (D) the Bank does not
adopt a new arrangement that would be aggregated with any terminated arrangement under Treasury Regulations Section 1.409A-1(c)(2) if the same Executive participated in both arrangements, at any time within three years following the date of
termination of the arrangement.
(ii) The Bank may terminate the Agreement within the 30 days preceding a Change in Control
(but not following a Change in Control), provided that the Agreement shall only be treated as terminated if all substantially similar arrangements sponsored by the Bank are terminated so that the Executive and all executives under substantially
similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within 12 months of the date of the termination of the arrangements. For these purposes, “Change in Control” shall be
defined in accordance with the Treasury Regulations under Code Section 409A.
(iii) The Bank may terminate the
Agreement within 12 months of a corporate dissolution taxed under Code Section 331, or with approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A), provided that the amounts deferred under the Agreement are included in the
Executive’s gross income in the latest of (A) the calendar year in which the Agreement terminates; (B) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (C) the first calendar year
in which the payment is administratively practicable.
8.2
Reorganization of the Bank
. In the event of a merger or consolidation of
the Bank, or the transfer of substantially all of the assets of the Bank to another corporation, such continuing, resulting, or transferee corporation shall have the right to continue and carry the Agreement and to assume all liabilities of the Bank
without obtaining the consent of the Executive. If such successor shall assume the liabilities of the Bank hereunder, the Bank shall be relieved of all such liability, and the Executive shall have the right to assert any claim against the Bank for
benefits under or in connection with this Agreement.
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8.3
Protected Benefits
. If the Agreement is terminated, or if liabilities accrued hereunder up to
the date of an event specified in Section 8.2 are not assumed by the successor to the Bank, then the dollar amount of benefits of Executive or Beneficiary receiving benefits under the Agreement, and the dollar amount of benefits of the
Executive or Beneficiary who is entitled to benefits under the Agreement, shall be guaranteed and shall not thereafter be reduced without the Executive’s or Beneficiary’s consent.
ARTICLE 9
CLAIMS AND REVIEW PROCEDURES
9.1
Claims Procedure
. An Executive or Beneficiary (the “Claimant”) who has not received benefits under the Agreement that he or she
believes should be paid may make a claim for such benefits as follows:
9.1.1
Initiation – Written Claim
. The
Claimant may initiate a claim by submitting to the Bank a written claim for benefits.
9.1.2
Timing of Bank Response
.
The Bank shall respond to such Claimant within 90 days after receiving the claim. If the Bank determines that special circumstances require additional time for processing the claim, the Bank may extend the response period by an additional 90 days by
notifying the Claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension shall set forth the special circumstances and the date by which the Bank expects to render its decision.
9.1.3
Notice of Decision
. If the Bank denies part or all of the claim, the Bank shall notify the Claimant in writing
of such denial. The Bank shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth: (a) the specific reasons for the denial; (b) a reference to the specific provisions of the
Agreement on which the denial is based; (c) description of any additional information or material necessary for the Claimant to perfect the claim and an explanation of why it is needed; (d) an explanation of the Agreement’s review
procedures and the time limits applicable to such procedures; (e) and a statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
9.2
Review Procedure
. If the Bank denies part or all of the claim, the Claimant shall have the opportunity for a full and fair review by the Bank
of the denial, as follows:
9.2.1
Initiation – Written Request
. In order to initiate the review, the Claimant,
within 60 days after receiving the Bank’s notice of denial, may file with the Bank a written request for review.
9.2.2
Additional Submissions – Information Access
. The Claimant shall then have the opportunity to submit written comments, documents, records, and other information relating to the claim. The Bank shall also provide the Claimant, upon request
and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits.
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9.2.3
Considerations on Review
. In considering the review, the Bank shall take
into account all materials and information the Claimant submits relating to the claim, without regard to whether such information was submitted or considered, in the initial benefit determination.
9.2.4
Timing of Bank Response
. The Bank shall respond in writing to such claimant within 60 days after receiving the request for
review. If the Bank determines that special circumstances require additional time for processing the claim, the Bank can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day
period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Bank expects to render its decision.
9.2.5
Notice of Decision
. The Bank shall notify the Claimant in writing of its decision on review. The Bank shall write the
notification in a manner calculated to be understood by the Claimant. The notification shall set forth: (a) the specific reasons for the denial; (b) a reference to the specific provisions of the Agreement on which the denial is based;
(c) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the
Claimant’s claim for benefits; and (d) a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).
ARTICLE 10
LEGAL STATUS
This Agreement is intended to constitute a nonqualified deferred compensation agreement which is not subject to the qualification requirements of Code Section 401(a). Further, this Agreement is intended to
constitute a “top hat” arrangement within the meaning of ERISA 201(2) and is not subject to the coverage, funding, and fiduciary requirements of ERISA. Finally, until the occurrence of a distribution event and the actual payment to the
Executive of a benefit hereunder, it is intended that there has been no transfer of any benefit to the Executive under Code Section 83 and no benefit is subject to inclusion for income tax purposes.
ARTICLE 11
MISCELLANEOUS
11.1
Binding Effect
. This Agreement shall bind the Executive and the Bank, and their beneficiaries, survivors, executors,
successors, administrators and transferees.
11.2
No Guarantee of Employment
. This Agreement is not an employment policy or
contract. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank’s right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the
Executive’s right to terminate employment at any time.
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11.3
Nontransferability
. Benefits under this Agreement cannot be sold, transferred, assigned,
pledged, attached, or encumbered in any manner.
11.4
Notice
. Any notice, consent, or demand required or permitted to be given under
the provisions of this Agreement by one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by delivering the same to such other party personally, or by mailing the same, by United
States certified mail, postage prepaid, to such party, addressed to their last known address as shown on the records of the Bank. The date of such mailing shall be deemed the date of such mailed notice, consent, or demand.
11.5
Tax Withholding and Code Section 409A Taxes
. Any distribution under this Agreement shall be reduced by the amount of any taxes required
to be withheld from such distribution. This Agreement shall permit the acceleration of the time or schedule of a payment to pay employment related taxes as permitted under Treasury regulation Section 1.409A-3(j) or to pay any taxes that may
become due at any time that the arrangement fails to meet the requirements of Code Section 409A and the regulations and other guidance promulgated thereunder. In the latter case, such payments shall not exceed the amount required to be included
in income as the result of the failure to comply with the requirements of Code Section 409A.
11.6
Applicable Law
. The
Agreement and all rights hereunder shall be governed by the laws of the State of Hawaii, except to the extent preempted by the laws of the United States of America.
11.7
Entire Agreement
. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement
other than those specifically set forth herein.
11.8
Named Fiduciary
. The Bank shall be the named fiduciary and plan administrator
under this Agreement. It may delegate to others certain aspects of the management and operational responsibilities including the employment of advisors and the delegation of ministerial duties to qualified individuals.
11.9
Construction
. The headings of the Articles in this Agreement are provided for convenience only and will not affect its construction or
interpretation. All references to “Article” or “Articles” refer to the corresponding Article or Articles of this Agreement. Wherever any words are used under the Agreement in the masculine, feminine, or neuter gender, they shall
be construed as though they were also used in another gender in all cases where they would so apply.
11.10
Acceleration of
Payments
. Except as specifically permitted herein or in other sections of this Agreement, no acceleration of the time or schedule of any payment may be made hereunder. Notwithstanding the foregoing, payments may be accelerated hereunder by the
Bank, in accordance with the provisions of Treasury Regulation Section 1.409A-3(j)(4) and any subsequent guidance issued by the United States Treasury Department. Accordingly, payments may be accelerated, in accordance with requirements and
conditions of the Treasury Regulations (or subsequent guidance) in the following circumstances: (i) as a result of certain domestic relations orders; (ii) in compliance with ethics agreements with the Federal government; (iii) in
14
compliance with ethics laws or conflicts of interest laws; (iv) in limited cash-outs (but not in excess of the limit under Code
Section 402(g)(1)(B)); (v) in the case of certain distributions to avoid a non-allocation year under Code Section 409(p); (vi) to apply certain offsets in satisfaction of a debt of the Executive to the Bank; (vii) in
satisfaction of certain bona fide disputes between the Executive and the Bank; or (viii) for any other purpose set forth in the Treasury Regulations and subsequent guidance.
11.11
Required Provision
. Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. § 1828(k) and any regulations promulgated thereunder.
IN WITNESS WHEREOF
, the Executive and the Bank
have signed this Agreement on the dates set forth below.
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TERRITORIAL SAVINGS BANK
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November 10, 2008
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By:
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/s/ Harold H. Ohama
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Date
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Chairman, Compensation Committee of the Board
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November 10, 2008
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/s/ Vernon Hirata
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Date
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Vernon Hirata
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Exhibit 10.9
TERRITORIAL SAVINGS BANK
SUPPLEMENTAL EMPLOYEE RETIREMENT AGREEMENT
FOR RALPH NAKATSUKA
THIS AGREEMENT is
adopted as of October 29, 2008, by and between TERRITORIAL SAVINGS BANK (the “Bank”), and Ralph Nakatsuka, Vice Chairman and Co-Chief Operating Officer of the Bank (the “Executive”).
RECITALS
The Executive is a member
of a select group of management or highly compensated employees who contribute materially to the continued growth, development, and future business success of the Bank. In order to promote the loyalty, diligence, and performance of the Executive and
to support the economic security of the Executive during retirement, the Bank desires to provide to the Executive a supplemental employee retirement benefit. This Agreement is intended to comply with Section 409A of the Internal Revenue Code of
1986, as amended (the “Code”) and the Treasury Regulations issued thereunder.
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 “
Beneficiary
” means such term as described in Article 4.
1.2 “
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.
1.3 “
Code
” means the Internal Revenue Code of 1986, as amended.
1.4 “
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.
1.5 “
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.
1.6 “
Effective Date
” means January 1,
2008.
1.7 “
Final Average Compensation
” means the average of the three calendar years of compensation of the Executive
immediately preceding the Executive’s Termination of Employment. For this purpose, the term “Compensation” shall mean the Internal Revenue Service Form W-2 compensation that is subject to tax, excluding any amounts paid on or after
Termination of Employment (e.g., severance pay, unused sick leave, unused vacation) and any bonus other than that paid under the Bank’s approved annual incentive plan regardless of whether or not such bonus is currently included in the
Executive’s taxable income. The term “Compensation” shall include salary reduction amounts contributed by the Bank and not includible in the Executive’s income pursuant to Code Sections 125 and 401(k).
1.8 “
Normal Retirement Date
” means the Executive’s 66th birthday.
2
1.9 “
Pension Offset
” means the Executive’s aggregate annual accrued benefit under
all qualified defined benefit plans maintained by the Bank payable in the form of a single life annuity.
1.10 “
Social Security
Benefit
” means the annual social security benefit to which the Executive is entitled under the Social Security Act. For purposes of determining the Executive’s projected Social Security Benefit, the Bank shall estimate the Social
Security Benefit from the regular pay rate assuming a 5% annual pay increase adjustment. For purposes of determining a Disability Benefit under Section 2.3, the Social Security Benefit offset used in the Normal Retirement Benefit formula shall
be equal to the Executive’s actual disability benefit payment under the Social Security Act due to the Executive’s Disability and, if the Executive is not entitled to an actual disability benefit payment under the Social Security Act, the
Social Security Benefit offset shall be determined as otherwise provided hereunder.
1.11 “
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.
1.12 “
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.
1.13 “
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
3
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.
1.14 “
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 the Effective Date shall be disregarded.
1.15
“
Projected Final Average Compensation
” means the Final Average Compensation, increased by 5% annually from (i) for purposes of Section 2.3, the date of the Executive’s Disability; (ii) for purposes of
Section 2.4, the date of the Executive’s Termination of Employment, and (iii) for purposes of Section 3.1.1, the date of the Executive’s death, until what would have been the Executive’s Normal Retirement Date had the
Executive remained in continuous employ of the Bank through his Normal Retirement Date.
ARTICLE 2
LIFETIME BENEFITS
2.1
Normal Retirement Benefit
. Upon the Executive’s Termination of Employment on or after his Normal Retirement Date for reasons other than death, 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 the following annual amount payable for a term certain of 15 years: 65% of Final Average Compensation minus Social Security
Benefit minus Pension Offset.
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 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
present value equivalent (determined using a 5% discount rate) to the following annual amount payable for a term certain of 15 years: 65% of the Executive’s Final Average Compensation multiplied by a fraction not exceeding one, the numerator of
which is the Executive’s completed Years of Service and the denominator of which is the Executive’s potential Years of Service determined as if the Executive remained employed by the Bank until the Executive’s Normal Retirement Date.
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2.2.2
Payment of Benefit
. The Bank shall pay the Early Retirement Benefit to the
Executive in a single cash lump sum distribution on of the first day of the month following the Executive’s Early Termination Date.
2.3
Disability Benefit
. If the Executive incurs a Disability prior to his 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 the following annual amount payable for a term certain of 15 years: 65% of the Executive’s Projected Final Average Compensation.
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 Executive’s termination due to Disability.
2.4
Change of Control Benefit
. Upon the Executive’s
Termination of Employment on an Early Retirement Date and 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.
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 the following annual amount payable for a term certain of 15 years: 65% of the Executive’s Projected Final Average Compensation.
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 following the Executive’s Termination of Employment.
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.
5
(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.
(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
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(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 harmless, on an after-tax basis, for an Excise Tax
or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 2.4.3(c), the Bank shall control
all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole
option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of
initial jurisdiction and in one or more appellate courts, as the Bank shall determine; provided, however, that if the Bank directs the Executive to pay such claim and sue for a refund, the Bank shall advance the amount of such payment to the
Executive, on an interest-free basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further
provided with respect to any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount. Furthermore, the Bank’s control of the contest shall be limited
to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issues raised by the Internal Revenue Service or any other taxing authority.
(d)
Adjustments to the Gross-Up Payment
. If, after the receipt by the Executive of an amount advanced by the Bank
pursuant to Section 2.4.3(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Bank’s complying with the requirements of Section 2.4.3(c) pay to the Bank the amount
of such refund (together with any interest paid or credited thereon after taxes applicable thereto within 30 days). If, after the receipt by the Executive of an amount advanced by the Bank pursuant to Section 2.4.3(c), a determination is made
that the Executive shall not be entitled to any refund with respect to such claim and such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and
the amount of such advance shall offset, to the extent thereof, the amount of the Gross-Up Payment required to be paid.
2.5
Restriction
on Timing of Payment
. Notwithstanding any provision of this Agreement to the contrary, in the event the Executive is a Specified Employee, then, to the extent necessary to avoid penalties under Code Section 409A, any payments under Sections
2.2 and 2.4 to which Executive is entitled for the first six months shall be withheld and shall be paid to the Executive in a lump sum on the first day of the seventh month following the Executive’s Termination of Employment. All subsequent
distributions shall be paid in the manner specified.
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ARTICLE 3
DEATH BENEFITS
3.1
Death During Active Service
. If the Executive dies while in the
active service of the Bank, the Bank shall pay to the Executive’s Beneficiary the “Preretirement Death Benefit” described in this Section 3.1 in lieu of any other benefit under this Agreement. The Bank shall not pay any
Preretirement Death Benefit under this Section 3.1 if the Executive has received any of lifetime benefit payment provided under Article 2.
3.1.1
Amount of Benefit
. The Preretirement Death Benefit under this Section 3.1 is the present value equivalent (determined using a 5% discount rate) of the following annual amount payable for a term
certain of 15 years: 100% of the Executive’s Projected Final Average Compensation.
3.1.2
Payment of Benefit
.
Upon the Executive’s death, the Bank shall pay the Preretirement Death Benefit to the Executive’s Beneficiary in the form of a lump sum within 30 days following the Executive’s death.
3.2
Death During Payment of a Lifetime Benefit
. If the Executive dies after any lifetime benefit payments have commenced under Article 2 but
before receiving all such payments, the Bank shall pay the remaining benefit payments to the Executive’s Beneficiary at the same time and in the same amounts they would have been paid to the Executive had the Executive survived.
3.3
Death After Termination of Employment But Before Payment of a Lifetime Benefit Commences
. If the Executive is entitled to the commencement of
any lifetime benefit payments under Article 2, but dies prior to the commencement of such benefit payments, the Bank shall pay the same benefit payments to the Executive’s Beneficiary that the Executive was entitled to prior to death except
that the benefit payments shall commence on the first day of the month following the date of the Executive’s death.
ARTICLE 4
BENEFICIARIES
The Executive shall designate a Beneficiary by filing a written designation (as attached hereto) with the Bank. The Executive may revoke or modify the designation at any time by filing a new designation. However, a designation shall only be
effective if signed by the Executive and received by the Bank during the Executive’s lifetime. The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive, or if the Executive
names a spouse as Beneficiary and the marriage is subsequently dissolved. If the Executive dies without a valid beneficiary designation, all payments shall be made to the personal representative of the Executive’s estate.
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ARTICLE 5
VESTING
5.1
Full Vesting
. Except as otherwise provided in this Article 5, the
Executive shall maintain a 100% vested and nonforfeitable interest in the benefits provided under this Agreement.
5.2
Termination for
Cause
. However, notwithstanding the above Section 5.1 or any other provision of this Agreement to the contrary, the Bank shall not pay, and the Executive shall not be entitled to, any benefit under this Agreement due to the Executive’s
Termination for Cause.
5.3
Suicide or Misstatement
. The Bank shall not pay, and the Executive shall not be entitled to, any benefit
under this Agreement if the Executive commits suicide within three years after the date of this Agreement. In addition, the Bank shall not pay, and the Executive shall not be entitled to, any benefit under this Agreement if the Executive has made
any material misstatement of fact on any application for any benefits provided by the Bank to the Executive.
ARTICLE 6
ADMINISTRATION
6.1
Authority of Board
. The Board of Directors shall maintain the authority and discretion to control and manage the operation and administration of the Agreement. In its discretion, the Board of Directors shall make such rules, interpretations,
and computations and take such other actions to administer the Agreement, as it may deem appropriate. The rules, interpretations, computations, and other actions of the Board of Directors shall be binding and conclusive on all persons. In
administering the Agreement, the Board of Directors shall have the authority to: (a) require, as a condition to receiving benefits under the Agreement, such information as it may reasonably require for the proper administration of the
Agreement; (b) make and enforce such rules and regulations as it deems to be necessary for the administration of the Agreement; (c) interpret the Agreement; (d) determine the amount and timing of benefits payable to any person in
accordance with the provisions of the Agreement; and (e) direct all payments to be made pursuant to the Agreement.
The Board of
Directors is granted the authority to name an individual or individuals from time to time to carry out one or more of the duties described above. The expenses of the Board of Directors, or the individual or individuals described in the preceding
sentence, shall be paid directly by the Bank.
6.2
Incapacity
. If a benefit is payable to a minor, to a person declared incompetent,
or to a person incapable of handling the disposition of his or her property, the Bank may pay such benefit to the guardian, legal representative, or person having the care or custody of such minor, incompetent person, or incapable person. The Bank
may require proof of incompetence, minority, or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Bank from all liability with respect to such benefit.
9
ARTICLE 7
FUNDING
7.1
Unfunded Plan
. All amounts payable in accordance with the Agreement shall
be paid in cash from the general funds of the Bank and no special or separate fund, other than a “rabbi trust” established pursuant to Section 7.2 below, shall be established, and no other segregation of assets shall be made to assure
the payment of any amounts payable in accordance with the Agreement. The Executive shall have no right, title, or interest whatsoever in or to any investment that the Bank may make to aid it in meeting its obligations hereunder, including, but not
limited to, deemed investments. Nothing contained in the Agreement, and no action taken pursuant to its provisions shall create or be construed to create a trust of any kind, or a fiduciary relationship between the Bank and the Executive or any
other person. To the extent that any person acquires a right to receive payments from the Bank hereunder, such right shall be no greater than the right of an unsecured creditor.
7.2
Rabbi Trust Allowed
. The Bank may, for administrative reasons, establish a “rabbi trust” for the benefit of Executive under the
Agreement. If such a trust is established, its assets shall be used exclusively for the purposes set forth in the Agreement and the applicable trust agreement, subject to the following conditions:
(a) The creation of said trust shall not cause the Agreement to be other than “unfunded” for purposes of Title I of ERISA;
(b) The Bank shall be treated as the “grantor” of said trust for purposes of Code Section 677; and
(c) The trust agreement shall provide that its assets may be used to satisfy claims of the Bank’s general creditors in
the event of insolvency, and the rights of such general creditors in such circumstances are enforceable by them under federal and state law.
It is intended that such a trust be consistent with tax law requirements preventing inclusion in income for income tax purposes prior to actual payment of benefits under the Agreement. If such a trust is established, then prior to the
payment of benefits to the Executive, there shall be no actual transfer of assets to the Executive under the Agreement and trust, and the Agreement and trust shall confer no current benefit that would be immediately taxable to the Executive under
the constructive receipt rule or economic benefit doctrine under the tax laws.
ARTICLE 8
AMENDMENT AND TERMINATION
8.1
Amendment or Termination
.
(a) The Bank reserves the right to amend this Agreement at any time. However, to the extent any such
amendment would adversely impact the accrued benefits of the Executive, the amendment shall require the written consent of the Executive, even if the Executive is no longer employed by the Bank.
10
(b) The Bank reserves the right to terminate the Agreement at any time. Upon termination of the
Agreement, the Bank shall determine whether all payments of benefits shall be made in accordance with the normal distribution schedule set forth under the Agreement or if payment of benefits shall be accelerated in order to wind down the Agreement.
To the extent any benefits under the Agreement are subject to Code Section 409A, any acceleration of the payment of such benefits due to terminating the Agreement shall comply with the following:
(i) the Bank may terminate the Agreement provided that: (A) all arrangements sponsored by the Bank that would be aggregated with this
Agreement under Treasury Regulations Section 1.409A-1(c)(2) if the Executive covered by this Agreement was also covered by any of those other arrangements are also terminated; (B) no payments other than payments that would be payable under
the terms of the arrangement if the termination had not occurred are made within 12 months of the termination of the arrangement; (C) all payments are made within 24 months of the termination of the arrangements; and (D) the Bank does not
adopt a new arrangement that would be aggregated with any terminated arrangement under Treasury Regulations Section 1.409A-1(c)(2) if the same Executive participated in both arrangements, at any time within three years following the date of
termination of the arrangement.
(ii) The Bank may terminate the Agreement within the 30 days preceding a Change in Control
(but not following a Change in Control), provided that the Agreement shall only be treated as terminated if all substantially similar arrangements sponsored by the Bank are terminated so that the Executive and all executives under substantially
similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within 12 months of the date of the termination of the arrangements. For these purposes, “Change in Control” shall be
defined in accordance with the Treasury Regulations under Code Section 409A.
(iii) The Bank may terminate the
Agreement within 12 months of a corporate dissolution taxed under Code Section 331, or with approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A), provided that the amounts deferred under the Agreement are included in the
Executive’s gross income in the latest of (A) the calendar year in which the Agreement terminates; (B) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (C) the first calendar year
in which the payment is administratively practicable.
8.2
Reorganization of the Bank
. In the event of a merger or consolidation of
the Bank, or the transfer of substantially all of the assets of the Bank to another corporation, such continuing, resulting, or transferee corporation shall have the right to continue and carry the Agreement and to assume all liabilities of the Bank
without obtaining the consent of the Executive. If such successor shall assume the liabilities of the Bank hereunder, the Bank shall be relieved of all such liability, and the Executive shall have the right to assert any claim against the Bank for
benefits under or in connection with this Agreement.
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8.3
Protected Benefits
. If the Agreement is terminated, or if liabilities accrued hereunder up to
the date of an event specified in Section 8.2 are not assumed by the successor to the Bank, then the dollar amount of benefits of Executive or Beneficiary receiving benefits under the Agreement, and the dollar amount of benefits of the
Executive or Beneficiary who is entitled to benefits under the Agreement, shall be guaranteed and shall not thereafter be reduced without the Executive’s or Beneficiary’s consent.
ARTICLE 9
CLAIMS AND REVIEW PROCEDURES
9.1
Claims Procedure
. An Executive or Beneficiary (the “Claimant”) who has not received benefits under the Agreement that he or she
believes should be paid may make a claim for such benefits as follows:
9.1.1
Initiation – Written Claim
. The
Claimant may initiate a claim by submitting to the Bank a written claim for benefits.
9.1.2
Timing of Bank Response
.
The Bank shall respond to such Claimant within 90 days after receiving the claim. If the Bank determines that special circumstances require additional time for processing the claim, the Bank may extend the response period by an additional 90 days by
notifying the Claimant in writing, prior to the end of the initial 90-day period, that an additional period is required. The notice of extension shall set forth the special circumstances and the date by which the Bank expects to render its decision.
9.1.3
Notice of Decision
. If the Bank denies part or all of the claim, the Bank shall notify the Claimant in writing
of such denial. The Bank shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth: (a) the specific reasons for the denial; (b) a reference to the specific provisions of the
Agreement on which the denial is based; (c) description of any additional information or material necessary for the Claimant to perfect the claim and an explanation of why it is needed; (d) an explanation of the Agreement’s review
procedures and the time limits applicable to such procedures; (e) and a statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
9.2
Review Procedure
. If the Bank denies part or all of the claim, the Claimant shall have the opportunity for a full and fair review by the Bank
of the denial, as follows:
9.2.1
Initiation – Written Request
. In order to initiate the review, the Claimant,
within 60 days after receiving the Bank’s notice of denial, may file with the Bank a written request for review.
9.2.2
Additional Submissions – Information Access
. The Claimant shall then have the opportunity to submit written comments, documents, records, and other information relating to the claim. The Bank shall also provide the Claimant, upon request
and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits.
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9.2.3
Considerations on Review
. In considering the review, the Bank shall take
into account all materials and information the Claimant submits relating to the claim, without regard to whether such information was submitted or considered, in the initial benefit determination.
9.2.4
Timing of Bank Response
. The Bank shall respond in writing to such claimant within 60 days after receiving the request for
review. If the Bank determines that special circumstances require additional time for processing the claim, the Bank can extend the response period by an additional 60 days by notifying the claimant in writing, prior to the end of the initial 60-day
period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Bank expects to render its decision.
9.2.5
Notice of Decision
. The Bank shall notify the Claimant in writing of its decision on review. The Bank shall write the
notification in a manner calculated to be understood by the Claimant. The notification shall set forth: (a) the specific reasons for the denial; (b) a reference to the specific provisions of the Agreement on which the denial is based;
(c) a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the
Claimant’s claim for benefits; and (d) a statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).
ARTICLE 10
LEGAL STATUS
This Agreement is intended to constitute a nonqualified deferred compensation agreement which is not subject to the qualification requirements of Code Section 401(a). Further, this Agreement is intended to
constitute a “top hat” arrangement within the meaning of ERISA 201(2) and is not subject to the coverage, funding, and fiduciary requirements of ERISA. Finally, until the occurrence of a distribution event and the actual payment to the
Executive of a benefit hereunder, it is intended that there has been no transfer of any benefit to the Executive under Code Section 83 and no benefit is subject to inclusion for income tax purposes.
ARTICLE 11
MISCELLANEOUS
11.1
Binding Effect
. This Agreement shall bind the Executive and the Bank, and their beneficiaries, survivors, executors,
successors, administrators and transferees.
11.2
No Guarantee of Employment
. This Agreement is not an employment policy or
contract. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere with the Bank’s right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the
Executive’s right to terminate employment at any time.
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11.3
Nontransferability
. Benefits under this Agreement cannot be sold, transferred, assigned,
pledged, attached, or encumbered in any manner.
11.4
Notice
. Any notice, consent, or demand required or permitted to be given under
the provisions of this Agreement by one party to another shall be in writing, shall be signed by the party giving or making the same, and may be given either by delivering the same to such other party personally, or by mailing the same, by United
States certified mail, postage prepaid, to such party, addressed to their last known address as shown on the records of the Bank. The date of such mailing shall be deemed the date of such mailed notice, consent, or demand.
11.5
Tax Withholding and Code Section 409A Taxes
. Any distribution under this Agreement shall be reduced by the amount of any taxes required
to be withheld from such distribution. This Agreement shall permit the acceleration of the time or schedule of a payment to pay employment related taxes as permitted under Treasury regulation Section 1.409A-3(j) or to pay any taxes that may
become due at any time that the arrangement fails to meet the requirements of Code Section 409A and the regulations and other guidance promulgated thereunder. In the latter case, such payments shall not exceed the amount required to be included
in income as the result of the failure to comply with the requirements of Code Section 409A.
11.6
Applicable Law
. The
Agreement and all rights hereunder shall be governed by the laws of the State of Hawaii, except to the extent preempted by the laws of the United States of America.
11.7
Entire Agreement
. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement
other than those specifically set forth herein.
11.8
Named Fiduciary
. The Bank shall be the named fiduciary and plan administrator
under this Agreement. It may delegate to others certain aspects of the management and operational responsibilities including the employment of advisors and the delegation of ministerial duties to qualified individuals.
11.9
Construction
. The headings of the Articles in this Agreement are provided for convenience only and will not affect its construction or
interpretation. All references to “Article” or “Articles” refer to the corresponding Article or Articles of this Agreement. Wherever any words are used under the Agreement in the masculine, feminine, or neuter gender, they shall
be construed as though they were also used in another gender in all cases where they would so apply.
11.10
Acceleration of
Payments
. Except as specifically permitted herein or in other sections of this Agreement, no acceleration of the time or schedule of any payment may be made hereunder. Notwithstanding the foregoing, payments may be accelerated hereunder by the
Bank, in accordance with the provisions of Treasury Regulation Section 1.409A-3(j)(4) and any subsequent guidance issued by the United States Treasury Department. Accordingly, payments may be accelerated, in accordance with requirements and
conditions of the Treasury Regulations (or subsequent guidance) in the following circumstances: (i) as a result of certain domestic relations orders; (ii) in compliance with ethics agreements with the Federal government; (iii) in
14
compliance with ethics laws or conflicts of interest laws; (iv) in limited cash-outs (but not in excess of the limit under Code
Section 402(g)(1)(B)); (v) in the case of certain distributions to avoid a non-allocation year under Code Section 409(p); (vi) to apply certain offsets in satisfaction of a debt of the Executive to the Bank; (vii) in
satisfaction of certain bona fide disputes between the Executive and the Bank; or (viii) for any other purpose set forth in the Treasury Regulations and subsequent guidance.
11.11
Required Provision
. Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their
compliance with 12 U.S.C. § 1828(k) and any regulations promulgated thereunder.
IN WITNESS WHEREOF
, the Executive and the Bank
have signed this Agreement on the dates set forth below.
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TERRITORIAL SAVINGS BANK
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November 10, 2008
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By:
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/s/ Harold H. Ohama
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Date
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Chairman, Compensation Committee of the Board
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November 10, 2008
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/s/ Ralph Nakatsuka
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Date
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Ralph Nakatsuka
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15
Exhibit 10.10
TERRITORIAL SAVINGS BANK
AMENDED AND RESTATED
EXECUTIVE DEFERRED INCENTIVE AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE DEFERRED INCENTIVE AGREEMENT (the “Agreement”) is entered into as of January 1, 2008, by and between TERRITORIAL SAVINGS BANK, a federally-chartered savings bank located in Honolulu, Hawaii
(the “Bank”), and ALLAN S. KITAGAWA, Chairman and Chief Executive Officer of the Bank (the “Executive”).
WHEREAS, the
Bank and Executive entered into the Executive Deferred Incentive Agreement (the “Predecessor Agreement”), effective January 1, 2004, in order to provide specified benefits to the Executive, a member of a select group of management or
highly compensated employees who contribute materially to the continued growth, development and future business success of the Bank; and
WHEREAS, 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; and
WHEREAS, the Bank and the Executive desire to amend and restate the Predecessor Agreement in the manner set forth herein in order to conform such agreement to Code Section 409A; and
WHEREAS, the Agreement shall supersede the Predecessor Agreement and no benefits shall accrue hereunder on or after August 29, 2007.
NOW, THEREFORE, in consideration of the premises and the mutual promises herein 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:
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1.1
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“
Beneficiary
” means each designated person, or the estate of the Executive, entitled to benefits, if any, upon the death of the Executive determined pursuant to
Article 6.
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1.2
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“
Board
” means the Board of Directors of the Bank as from time to time constituted.
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1.3
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“
Beneficiary Designation Form
” means the form established from time to time by the Plan Administrator that the Executive completes, signs and returns to the Plan
Administrator to designate one or more beneficiaries.
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1.4
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“
Change in Control
” means:
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(a) There
occurs a “change of 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; or
(b) As a result of, or in connection with, any merger or other business combination, sale of assets or contested election, wherein the persons 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; or
(c) The Bank transfers substantially all of its assets to another corporation or entity, which is not an affiliate of the Bank; or
(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 in Control shall not occur as a result of a conversion of the Bank from the
mutual to stock form of organization (including without limitation, through the formation of a stock holding company) (“Conversion”) or reorganization of the Bank into the mutual holding company form of ownership
(“Reorganization”).
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1.5
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“
Code
” means the Internal Revenue Code of 1986, as amended.
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1.6
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“
Deferral Account
” means the Bank’s accounting of the accumulated Incentive Awards, if any, plus accrued interest.
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1.7
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“
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 twelve (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 twelve (12) months, receiving income replacement benefits for a period of not less than three (3) 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.
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1.8
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“
Early Termination
” means Separation from Service before Normal Retirement Age for reasons other than death, Disability, or Termination for Cause, or within
thirty-six (36) months following a Change in Control.
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1.9
|
“
Effective Date
” of this Agreement shall be January 1, 2008.
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1.10
|
“
Exhibit A
” means the exhibit attached to this Agreement and made a part hereof that sets forth the criteria for determining Incentive Awards. The
Board, in its sole discretion, may change the criteria from one Plan Year to the next. The Bank shall notify the
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2
|
|
Executive in writing, within thirty (30) days of the beginning of each Plan Year, of such changes. Once such written notice is given, the criteria shall
not change for such Plan Year without the Executive’s written consent.
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1.11
|
“
Incentive Award
” means the amount, if any, awarded to the Executive and automatically deferred according to Article 2 of this Agreement.
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1.12
|
“
Normal Retirement Age
” means the date the Executive attains age sixty-five (65).
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1.13
|
“
Plan Administrator
” means the plan administrator described in Article 8.
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1.14
|
“
Plan Year
” means a twelve-month period commencing on January 1 and ending on December 31 of each year. The initial Plan Year shall commence on the
Effective Date of this Agreement and end on the following December 31.
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1.15
|
“
Separation from Service
” means 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 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.
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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 forty-nine percent (49%) of the average level of bona fide services performed over the immediately preceding thirty-six (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.
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1.15a
|
“
Specified Employee
” means an employee who at the time of Separation from Service 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.
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1.16
|
“
Termination for Cause
” has the meaning set forth in Section 7.1.
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3
Article 2
Incentive Award
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2.1
|
Incentive Award
. For each Plan Year, the Bank shall determine the Executive’s Incentive Award in accordance with the criteria on Exhibit A.
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2.2
|
Incentive Deferral
. Within sixty (60) days following the end of each Plan Year, the Bank shall declare the Incentive Award for the most recently completed Plan Year and
credit such amount to the Deferral Account. Effective August 29, 2007, no further Incentive Awards shall be made under the Plan.
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Article 3
Deferral Account
|
3.1
|
Establishing and Crediting
. The Bank shall establish a Deferral Account on its books for the Executive and shall credit to the Deferral Account the following amounts:
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3.1.1
|
Incentive Awards
. Effective August 29, 2007, no Incentive Awards shall be credited to the Executive’s Deferred Account.
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3.1.2
|
Interest
. With respect to Incentive Awards that were credited to the Executive’s Deferred Account under the Predecessor Agreement, interest shall be rewarded as follows:
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(a)
|
On the last day of each month and immediately prior to the payment of any benefits, but only until commencement of benefit payments under this Agreement, interest shall be credited
on the Deferral Account at an annual rate equal to seven percent (7.0%), compounded annually.
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(b)
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On the last day of each month during any applicable installment period, interest shall be credited on the unpaid Deferral Account balance at an annual rate equal to seven percent
(7.0%), compounded annually. The Board, in its sole discretion, may change the rate in this Section 3.1.2(b) only on a prospective basis and only prior to the commencement of installment payments.
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3.2
|
Statement of Accounts
. The Plan Administrator shall provide to the Executive, within one hundred twenty (120) days after the end of each Plan Year, a statement setting
forth the Deferral Account balance.
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3.3
|
Accounting Device Only
. The Deferral Account is solely a device for measuring amounts to be paid under this Agreement, if any. The Deferral Account is not a trust fund of any
kind. The Executive is a general unsecured creditor of the Bank for the payment of benefits. The benefits represent the mere Bank promise to pay such benefits.
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The Executive’s rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by the Executive’s creditors.
4
Article 4
Distributions During Lifetime
|
4.1
|
Time and Form of Benefit.
Upon the earlier of the Executive’s attainment of Normal Retirement Age, Early Termination, termination due to Disability, or Separation from
Service within thirty-six (36) months following a Change in Control, the Bank shall pay to the Executive the benefit described in this Section 4.1 in lieu of any other benefit under this Article.
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4.1.1
|
Amount of Benefit
. The benefit under this Section 4.1 is the Deferral Account balance as of the Executive’s Normal Retirement Age, Early Termination, termination
due to Disability, or Separation from Service within thirty-six months following a Change in Control.
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4.1.2
|
Payment of Benefit
. The Bank shall pay the benefit to the Executive in a single cash lump-sum distribution within thirty (30) days following the earlier of the date of
the Executive’s Normal Retirement Age, Early Termination, termination due to Disability, or Separation from Service within thirty-six (36) months following a Change in Control.
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4.2
|
Restriction on Timing of Payment
. Notwithstanding any provision of this Agreement to the contrary, in the event
the Executive is a Specified Employee, then to the extent necessary to avoid penalties under Code Section 409A, any payment under Section 4.1 that is payable due to the Executive’s Separation from Service shall be withheld and paid to
the Executive on the first day of the seventh month following the Executive’s Separation from Service. The withheld amounts plus interest, compounded monthly at the rate designated in accordance with Section 3.1.2, shall be paid to the
Executive on the first day of the seventh (7
th
) month following the Executive’s date of Separation from Service.
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Article 5
Distributions at Death
|
5.1
|
Death During Active Service
. If the Executive dies while in active service to the Bank, the Bank shall pay to the Beneficiary the Deferral Account balance as of the date of
the Executive’s death. This benefit shall be paid to the Beneficiary in a single cash lump-sum distribution within sixty (60) days following the date of the Executive’s death.
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5.2
|
Death After Separation from Service But Before Benefit Payments Commence
. If the Executive is entitled to benefit payments under this Agreement, but dies prior to the payment
of said benefit, the Bank shall pay to the Beneficiary the same benefits that the Executive was entitled to prior to death except that the benefit payments shall be made within sixty (60) days following the date of the Executive’s death.
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5
Article 6
Beneficiaries
|
6.1
|
Beneficiary
. The Executive shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under the Agreement upon the death of the
Executive. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other plan of the Bank in which the Executive participates.
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6.2
|
Beneficiary Designation; Change
. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan
Administrator or its designated agent. The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently
dissolved. The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of a new Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time
to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form
filed by the Executive and accepted by the Plan Administrator prior to the Executive’s death.
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6.3
|
Acknowledgment
. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or
its designated agent.
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6.4
|
No Beneficiary Designation
. If the Executive dies without a valid Beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the
Executive’s spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, the benefits shall be made to the personal representative of the Executive’s estate.
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6.5
|
Facility of Payment
. If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person
incapable of handling the disposition of that person’s property, the Plan Administrator may direct payment of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable
person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Executive and the
Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such payment amount.
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6
Article 7
General Limitations
|
7.1
|
Termination for Cause
. In the event the Executive’s employment is Terminated for Cause, no benefits shall be due under this Agreement. For purposes of this Agreement,
“Termination for Cause” shall be defined as 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 a 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 at a meeting of such board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board with counsel), of finding
that, in the good faith opinion of the Board, the Executive committed the conduct described above and specifying the particulars thereof.
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7.2
|
No Withdrawal Election
. The Executive may not elect, at any time, to withdraw any portion of the Deferral Account balance.
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Article 8
Administration of
Agreement
|
8.1
|
Plan Administrator Duties
. This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall
appoint. The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Agreement and (ii) decide or resolve any and all
questions, including interpretations of this Agreement, that may arise in connection with the Agreement.
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8.2
|
Agents
. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit (including acting
through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Bank.
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8.3
|
Binding Effect of Decisions
. The decisions or actions of the Plan Administrator with respect to any questions arising out of or in connection with the administration,
interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement.
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8.4
|
Indemnity of Plan Administrator
. The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or
liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.
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7
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8.5
|
Bank Information
. To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters
relating to the salary of the Executive, the date and circumstances of the retirement, Disability, death or Separation from Service of the Executive, and such other pertinent information as the Plan Administrator may reasonably require.
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Article 9
Claims and Review Procedures
|
9.1
|
Claims Procedure
. The Executive or any Beneficiary (“claimant”) who has not received benefits under the Agreement that he or she believes should be paid shall make
a claim for such benefits as follows:
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|
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9.1.1
|
Initiation - Written Claim
. The claimant initiates a claim by submitting to the Bank a written claim for the benefits.
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9.1.2
|
Timing of Bank Response
. The Bank shall respond to such claimant within ninety (90) days after receiving the claim. If the Bank determines that special circumstances
require additional time for processing the claim, the Bank can extend the response period by an additional ninety (90) days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is
required. The notice of extension must set forth the special circumstances and the date by which the Bank expects to render its decision.
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9.1.3
|
Notice of Decision
. If the Bank denies part or all of the claim, the Bank shall notify the claimant in writing of such denial. The Bank shall write the notification in a
manner calculated to be understood by the claimant. The notification shall set forth:
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(a)
|
The specific reasons for the denial,
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(b)
|
A reference to the specific provisions of the Agreement on which the denial is based,
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(c)
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A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,
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(d)
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An explanation of the Agreement’s review procedures and the time limits applicable to such procedures, and
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(e)
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A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
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9.2
|
Review Procedure
. If the Bank denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Bank of the denial, as follows:
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9.2.1
|
Initiation - Written Request
. To initiate the review, the claimant, within sixty (60) days after receiving the Bank’s notice of denial, must file with the Bank a
written request for review.
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8
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9.2.2
|
Additional Submissions - Information Access
. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the
claim. The Bank shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s claim
for benefits.
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9.2.3
|
Considerations on Review
. In considering the review, the Bank shall take into account all materials and information the claimant submits relating to the claim, without regard
to whether such information was submitted or considered in the initial benefit determination.
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9.2.4
|
Timing of Bank Response
. The Bank shall respond in writing to such claimant within sixty (60) days after receiving the request for review. If the Bank determines that
special circumstances require additional time for processing the claim, the Bank can extend the response period by an additional sixty (60) days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an
additional period is required. The notice of extension must set forth the special circumstances and the date by which the Bank expects to render its decision.
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9.2.5
|
Notice of Decision
. The Bank shall notify the claimant in writing of its decision on review. The Bank shall write the notification in a manner calculated to be understood by
the claimant. The notification shall set forth:
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(a)
|
The specific reasons for the denial,
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(b)
|
A reference to the specific provisions of the Agreement on which the denial is based,
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(c)
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A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as
defined in applicable ERISA regulations) to the claimant’s claim for benefits, and
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(d)
|
A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).
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Article 10
Amendments and Termination
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10.1
|
Amendment
. The Bank reserves the right to amend this Agreement at any time. However, to the extent any such amendment would adversely impact the accrued benefits of the
Executive, the amendment shall require the written consent of the Executive, even if the Executive is no longer employed by the Bank.
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9
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10.2
|
Termination
. The Bank reserves the right to terminate the Agreement at any time. Upon termination of the Agreement, the Bank shall determine whether all payments of benefits
shall be made in accordance with the normal distribution schedule set forth under the Agreement or if payment of benefits shall be accelerated in order to wind down the Agreement. To the extent any benefits under the Agreement are subject to Code
Section 409A, any acceleration of the payment of such benefits due to terminating the Agreement shall comply with the following:
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(a) the Bank may terminate the Agreement provided that: (i) all arrangements sponsored by the Bank that would be aggregated with this Agreement under Treasury Regulations Section 1.409A-1(c)(2) if the
Executive covered by this Agreement was also covered by any of those other arrangements are also terminated; (ii) no payments other than payments that would be payable under the terms of the arrangement if the termination had not occurred are
made within twelve (12) months of the termination of the arrangement; (iii) all payments are made within twenty-four (24) months of the termination of the arrangements; and (iv) the Bank does not adopt a new arrangement that
would be aggregated with any terminated arrangement under Treasury Regulations Section 1.409A-1(c)(2) if the same Executive participated in both arrangements, at any time within three (3) years following the date of termination of the
arrangement.
(b) The Bank may terminate the Agreement within the thirty (30) days preceding a Change in Control (but
not following a Change in Control), provided that the Agreement shall only be treated as terminated if all substantially similar arrangements sponsored by the Bank are terminated so that the Executive and all executives under substantially similar
arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of the date of the termination of the arrangements. For these purposes, “Change in Control” shall be
defined in accordance with the Treasury Regulations under Code Section 409A.
(c) The Bank may terminate the Agreement
within twelve (12) months of a corporate dissolution taxed under Code Section 331, or with approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A), provided that the amounts deferred under the Agreement are included in the
Executive’s gross income in the latest of (i) the calendar year in which the Agreement terminates; (ii) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar
year in which the payment is administratively practicable.
10
Article 11
Miscellaneous
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11.1
|
Binding Effect
. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, administrators and transferees.
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11.2
|
No Guarantee of Employment
. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere
with the Bank’s right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive’s right to separate from service at any time.
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11.3
|
Non-Transferability
. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
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11.4
|
Tax Withholding and Code Section 409A Taxes
. Any distribution under this Agreement shall be reduced by the amount of any taxes required to be withheld from such
distribution. This Agreement shall permit the acceleration of the time or schedule of a payment to pay employment related taxes as permitted under Treasury regulation Section 1.409A-3(j) or to pay any taxes that may become due at any time that
the arrangement fails to meet the requirements of Code Section 409A and the regulations and other guidance promulgated thereunder. In the latter case, such payments shall not exceed the amount required to be included in income as the result of
the failure to comply with the requirements of Code Section 409A.
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11.5
|
Applicable Law
. The Agreement, Participation Agreement and all rights under such agreements shall be governed by the laws of the State of Hawaii, except to the extent
preempted by the laws of the United States of America.
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11.6
|
Unfunded Arrangement
. The Executive and the Beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent
the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the
Executive’s life or other informal funding asset is a general asset of the Bank to which the Executive and the Beneficiary have no preferred or secured claim.
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11.7
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Successors
. The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another bank, firm, or person unless
such succeeding or continuing bank, firm, or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such event, the term “Bank” as used in this Agreement shall be deemed to refer to
the successor or survivor entity.
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11.8
|
Entire Agreement
. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive
by virtue of this Agreement other than those specifically set forth herein.
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11
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11.9
|
Interpretation
. Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the
feminine and use of the singular includes the plural.
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11.10
|
Alternative Action
. In the event it shall become impossible for the Bank or the Plan Administrator to perform any act required by this Agreement, the Bank or Plan
Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Bank, provided that such alternative acts do not violate Code Section 409A
and the Treasury Regulations issued thereunder.
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11.11
|
Headings
. Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.
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11.12
|
Validity
. In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but
this Agreement shall be construed and enforced as if such illegal and invalid provision has never been inserted herein.
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11.13
|
Notice
. Any notice or filing required or permitted to be given to the Plan Administrator under this Agreement shall be sufficient if in writing and hand-delivered, or sent by
registered or certified mail, to the address below:
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Plan Administrator
Territorial Savings Bank
1132 Bishop St., #2200
Honolulu, HI 96813
Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for
registration or certification.
Any notice or filing required or permitted to be given to the Executive under this Agreement shall be
sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Executive.
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11.14
|
Acceleration of Payments
. Except as specifically permitted herein or in other sections of this Agreement, no acceleration of the time or schedule of any payment may be made
hereunder. Notwithstanding the foregoing, payments may be accelerated hereunder by the Bank, in accordance with the provisions of Treasury Regulation Section 1.409A-3(j)(4) and any subsequent guidance issued by the United States Treasury
Department. Accordingly, payments may be accelerated, in accordance with the requirements and conditions of the Treasury Regulations (or subsequent guidance) in the following circumstances: (i) as a result of certain domestic relations orders;
(ii) in compliance with ethics agreements with the Federal government; (iii) in compliance with ethics laws or conflicts of interest laws; (iv) in limited cash-outs (but not in excess of the limit under Code
Section 402(g)(1)(B)); (v) in the case of certain distributions to avoid a non-allocation year under Code Section 409(p); (vi) to apply certain offsets in satisfaction of a debt of the Executive to the Bank; (vii) in
satisfaction of certain bona fide disputes between the Executive and the Bank; or (viii) for any other purpose set forth in the Treasury Regulations and subsequent guidance.
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12
|
11.15
|
Required Provision
. Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. §
1828(k) and any regulations promulgated thereunder.
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13
IN WITNESS WHEREOF
, the Executive and a duly authorized representative of the Bank have signed
this Agreement on the dates set forth below
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TERRITORIAL SAVINGS BANK
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November 10, 2008
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By:
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/s/ Harold H. Ohama
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Date
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Chairman of the Compensation Committee
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November 10, 2008
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/s/ Allan S. Kitagawa
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Date
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Allan S. Kitagawa
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14
EXHIBIT A
ANNUAL PERFORMANCE ELEMENTS
ON OR AFTER AUGUST 29, 2007
Executive: ALLAN S. KITAGAWA
The maximum incentive
compensation under the Agreement is zero percent (0%) of your salary.
Exhibit 10.11
TERRITORIAL SAVINGS BANK
AMENDED AND RESTATED
EXECUTIVE DEFERRED INCENTIVE AGREEMENT
THIS AMENDED AND RESTATED EXECUTIVE DEFERRED INCENTIVE AGREEMENT (the “Agreement”) is entered into as of January 1, 2008, by and between TERRITORIAL SAVINGS BANK, a federally-chartered savings bank located in Honolulu, Hawaii
(the “Bank”), and VERNON H. HIRATA (the “Executive”).
WHERAS, the Bank and Executive entered into the Executive
Deferred Incentive Agreement (the “Predecessor Agreement”), effective January 1, 2004, in order to provide specified benefits to the Executive, a member of a select group of management or highly compensated employees who contribute
materially to the continued growth, development and future business success of the Bank; and
WHEREAS, 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; and
WHEREAS, the Bank and the Executive desire to amend
and restate the Predecessor Agreement in the manner set forth herein in order to conform such agreement to Code Section 409A; and
WHEREAS, the Agreement shall supersede the Predecessor Agreement and no benefits shall accrue hereunder on or after August 29, 2007.
NOW, THEREFORE, in consideration of the premises and the mutual promises herein 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:
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1.1
|
“
Beneficiary
” means each designated person, or the estate of the Executive, entitled to benefits, if any, upon the death of the Executive determined pursuant to
Article 6.
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1.2
|
“
Board
” means the Board of Directors of the Bank as from time to time constituted.
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1.3
|
“
Beneficiary Designation Form
” means the form established from time to time by the Plan Administrator that the Executive completes, signs and returns to the Plan
Administrator to designate one or more beneficiaries.
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1.4
|
“
Change in Control
” means:
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|
|
(a)
|
There occurs a “change of 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; or
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(b)
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As a result of, or in connection with, any merger or other business combination, sale of assets or contested election, wherein the persons 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; or
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(c)
|
The Bank transfers substantially all of its assets to another corporation or entity, which is not an affiliate of the Bank; or
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(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.
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A Change in Control shall not occur as
a result of a conversion of the Bank from the mutual to stock form of organization (including without limitation, through the formation of a stock holding company) (“Conversion”) or reorganization of the Bank into the mutual holding
company form of ownership (“Reorganization”).
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1.5
|
“
Code
” means the Internal Revenue Code of 1986, as amended.
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1.6
|
“
Deferral Account
” means the Bank’s accounting of the accumulated Incentive Awards, if any, plus accrued interest.
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1.7
|
“
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 twelve (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 twelve (12) months, receiving income replacement benefits for a period of not less than three (3) 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.
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1.8
|
“
Early Termination
” means Separation from Service before Normal Retirement Age for reasons other than death, Disability, or Termination for Cause, or within
thirty-six (36) months following a Change in Control.
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1.9
|
“
Effective Date
” of this Agreement shall be January 1, 2008.
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1.10
|
“
Exhibit A
” means the exhibit attached to this Agreement and made a part hereof that sets forth the criteria for determining Incentive Awards. The
Board, in its sole discretion, may change the criteria from one Plan Year to the next. The Bank shall notify the
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2
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|
Executive in writing, within thirty (30) days of the beginning of each Plan Year, of such changes. Once such written notice is given, the criteria shall
not change for such Plan Year without the Executive’s written consent.
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1.11
|
“
Incentive Award
” means the amount, if any, awarded to the Executive and automatically deferred according to Article 2 of this Agreement.
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1.12
|
“
Normal Retirement Age
” means the date the Executive attains age sixty-five (65).
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1.13
|
“
Plan Administrator
” means the plan administrator described in Article 8.
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1.14
|
“
Plan Year
” means a twelve-month period commencing on January 1 and ending on December 31 of each year. The initial Plan Year shall commence on the
Effective Date of this Agreement and end on the following December 31.
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1.15
|
“
Separation from Service
” means 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 (6) months or, if longer, so long as the Executive’s right to
reemployment is provided by law or contract. If the leave exceeds six (6) 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.
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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 forty-nine percent (49%) of the average level of bona fide services performed over the immediately preceding thirty-six (36) months (or such lesser
period of time in which the Executive performed services for the Bank). The determination of whether a Executive has had a Separation from Service shall be made by applying the presumptions set forth in the Treasury Regulations under Code
Section 409A.
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1.15a
|
“
Specified Employee
” means an employee who at the time of Separation from Service 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.
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1.16
|
“
Termination for Cause
” has the meaning set forth in Section 7.1.
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3
Article 2
Incentive Award
|
2.1
|
Incentive Award
. For each Plan Year, the Bank shall determine the Executive’s Incentive Award in accordance with the criteria on Exhibit A.
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2.2
|
Incentive Deferral
. Within sixty (60) days following the end of each Plan Year, the Bank shall declare the Incentive Award for the most recently completed Plan Year and
credit such amount to the Deferral Account. Effective on August 29, 2007, no further Incentive Awards shall be made under the Plan.
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Article 3
Deferral Account
|
3.1
|
Establishing and Crediting
. The Bank shall establish a Deferral Account on its books for the Executive and shall credit to the Deferral Account the following amounts:
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3.1.1
|
Incentive Awards
. Effective August 29, 2007, no Incentive Awards shall be credited to the Executive’s Deferred Account.
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3.1.2
|
Interest
. With respect to Incentive Awards that were credited to the Executive’s Deferred Account under the Predecessor Agreement, interest shall be rewarded as follows:
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(a)
|
On the last day of each month and immediately prior to the payment of any benefits, but only until commencement of benefit payments under this Agreement, interest shall be credited
on the Deferral Account at an annual rate equal to seven percent (7.0%), compounded annually.
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(b)
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On the last day of each month during any applicable installment period, interest shall be credited on the unpaid Deferral Account balance at an annual rate equal to seven percent
(7.0%), compounded annually. The Board, in its sole discretion, may change the rate in this Section 3.1.2(b) only on a prospective basis and only prior to the commencement of installment payments.
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3.2
|
Statement of Accounts
. The Plan Administrator shall provide to the Executive, within one hundred twenty (120) days after the end of each Plan Year, a statement setting
forth the Deferral Account balance.
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3.3
|
Accounting Device Only
. The Deferral Account is solely a device for measuring amounts to be paid under this Agreement, if any. The Deferral Account is not a trust fund of any
kind. The Executive is a general unsecured creditor of the Bank for the payment of benefits. The benefits represent the mere Bank promise to pay such benefits.
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The Executive’s rights are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or
garnishment by the Executive’s creditors.
4
Article 4
Distributions During Lifetime
|
4.1
|
Time and Form of Benefit
. Upon the earlier of the Executive’s attainment of Normal Retirement Age, Early Termination, termination due to Disability, or Separation from
Service within thirty-six (36) months following a Change in Control, the Bank shall pay to the Executive the benefit described in this Section 4.1 in lieu of any other benefit under this Article.
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4.1.1
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Amount of Benefit
. The benefit under this Section 4.1 is the Deferral Account balance as of the Executive’s Normal Retirement Age, Early Termination, termination
due to Disability, or Separation from Service within thirty-six (36) months following a Change in Control.
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4.1.2
|
Payment of Benefit
. The Bank shall pay the benefit to the Executive in a single cash lump-sum distribution within thirty (30) days following the earlier of the date of
the Executive’s Normal Retirement Age, Early Termination, termination due to Disability, or Separation from Service within thirty-six (36) months following a Change in Control.
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4.2
|
Restriction on Timing of Payment
. Notwithstanding any provision of this Agreement to the contrary, in the event
the Executive is a Specified Employee (within the meaning of Treasury Regulations §1.409A-1(i)), then, to the extent necessary to avoid penalties under Code Section 409A, any payments under Sections 4.2 and 4.4 to which Executive is
entitled for the first six (6) months shall be held and shall be paid to the Executive on the first day of the seventh (7
th
) month
following the Executive’s Separation from Service. The withheld installments plus interest, compounded monthly at the rate designated in accordance with Section 3.1.2, shall be paid to the Executive on the first day of the seventh
(7
th
) month following the Executive’s date of Separation from Service.
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Article 5
Distributions at Death
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5.1
|
Death During Active Service
. If the Executive dies while in active service to the Bank, the Bank shall pay to the Beneficiary the Deferral Account balance as of the date of
the Executive’s death. This benefit shall be paid to the Beneficiary in a single cash lump-sum distribution within sixty (60) days following the date of the Executive’s death.
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5.2
|
Death After Separation from Service But Before Benefit Payments Commence
. If the Executive is entitled to benefit payments under this Agreement, but dies prior to the payment
of said benefit, the Bank shall pay to the Beneficiary the same benefits that the Executive was entitled to prior to death except that the benefit payments shall be within sixty (60) days following the date of the Executive’s death.
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5
Article 6
Beneficiaries
|
6.1
|
Beneficiary
. The Executive shall have the right, at any time, to designate a Beneficiary(ies) to receive any benefits payable under the Agreement upon the death of the
Executive. The Beneficiary designated under this Agreement may be the same as, or different from, the beneficiary designation under any other plan of the Bank in which the Executive participates.
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6.2
|
Beneficiary Designation; Change
. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan
Administrator or its designated agent. The Executive’s Beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently
dissolved. The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of a new Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time
to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form
filed by the Executive and accepted by the Plan Administrator prior to the Executive’s death.
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6.3
|
Acknowledgment
. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or
its designated agent.
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6.4
|
No Beneficiary Designation
. If the Executive dies without a valid Beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the
Executive’s spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, the benefits shall be made to the personal representative of the Executive’s estate.
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6.5
|
Facility of Payment
. If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person
incapable of handling the disposition of that person’s property, the Plan Administrator may direct payment of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable
person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any payment of a benefit shall be a payment for the account of the Executive and the
Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such payment amount.
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6
Article 7
General Limitations
|
7.1
|
Termination for Cause
. In the event the Executive’s employment is Terminated for Cause, no benefits shall be due under this Agreement. For purposes of this Agreement,
“Termination for Cause” shall be defined as 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 a 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 at a meeting of such board called and held for the purpose (after reasonable notice to the Executive and an opportunity for the Executive to be heard before the Board with counsel), of finding
that, in the good faith opinion of the Board, the Executive committed the conduct described above and specifying the particulars thereof.
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7.2
|
No Withdrawal Election
. The Executive may not elect, at any time, to withdraw any portion of the Deferral Account balance.
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Article 8
Administration of
Agreement
|
8.1
|
Plan Administrator Duties
. This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall
appoint. The Plan Administrator shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Agreement and (ii) decide or resolve any and all
questions, including interpretations of this Agreement, that may arise in connection with the Agreement.
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8.2
|
Agents
. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit (including acting
through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Bank.
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|
8.3
|
Binding Effect of Decisions
. The decisions or actions of the Plan Administrator with respect to any questions arising out of or in connection with the administration,
interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement.
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8.4
|
Indemnity of Plan Administrator
. The Bank shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or
liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.
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7
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8.5
|
Bank Information
. To enable the Plan Administrator to perform its functions, the Bank shall supply full and timely information to the Plan Administrator on all matters
relating to the salary of the Executive, the date and circumstances of the retirement, Disability, death or Separation from Service of the Executive, and such other pertinent information as the Plan Administrator may reasonably require.
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Article 9
Claims and Review Procedures
|
9.1
|
Claims Procedure
. The Executive or any Beneficiary (“claimant”) who has not received benefits under the Agreement that he or she believes should be paid shall make
a claim for such benefits as follows:
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|
9.1.1
|
Initiation - Written Claim
. The claimant initiates a claim by submitting to the Bank a written claim for the benefits.
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|
9.1.2
|
Timing of Bank Response
. The Bank shall respond to such claimant within ninety (90) days after receiving the claim. If the Bank determines that special circumstances
require additional time for processing the claim, the Bank can extend the response period by an additional ninety (90) days by notifying the claimant in writing, prior to the end of the initial 90-day period, that an additional period is
required. The notice of extension must set forth the special circumstances and the date by which the Bank expects to render its decision.
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9.1.3
|
Notice of Decision
. If the Bank denies part or all of the claim, the Bank shall notify the claimant in writing of such denial. The Bank shall write the notification in a
manner calculated to be understood by the claimant. The notification shall set forth:
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|
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(a)
|
The specific reasons for the denial,
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(b)
|
A reference to the specific provisions of the Agreement on which the denial is based,
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(c)
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A description of any additional information or material necessary for the claimant to perfect the claim and an explanation of why it is needed,
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(d)
|
An explanation of the Agreement’s review procedures and the time limits applicable to such procedures, and
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(e)
|
A statement of the claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.
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|
9.2
|
Review Procedure
. If the Bank denies part or all of the claim, the claimant shall have the opportunity for a full and fair review by the Bank of the denial, as follows:
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|
9.2.1
|
Initiation – Written Request
. To initiate the review, the claimant, within sixty (60) days after receiving the Bank’s notice of denial, must file with the Bank
a written request for review.
|
8
|
|
9.2.2
|
Additional Submissions – Information Access
. The claimant shall then have the opportunity to submit written comments, documents, records and other information relating
to the claim. The Bank shall also provide the claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the claimant’s
claim for benefits.
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9.2.3
|
Considerations on Review
. In considering the review, the Bank shall take into account all materials and information the claimant submits relating to the claim, without regard
to whether such information was submitted or considered in the initial benefit determination.
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|
9.2.4
|
Timing of Bank Response
. The Bank shall respond in writing to such claimant within sixty (60) days after receiving the request for review. If the Bank determines that
special circumstances require additional time for processing the claim, the Bank can extend the response period by an additional sixty (60) days by notifying the claimant in writing, prior to the end of the initial 60-day period, that an
additional period is required. The notice of extension must set forth the special circumstances and the date by which the Bank expects to render its decision.
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|
9.2.5
|
Notice of Decision
. The Bank shall notify the claimant in writing of its decision on review. The Bank shall write the notification in a manner calculated to be understood by
the claimant. The notification shall set forth:
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|
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(a)
|
The specific reasons for the denial,
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|
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(b)
|
A reference to the specific provisions of the Agreement on which the denial is based,
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(c)
|
A statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as
defined in applicable ERISA regulations) to the claimant’s claim for benefits, and
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(d)
|
A statement of the claimant’s right to bring a civil action under ERISA Section 502(a).
|
Article 10
Amendments and Termination
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10.1
|
Amendment
. The Bank reserves the right to amend this Agreement at any time. However, to the extent any such amendment would adversely impact the accrued benefits of the
Executive, the amendment shall require the written consent of the Executive, even if the Executive is no longer employed by the Bank.
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9
|
10.2
|
Termination
. The Bank reserves the right to terminate the Agreement at any time. Upon termination of the Agreement, the Bank shall determine whether all payments of benefits
shall be made in accordance with the normal distribution schedule set forth under the Agreement or if payment of benefits shall be accelerated in order to wind down the Agreement. To the extent any benefits under the Agreement are subject to Code
Section 409A, any acceleration of the payment of such benefits due to terminating the Agreement shall comply with the following:
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(a) the Bank may terminate the Agreement provided that: (i) all arrangements sponsored by the Bank that would be aggregated with this Agreement under Treasury Regulations Section 1.409A-1(c)(2) if the
Executive covered by this Agreement was also covered by any of those other arrangements are also terminated; (ii) no payments other than payments that would be payable under the terms of the arrangement if the termination had not occurred are
made within twelve (12) months of the termination of the arrangement; (iii) all payments are made within twenty-four (24) months of the termination of the arrangements; and (iv) the Bank does not adopt a new arrangement that
would be aggregated with any terminated arrangement under Treasury Regulations Section 1.409A-1(c)(2) if the same Executive participated in both arrangements, at any time within three (3) years following the date of termination of the
arrangement.
(b) The Bank may terminate the Agreement within the thirty (30) days preceding a Change in Control (but
not following a Change in Control), provided that the Agreement shall only be treated as terminated if all substantially similar arrangements sponsored by the Bank are terminated so that the Executive and all executives under substantially similar
arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of the date of the termination of the arrangements. For these purposes, “Change in Control” shall be
defined in accordance with the Treasury Regulations under Code Section 409A.
(c) The Bank may terminate the Agreement
within twelve (12) months of a corporate dissolution taxed under Code Section 331, or with approval of a bankruptcy court pursuant to 11 U.S.C. §503(b)(1)(A), provided that the amounts deferred under the Agreement are included in the
Executive’s gross income in the latest of (i) the calendar year in which the Agreement terminates; (ii) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar
year in which the payment is administratively practicable.
10
Article 11
Miscellaneous
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11.1
|
Binding Effect
. This Agreement shall bind the Executive and the Bank and their beneficiaries, survivors, executors, administrators and transferees.
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11.2
|
No Guarantee of Employment
. This Agreement is not a contract for employment. It does not give the Executive the right to remain an employee of the Bank, nor does it interfere
with the Bank’s right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive’s right to separate from service at any time.
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11.3
|
Non-Transferability
. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
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11.4
|
Tax Withholding and Code Section 409A Taxes
. Any distribution under this Agreement shall be reduced by the amount of any taxes to be withheld from such distribution.
This Agreement shall permit the acceleration of the time or schedule of a payment to pay employment related taxes as permitted under Treasury Regulation Section 1.409A-3(j) or to pay any taxes that may become due at any time that the
arrangement fails to meet the requirements of Code Section 409A and the regulations and other guidance promulgated thereunder. In the latter case, such payments shall not exceed the amount required to be included in income as the result of the
failure to comply with the requirements of Code Section 409A.
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11.5
|
Applicable Law
. The Agreement, Participation Agreement and all rights under such agreements shall be governed by the laws of the State of Hawaii, except to the extent
preempted by the laws of the United States of America.
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11.6
|
Unfunded Arrangement
. The Executive and the Beneficiary are general unsecured creditors of the Bank for the payment of benefits under this Agreement. The benefits represent
the mere promise by the Bank to pay such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the
Executive’s life or other informal funding asset is a general asset of the Bank to which the Executive and the Beneficiary have no preferred or secured claim.
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11.7
|
Successors
. The Bank shall not merge or consolidate into or with another Bank, or reorganize, or sell substantially all of its assets to another bank, firm, or person unless
such succeeding or continuing bank, firm, or person agrees to assume and discharge the obligations of the Bank under this Agreement. Upon the occurrence of such event, the term “Bank” as used in this Agreement shall be deemed to refer to
the successor or survivor entity.
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11.8
|
Entire Agreement
. This Agreement constitutes the entire agreement between the Bank and the Executive as to the subject matter hereof. No rights are granted to the Executive
by virtue of this Agreement other than those specifically set forth herein.
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11
|
11.9
|
Interpretation
. Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the
feminine and use of the singular includes the plural.
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11.10
|
Alternative Action
. In the event it shall become impossible for the Bank or the Plan Administrator to perform any act required by this Agreement, the Bank or Plan
Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Bank, provided that such alternative acts do not violate Code Section 409A
and the Treasury Regulations issued thereunder.
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11.11
|
Headings
. Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.
|
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11.12
|
Validity
. In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but
this Agreement shall be construed and enforced as if such illegal and invalid provision has never been inserted herein.
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|
11.13
|
Notice
. Any notice or filing required or permitted to be given to the Plan Administrator under this Agreement shall be sufficient if in writing and hand-delivered, or sent by
registered or certified mail, to the address below:
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Plan Administrator
Territorial Savings Bank
1132 Bishop St.,
#2200
Honolulu, HI 96813
Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark or the receipt for registration or certification.
Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered, or sent
by mail, to the last known address of the Executive.
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11.14
|
Acceleration of Payments
. Except as specifically permitted herein or in other sections of this Agreement, no acceleration of the time or schedule of any payment may be made
hereunder. Notwithstanding the foregoing, payments may be accelerated hereunder by the Bank, in accordance with the provisions of Treasury Regulation Section 1.409A-3(j)(4) and any subsequent guidance issued by the United States Treasury
Department. Accordingly, payments may be accelerated, in accordance with the requirements and conditions of the Treasury Regulations (or subsequent guidance) in the following circumstances: (i) as a result of certain domestic relations orders;
(ii) in compliance with ethics agreements with the Federal government; (iii) in compliance with ethics laws or conflicts of interest laws; (iv) in limited cash-outs (but not in excess of the limit under Code
Section 402(g)(1)(B)); (v) in the case of certain distributions to avoid a non-allocation year under Code Section 409(p); (vi) to apply certain offsets in satisfaction of a debt of the Executive to the Bank; (vii) in
satisfaction of certain bona fide disputes between the Executive and the Bank; or (viii) for any other purpose set forth in the Treasury Regulations and subsequent guidance.
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12
|
11.15
|
Required Provision
. Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. §
1828(k) and any regulations promulgated thereunder.
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13
IN WITNESS WHEREOF
, the Executive and a duly authorized representative of the Bank have signed
this Agreement on the dates set forth below
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TERRITORIAL SAVINGS BANK
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November 10, 2008
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By:
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/s/ Harold H. Ohama
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Date
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|
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Chairman of the Compensation Committee
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November 10, 2008
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/s/ Vernon Hirata
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Date
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Vernon Hirata
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14
EXHIBIT A
ANNUAL PERFORMANCE ELEMENTS
ON OR AFTER AUGUST 29, 2007
Executive: VERNON H. HIRATA
The maximum incentive
compensation under the Agreement is zero percent (0%) of your salary.
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.
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TERRITORIAL SAVINGS BANK
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Date
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President and Chief Executive Officer
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CONTENTS
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Page No.
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Section 1.
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Plan Identity
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1
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1.1
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Name
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1
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1.2
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Purpose
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1
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1.3
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Effective Date
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1
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1.4
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Fiscal Period
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1
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1.5
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Single Plan for All Employers
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1
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1.6
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Interpretation of Provisions
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1
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Section 2.
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Definitions
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1
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Section 3.
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Eligibility for Participation
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7
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3.1
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Initial Eligibility
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7
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3.2
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Definition of Eligibility Year
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7
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3.3
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Terminated Employees
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8
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3.4
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Certain Employees Ineligible
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8
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3.5
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Participation and Reparticipation
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8
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3.6
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Omission of Eligible Employee
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8
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3.7
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Inclusion of Ineligible Employee
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8
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Section 4.
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Contributions and Credits
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9
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4.1
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Discretionary Contributions
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9
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4.2
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Contributions for Stock Obligations
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9
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4.3
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Conditions as to Contributions
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9
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4.4
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Rollover Contributions
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10
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Section 5.
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Limitations on Contributions and Allocations
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10
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5.1
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Limitation on Annual Additions
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10
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5.2
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Effect of Limitations
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11
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5.3
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Limitations as to Certain Participants
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11
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5.4
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Erroneous Allocations
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12
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Section 6.
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Trust Fund and Its Investment.
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12
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6.1
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Creation of Trust Fund
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12
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6.2
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Stock Fund and Investment Fund
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12
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6.3
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Acquisition of Stock
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13
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6.4
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Participants’ Option to Diversify
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13
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Section 7.
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Voting Rights and Dividends on Stock
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14
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7.1
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Voting and Tendering of Stock
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14
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7.2
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Application of Dividends
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15
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Section 8.
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Adjustments to Accounts
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16
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8.1
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ESOP Allocations
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16
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8.2
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Charges to Accounts
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17
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8.3
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Stock Fund Account
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17
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8.4
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Investment Fund Account
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17
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8.5
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Adjustment to Value of Trust Fund
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17
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8.6
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Participant Statements
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17
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Section 9.
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Vesting of Participants’ Interests
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18
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9.1
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Deferred Vesting in Accounts
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18
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9.2
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Computation of Vesting Years
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18
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9.3
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Full Vesting Upon Certain Events
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19
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9.4
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Full Vesting Upon Plan Termination
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20
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9.5
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Forfeiture, Repayment, and Restoral
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20
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9.6
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Accounting for Forfeitures
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20
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9.7
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Vesting and Nonforfeitability
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20
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Section 10.
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Payment of Benefits
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21
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10.1
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Benefits for Participants
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21
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10.2
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Time for Distribution
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21
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10.3
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Marital Status
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25
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10.4
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Delay in Benefit Determination
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25
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10.5
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Accounting for Benefit Payments
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25
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10.6
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Options to Receive and Sell Stock
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25
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10.7
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Restrictions on Disposition of Stock
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26
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10.8
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Continuing Loan Provisions; Creations of Protections and Rights
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26
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10.9
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Direct Rollover of Eligible Distribution
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26
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10.10
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Waiver of 30-Day Period After Notice of Distribution
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27
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Section 11.
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Rules Governing Benefit Claims and Review of Appeals
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27
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11.1
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Claim for Benefits
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27
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11.2
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Notification by Committee
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28
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11.3
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Claims Review Procedure
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28
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Section 12.
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The Committee and its Functions
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28
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12.1
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Authority of Committee
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28
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12.2
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Identity of Committee
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28
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12.3
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Duties of Committee
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29
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12.4
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Valuation of Stock.
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29
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12.5
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Compliance with ERISA
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29
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12.6
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Action by Committee
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29
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12.7
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Execution of Documents
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29
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12.8
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Adoption of Rules
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29
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12.9
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Responsibilities to Participants
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29
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12.10
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Alternative Payees in Event of Incapacity
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30
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12.11
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Indemnification by Employers
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30
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12.12
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Nonparticipation by Interested Member
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30
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Section 13.
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Adoption, Amendment, or Termination of the Plan
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30
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13.1
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Adoption of Plan by Other Employers
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30
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13.2
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Plan Adoption Subject to Qualification
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30
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13.3
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Right to Amend or Terminate
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30
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Section 14.
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Miscellaneous Provisions
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31
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14.1
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Plan Creates No Employment Rights
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31
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14.2
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Nonassignability of Benefits
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31
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14.3
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Limit of Employer Liability
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31
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14.4
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Treatment of Expenses
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31
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14.5
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Number and Gender
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31
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14.6
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Nondiversion of Assets
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31
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14.7
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Separability of Provisions
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32
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14.8
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Service of Process
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32
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14.9
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Governing State Law
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32
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14.10
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Employer Contributions Conditioned on Deductibility
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32
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14.11
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Unclaimed Accounts
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32
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14.12
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Qualified Domestic Relations Order
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32
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14.13
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Use of Electronic Mediums to Provide Notices and Make Participant Elections
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33
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(ii)
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Section 15.
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Top-Heavy Provisions
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33
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15.1
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Top-Heavy Plan
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33
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15.2
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Definitions
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33
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15.3
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Top-Heavy Rules of Application
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34
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15.4
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Minimum Contributions
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35
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15.5
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Top-Heavy Provisions Control in Top-Heavy Plan
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35
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(iii)
TERRITORIAL SAVINGS BANK
EMPLOYEE STOCK OWNERSHIP PLAN
Section 1.
Plan Identity
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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
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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
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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
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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.
-5-
“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:
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(i)
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to acquire qualifying Employer securities as defined in Treasury Regulations § 54.4975-12;
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(ii)
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to repay such Stock Obligation; or
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(iii)
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to repay a prior exempt loan.
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“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.
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3.4-2.
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Leased Employees are not eligible to participate in the Plan.
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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 options, if available under the Plan. The other
investment options shall satisfy the requirements of Regulations under Section 404(c) of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”).
6.4-3 The Plan may transfer the portion of the Participant’s Account subject to the diversification election to another qualified
defined contribution plan of the Employer that offers at least three investment options satisfying the requirements of the Regulations under Section 404(c) of ERISA.
Section 7.
Voting Rights and Dividends on Stock
.
7.1
Voting and Tendering of
Stock
.
7.1-1. The Trustee generally shall vote all shares of Stock held under the Plan in accordance with the
written instructions of the Committee. However, if any Employer has a registration-type class of securities within the meaning of Section 409(e)(4) of the Code, or if a matter submitted to the holders of the Stock involves a merger,
consolidation, recapitalization, reclassification, liquidation, dissolution, or sale of substantially all assets of an entity, then (i) the shares of Stock which have been allocated to Participants’ Accounts shall be voted by the Trustee
in accordance with the Participants’ written instructions, and (ii) the Trustee shall vote any unallocated Stock, allocated Stock for which it has received no voting instructions, and Stock for which Participants vote to
“abstain,” in the same proportions as it votes the allocated Stock for which it has received instructions from Participants. In the event no shares of Stock have been allocated to Participants’ Accounts at the time Stock is to be
voted and any exempt loan which may be outstanding is not in default, each Participant shall be deemed to have one share of Stock allocated to his or her Account for the sole purpose of providing the Trustee with voting instructions.
Notwithstanding any provision hereunder to the contrary, all unallocated shares of Stock must be voted by the Trustee in a manner determined by the
Trustee to be for the exclusive benefit of the Participants and Beneficiaries. Whenever such voting rights are to be exercised, the Employers shall provide the Trustee, in a timely manner, with the same notices and other materials as are provided to
other holders of the Stock, which
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the Trustee shall distribute to the Participants. The Participants shall be provided with adequate opportunity to deliver their instructions to the Trustee
regarding the voting of Stock allocated to their Accounts. The instructions of the Participants’ with respect to the voting of allocated shares hereunder shall be confidential.
7.1-2 In the event of a tender offer, Stock shall be tendered by the Trustee in the same manner as set forth above with respect to the
voting of Stock. Notwithstanding any provision hereunder to the contrary, Stock must be tendered by the Trustee in a manner determined by the Trustee to be for the exclusive benefit of the Participants and Beneficiaries.
7.2
Application of Dividends
.
7.2-1
Stock Dividends
. Dividends on Stock which are received by the Trustee in the form of additional Stock shall be retained in the Stock Fund, and shall be allocated among the Participants’ Accounts and
the Unallocated Stock Fund in accordance with their holdings of the Stock on which the dividends are paid.
7.2-2
Cash
Dividends
. The treatment of dividends paid in cash shall be determined after consideration to whether the cash dividends are paid on Stock held in Participants’ Accounts or the Unallocated Stock Fund.
(i)
On Stock in Participants’ Accounts
. (A)
Employer Exercises Discretion
. Dividends on Stock credited to
Participants’ Accounts which are received by the Trustee in the form of cash shall, at the direction of the Employer paying the dividends, either (i) be credited to the Accounts in accordance with Section 8.4(c) and invested as part
of the Investment Fund, (ii) be distributed immediately to the Participants in proportion with the Participants’ Stock Fund Account balance (iii) be distributed to the Participants within 90 days of the close of the Plan Year in which
paid in proportion with the Participants’ Stock Fund Account balance or (iv) be used to make payments on the Stock Obligation. If dividends on Stock allocated to a Participant’s Account are used to repay the Stock Obligation, Stock
with a fair market value equal to the dividends so used must be allocated to such Participant’s Account in lieu of the dividends.
(B)
Participant Exercises Discretion over Dividend
. In addition, in the sole discretion of the Employer, the Employer may grant Participants the right to elect: (I) to have cash dividends paid on shares of
Stock credited to such Participants’ Stock Fund Accounts distributed to the Participant, or (II) to leave the cash dividends allocated to the Participant’s Account in the Plan, to be credited to the Stock Fund Account and invested in
shares of Stock. Dividends on which such election may be made will be fully vested in the Participant (even if not otherwise vested, absent the ability to make such election). Accordingly, the Employer may choose to offer this election only to
Participants who are fully vested in their Account. In the event the Employer elects to give Participants the right to determine the treatment of such dividends, the Participant’s election shall be made by filing with the Committee the
appropriate written direction as provided by the Committee at such time and in accordance with such procedures and limitations which the Committee may from time to time establish; provided, however, that the procedures established by the Committee
shall provide a reasonable opportunity to change the election at least annually, may establish a default election if a Participant fails to make an affirmative election within the time established for making elections, may provide that the election
is applicable for the Plan Year and cannot be revoked with respect to such Plan Year, shall otherwise be implemented in a manner such that the dividends paid or reinvested will constitute “applicable dividends” which may be deducted under
Code Section 404(k), and are in accordance with applicable guidance issued or to be issued by the Secretary of the Treasury. If the Employer elects to give Participants the right to exercise the discretion in this Paragraph 7.2-2(i)(B), the
ability to make such election shall be available to the Participant with respect to dividends paid for the entire Plan Year.
-15-
(ii)
On Stock in the Unallocated Stock Fund
. Dividends received on shares of Stock
held in the Unallocated Stock Fund shall be applied to the repayment of principal and interest then due on the Stock Obligation used to acquire such shares. If the amount of dividends exceeds the amount needed to repay such principal and interest
(including any prepayments of principal and interest deemed advisable by the Employer), then in the sole discretion of the Committee, the excess shall: (A) be allocated to Active Participants on a non-discriminatory basis, consistent with
Section 7.2-2(i) above, and in the discretion of the Committee, treated as a dividend described in such Section, or (B) be deemed to be general earnings of the Trust Fund and used for paying appropriate Plan or Trust related expenditures
for the Plan Year. Notwithstanding the foregoing, dividends paid on a share of Stock may not be used to make payments on a particular Stock Obligation unless the share was acquired with the proceeds of such loan or a refinancing of such loan.
Section 8.
Adjustments to Accounts
.
8.1
ESOP Allocations
. Amounts available for allocation for a particular Plan Year will be divided into two categories. The first category relates to shares of Stock released from the Unallocated Stock
Fund attributable to using cash dividends to make Stock Obligation payments. The second category relates to contributions made by the Employer, shares of Stock released from the Unallocated Stock Fund on the basis of Employer contributions (or on
the basis of the complete repayment of the Stock Obligation through the sale or other disposition of Stock in the Unallocated Stock Fund) and amounts forfeited from Stock Fund Accounts pursuant to Section 9.5.
8.1-1. Shares of Stock attributable to the first category will be allocated to the Stock Fund Accounts of eligible Participants as
follows:
(i) first, if dividends paid on shares of Stock held in Participants’ Stock Fund Accounts are used to make
payments on an Stock Obligation, there shall be allocated to each such account a number of shares of Stock released from the Unallocated Stock Fund with a fair market value (determined as of the Valuation Date coincident with or immediately
preceding the loan payment date) that at least equals the amount of dividends so used,
(ii) second, if necessary, any
remaining shares of Stock shall be applied to reinstate amounts forfeited from Stock Fund Accounts of former employees who are entitled to a reinstatement under Section 9.5, and
(iii) finally, any remaining shares of Stock shall be allocated as a general investment gain in proportion to the number of shares held in
the Active Participants’ Stock Fund Accounts as of the last Valuation Date of the Plan Year for which they are allocated in the same manner as described in Section 7.2-2(i).
8.1-2. Shares of Stock or cash attributable to the second category (i.e., Employer contributions, Stock released from the Unallocated
Stock Fund on the basis of Employer contributions, and amounts forfeited) will be allocated to the Stock Fund Accounts or Investment Fund Accounts, as the case may be, pro rata, in proportion to the 415 Compensation of each Active Participant that
was earned by such Participant during the period of the Plan Year in which such person participated in the Plan compared to total 415 Compensation for all Active Participants.
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8.1-3. Shares of Stock or cash attributable to contributions made under
Section 4.1-2 shall be allocated specifically to the Participants on whose behalf such contributions were made.
8.2
Charges to
Accounts
. When a Valuation Date occurs, any distributions made to or on behalf of any Participant or Beneficiary since the last preceding Valuation Date shall be charged to the proper Accounts maintained for that Participant or Beneficiary.
8.3
Stock Fund Account
. Subject to the provisions of Sections 5 and 8.1, as of the last day of each Plan Year, the
Trustee shall credit to each Participant’s Stock Fund Account: (a) the Participant’s allocable share of Stock purchased by the Trustee or contributed by the Employer to the Trust Fund for that year; (b) the Participant’s
allocable share of the Stock that is released from the Unallocated Stock Fund for that year; (c) the Participant’s allocable share of any forfeitures of Stock arising under the Plan during that year; and (d) any stock dividends
declared and paid during that year on Stock credited to the Participant’s Stock Fund Account.
If, in any Plan Year during which an
outstanding Stock Obligation exists, the Employer directs the Trustee to sell or otherwise dispose of a number of shares of Stock in the Unallocated Stock Fund sufficient to repay, in its entirety, the Stock Obligations, and following such
repayment, there remains Stock or other assets in the Unallocated Stock Fund, such Stock or other assets shall be allocated as of the last day of the Plan Year in which the repayment occurred as earnings of the Plan to Active Participants, in
proportion to the number of shares held in Active Participants’ Stock Fund Accounts.
8.4
Investment Fund Account
.
Subject to the provisions of Sections 5 and 8.1 as of the last day of each Plan Year, the Trustee shall credit to each Participant’s Investment Fund Account: (a) the Participant’s allocable share of any contribution for that year made
by the Employer in cash or in property other than Stock that is not used by the Trustee to purchase Employer Stock or to make payments due under a Stock Obligation; (b) the Participant’s allocable share of any forfeitures from the
Investment Fund Accounts of other Participants arising under the Plan during that year; (c) any cash dividends paid during that year on Stock credited to the Participant’s Stock Fund Account, other than dividends which are paid directly to
the Participant and other than dividends which are used to repay Stock Obligation; and (d) the share of the net income or loss of the Trust Fund properly allocable to that Participant’s Investment Fund Account, as provided in
Section 8.5.
8.5
Adjustment to Value of Trust Fund
. As of the last day of each Plan Year, the Trustee shall determine:
(i) the net worth of that portion of the Trust Fund which consists of properties other than Stock (the “Investment Fund”); and (ii) the increase or decrease in the net worth of the Investment Fund since the last day of the
preceding Plan Year. The net worth of the Investment Fund shall be the fair market value of all properties held by the Trustee under the Trust Agreement other than Stock, net of liabilities other than liabilities to Participants and their
beneficiaries. The Trustee shall allocate to the Investment Fund Account of each Participant that percentage of the increase or decrease in the net worth of the Investment Fund equal to the ratio which the balances credited to the Participant’s
Investment Fund Account bear to the total amount credited to all Participants’ Investments Fund Accounts. This allocation shall be made after application of Section 7.2, but before application of Sections 8.1, 8.4 and 5.1.
8.6
Participant Statements
. Each Plan Year, the Trustee will provide each Participant with a statement of his or her Account balances, and
the vested percentage thereof, as of the last day of the Plan Year.
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Section 9.
Vesting of Participants’ Interests
.
9.1
Vesting in Accounts
. A Participant’s vested interest in his Account shall be based on his Vesting Years in accordance with the
following table, subject to the balance of this Section 9:
|
|
|
|
|
|
Vesting Years
|
|
Percentage of
Interest Vested
|
|
|
Fewer than 3
|
|
0
|
%
|
|
3 or more
|
|
100
|
%
|
9.2
Computation of Vesting Years
. For purposes of this Plan, a “Vesting
Year” means generally a Plan Year in which an Eligible Employee has performed at least 1,000 Hours of Service, beginning with the first Plan Year in which the Eligible Employee has completed an Hour of Service with the Employer, and including
Service with other Employers as provided in the definition of “Service.” Notwithstanding the above, an Eligible Employee who was employed with the Bank prior to the Effective Date shall receive credit for vesting purposes for each calendar
year, up to three years of continuous employment with the Bank in which such Eligible Employee completed 1,000 Hours of Service (such years shall also be referred to as “Vesting Years”). However, a Participant’s Vesting Years shall be
computed subject to the following conditions and qualifications:
9.2-1 A Participant’s Vesting Years shall not include
any Service prior to the date on which an Employee attains age 18.
9.2-2 To the extent applicable, a Participant’s
vested interest in his Account accumulated before five (5) consecutive one year Breaks in Service shall be determined without regard to any Service after such five consecutive Breaks in Service. Further, if a Participant has five
(5) consecutive one year Breaks in Service before his interest in his Account has become vested to some extent, pre-Break in Service years of Service shall not be required to be taken into account for purposes of determining his post-Break in
Service vested percentage.
9.2-3 To the extent applicable, in the case of a Participant who has five (5) or more
consecutive one year Breaks in Service, the Participant’s pre-Break in Service will count in vesting of the Employer-derived post-Break in Service accrued benefit only if either:
(i) such Participant has any nonforfeitable interest in the accrued benefit attributable to Employer contributions at the time of
severance from employment, or
(ii) upon returning to Service the number of consecutive one year Breaks in Service is less
than the number of years of Service.
9.2-4 Notwithstanding any provision of the Plan to the contrary, calculation of
service for determining Vesting Years with respect to Qualified Military Service will be provided in accordance with Section 414(u) of the Code.
9.2-5 To the extent applicable, if any amendment changes the vesting schedule, including an automatic change to or from a top-heavy vesting schedule, any Participant with three (3) or more Vesting Years may, by
filing a written request with the Employer, elect to have his vested percentage computed under the vesting schedule in effect prior to the amendment. The election period must begin not later than the later of sixty (60) days after the amendment
is adopted, the amendment becomes effective, or the Participant is issued written notice of the amendment by the Employer or the Committee.
-18-
9.3
Full Vesting Upon Certain Events
.
9.3-1 Notwithstanding Section 9.1, a Participant’s interest in his Account shall fully vest on the Participant’s Normal
Retirement Date. The Participant’s interest in his or her Account shall also fully vest in the event that his Service is terminated by Disability or by death. Participants who die while performing Qualified Military Service shall be deemed to
be fully vested, in accordance with the HEART Act of 2008.
9.3-2 The Participant’s interest in his Account shall also
fully vest in the event of a “Change in Control” of the Bank, or the Company. For these purposes, “Change in Control” shall mean an event of a nature that (i) would be required to be reported in response to Item 5.01 of
the Current Report on Form 8K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”); or (ii) results in a Change in Control of the Bank or the Company within
the meaning of the Home Owners’ Loan Act, as amended, and applicable rules and regulations promulgated thereunder as in effect at the time of the Change in Control (collectively, the “HOLA”); or (iii) without limitation such a
Change in Control shall be deemed to have occurred at such time as (a) any “Person” (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the “beneficial owner” (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of the Bank or the Company representing 25% or more of the Bank’s or the Company’s outstanding securities except for any securities purchased by the Bank’s employee stock
ownership plan or trust; or (b) individuals who constitute the Board on the date hereof (the “Incumbent Board”) cease for any reason to constitute at least a majority thereof,
provided
,
however
, that this sub-section
(b) shall not apply if the Incumbent Board is replaced by the appointment by a Federal banking agency of a conservator or receiver for the Bank and,
provided further
that any person becoming a director subsequent to the date hereof whose
election was approved by a vote of at least two-thirds of the directors comprising the Incumbent Board or whose nomination for election by the Company’s stockholders was approved by the same Nominating Committee serving under an Incumbent
Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Company, or similar
transaction in which the Bank or Company is not the surviving institution occurs; or (d) a proxy statement is distributed soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking
stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the Plan are to be
exchanged for or converted into cash or property or securities not issued by the Company; or (e) a tender offer is made for 25% or more of the voting securities of the Company and the shareholders owning beneficially or of record 25% or more of
the outstanding securities of the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. Notwithstanding anything herein to the contrary, the
reorganization of the Company by way of a second step conversion shall not be considered a “Change in Control.”
9.3-3 Upon a Change in Control described in 9.3-2, the Plan shall be terminated and the Plan Administrator shall direct the Trustee to sell a sufficient amount of Stock from the Unallocated Stock Fund to repay any outstanding Stock
Obligation in full. The proceeds of such sale shall be used to repay such Stock Obligation. After repayment of the Stock Obligation, all remaining shares in the Unallocated Stock Fund (or the proceeds thereof, if applicable) shall be deemed to be
earnings and shall be allocated in accordance with the requirements of Section 8.3.
-19-
9.4
Full Vesting Upon Plan Termination
. Notwithstanding Section 9.1, a
Participant’s interest in his Account shall fully vest upon termination of this Plan or upon the permanent and complete discontinuance of contributions by his Employer. In the event of a partial termination, the interest of each affected
Participant shall fully vest with respect to that part of the Plan which is terminated. A partial termination of the Plan shall be determined by the Internal Revenue Service Commissioner based on the facts and circumstances of the particular case in
accordance with Code Section 411(d)(3) and the corresponding Treasury Regulations issued thereunder.
9.5
Forfeiture, Repayment,
and Restoral
. If a Participant’s Service terminates before his interest in his Account is fully vested, that portion which has not vested shall be forfeited after a one-year Break in Service. If a Participant’s Service terminates
prior to having any portion of his Account become vested, such Participant shall be deemed to have received a distribution of his vested interest immediately upon his termination of Service.
If a Participant who has suffered a forfeiture of the nonvested portion of his Account returns to Service before he has five (5) consecutive
one-year Breaks in Service, the nonvested portion shall be restored, provided that, if the Participant had received a distribution of his vested Account balance, the amount distributed shall be repaid prior to such restoral. The Participant may
repay such amount at any time within five years after he has returned to Service. The amount repaid shall be credited to his Account at the time it is repaid; an additional amount equal to that portion of his Account which was previously forfeited
shall be restored to his Account at the same time from other Employees’ forfeitures and, if such forfeitures are insufficient, then from amounts allocated in accordance with Section 8.1-1(ii), and if insufficient, then from a special
contribution by his Employer for that year. A Participant who was deemed to have received a distribution of his vested interest in the Plan shall have his Account restored as of the first day on which he performs an Hour of Service after his return.
In addition, if a Participant did not receive a distribution of his vested Account balance but his non-vested Account balance was
forfeited after a one-year Break in Service, such nonvested Account balance shall be restored if the Plan terminates before the Participant has a five-year Break in Service. If the Participant did not receive a distribution of his vested Account
balance, any forfeiture restored shall include earnings that would have been credited to the Account but for the forfeiture.
9.6
Accounting for Forfeitures
. If a portion of a Participant’s Account is forfeited, Stock allocated to said Participant’s Account shall be forfeited only after other assets are forfeited. If interests in more than one class of
Stock have been allocated to a Participant’s Account, the Participant must be treated as forfeiting the same proportion of each class of Stock. A forfeiture shall be charged to the Participant’s Account as of the first day of the first
Valuation Period in which the forfeiture becomes certain pursuant to Section 9.5. Except as otherwise provided in that Section, a forfeiture shall be added to the contributions of the terminated Participant’s Employer which are to be
credited to other Participants pursuant to Section 4.1 as of the last day of the Plan Year in which the forfeiture becomes certain.
9.7
Vesting and Nonforfeitability
. A Participant’s interest in his Account which has become vested shall be nonforfeitable for any reason.
-20-
Section 10.
Payment of Benefits
.
10.1
Benefits for Participants
. For a Participant whose Service ends for any reason, distribution will be made to or for the benefit of the
Participant or, in the case of the Participant’s death, his Beneficiary, by payment in a lump sum, in accordance with Section 10.2. Prior to any such distribution, any Participant entitled to a distribution will receive a form upon which
the Participant can elect the manner of such distribution (e.g., whether to receive the distribution directly or transfer such distribution to an individual retirement account or other tax-qualified plan), a special tax notice regarding the
consequences of such distribution, and, if applicable, that the Participant has the right not to consent to a distribution at such time.
If a Participant so desires, he may direct how his benefits are to be paid to his Beneficiary. Notice to the Participant with regard to having the right to elect the manner in which his vested Account balance will be distributed to him may
be given up to 180 days before the first day of the first period for which an amount is payable. If a deceased Participant did not file a direction with the Committee, the Participant’s benefits shall be distributed to his Beneficiary in a lump
sum. Notwithstanding any provision to the contrary, if the value of a Participant’s vested Account balance at the time of any distribution does not exceed $1,000, then such Participant’s vested Account shall be distributed, without regard
to whether the Participant consents, in a lump sum within 60 days after the end of the Plan Year in which employment terminates. If the value of a Participant’s vested Account balance is in excess of $5,000, then his benefits shall not be paid
prior to his Normal Retirement Date unless he elects an early payment date in a written election filed with the Committee. A Participant may modify such an election at any time, provided any new benefit payment date is at least 30 days after a
modified election is delivered to the Committee. Failure of a Participant to consent to a distribution prior his Normal Retirement Date shall be deemed to be an election to defer commencement of payment of any benefit under this section.
Notwithstanding the foregoing, unless a Participant elects to receive a distribution, the Plan administrator shall transfer accounts of $1,000 or more, but not exceeding $5,000, in a direct rollover to an individual retirement plan designated by the
Plan administrator in accordance with Code Section 401(a)(31)(B) and the regulations promulgated thereunder. All distributions of $5,000 or less that are made pursuant to this Section without the Participant’s consent shall be made in
cash.
10.2
Time for Distribution
.
10.2-1 If the Participant and, if applicable, with the consent of the Participant’s spouse, elects the distribution of the
Participant’s Account balance in the Plan, distribution shall commence as soon as practicable following his termination of Service, but no later than one year after the close of the Plan Year in which the Participant severs employment by reason
of attainment of Normal Retirement Age under the Plan, Disability, or death, or which is the fifth Plan Year following the Plan Year in which the Participant otherwise severs employment, except that this clause shall not apply if the Participant is
reemployed by the Employer before distribution is required to begin.
10.2-2 Unless the Participant elects otherwise, the
distribution of the balance of a Participant’s Account shall commence not later than the 60th day after the latest of the close of the Plan Year in which -
(i) the Participant attains the age of 65;
(ii) occurs the tenth anniversary of the year in which the Participant commenced participation in the Plan; or
(iii) the Participant terminates his Service with the Employer.
10.2-3 Minimum Distribution
Requirements.
-21-
(i) General Rules.
(A) TEFRA Section 242(b)(2) Elections. Notwithstanding the other provisions of this Section 10, distributions may be made under
a designation made before January 1, 1984, in accordance with Section 242(b)(2) of the Tax Equity and Fiscal Responsibility Act (“TEFRA”) and the provisions of the Plan that relate to Section 242(b)(2) of TEFRA.
(ii) Time and Manner of Distribution.
(A) Required Beginning Date. The Participant’s entire interest will be distributed, or begin to be distributed, to the Participant no later than the Participant’s Required Beginning Date.
(B) Death of Participant before Distributions Begin. If the Participant dies before distributions begin, the Participant’s entire
interest will be distributed, or begin to be distributed, no later than as follows:
(I) if the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary, then, distributions to the surviving spouse will begin by December 31 of the calendar year immediately
following the calendar year in which the Participant died, or by December 31 of the calendar year in which the Participant would have attained age 70
1
/
2
, if later.
(II) if the Participant’s surviving spouse is not the
Participant’s sole Designated Beneficiary, then, distributions to the Designated Beneficiary will begin by December 31 of the calendar year immediately following the calendar year in which the Participant died.
(III) if there is no Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, the
Participant’s entire interest will be distributed by December 31 of the calendar year containing the fifth anniversary of the Participant’s death.
(IV) if the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary and the surviving spouse dies after
the Participant but before distributions to the surviving spouse begin, this Section 10.2.3(ii)(B), other than Section 10.2.3(ii)(B)(I), will apply if the surviving spouse were the Participant.
For purposes of this Section 10.2.3(ii)(B) and Section 10.2.3(iv), unless Section 10.2.3(ii)(IV) applies, distributions are
considered to begin on the Participant’s Required Beginning Date. If Section 10.2.3(ii)(IV) applies, distributions are considered to begin on the date distributions are required to begin to the surviving spouse under
Section 10.2.3(ii)(B)(I).
(C) Forms of Distribution. Unless the Participant’s interest is distributed in a lump
sum on or before the Required Beginning Date, as of the first distribution calendar year distributions will be made in accordance with Sections 10.2.3(iii) and Section 10.2.3(iv).
(iii) Required Minimum Distributions During Participant’s Lifetime.
(A) Amount of Required Minimum Distribution for Each Distribution Calendar Year. During the Participant’s lifetime, the minimum
amount that will be distributed for each Distribution Calendar Year is the lesser of:
(I) the quotient obtained by
dividing the Participant’s Account Balance by the distribution period in the Uniform Lifetime Table (as set forth in Section 1.401(a)(9)-9 of the Treasury Regulations), using the Participant’s age as of the Participant’s birthday
in the Distribution Calendar Year; or
-22-
(II) if the Participant’s sole Designated Beneficiary for the Distribution Calendar
Year is the Participant’s spouse, the quotient obtained by dividing the Participant’s Account Balance by the number in the Joint and Last Survivor Table set forth in Section 1.401(a)(9)-9 of the Treasury Regulations, using the
Participant’s and spouse’s ages as of the Participant’s and spouse’s birthdays in the Distribution Calendar Year.
(B) Lifetime Required Minimum Distributions Continue through Year of Participant’s Death. Required minimum distributions will be determined under this Section 10.2.3 beginning with the first Distribution
Calendar Year and up to and including the Distribution Calendar Year that includes the Participant’s date of death.
(iv) Required Minimum Distributions After Participant’s Death.
(A) Death On or After Date Distributions
Begin.
(I) Participant Survived by Designated Beneficiary. If the Participant dies on or after the date distributions
begin and there is a Designated Beneficiary, the minimum amount that will be distributed for each Distribution Calendar Year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s Account Balance
by the longer of the remaining Life Expectancy of the Participant or the remaining Life Expectancy of the Participant’s Designated Beneficiary, determined as follows:
The Participant’s remaining Life Expectancy is calculated using the age of the Participant in the year of death, reduced by one for each subsequent
year. If the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary, the remaining Life Expectancy of the surviving spouse is calculated for each Distribution Calendar Year after the year of the Participant’s
death using the surviving spouse’s age as of the spouse’s birthday in that year. For Distribution Calendar Years after the year of the surviving spouse’s death, the remaining Life Expectancy of the surviving spouse is calculated using
the age of the surviving spouse as of the spouse’s birthday in the calendar year of the spouse’s death, reduced by one for each subsequent calendar year.
If the Participant’s surviving spouse is not the Participant’s sole Designated Beneficiary, the Designated Beneficiary’s
remaining Life Expectancy is calculated using the age of the Beneficiary in the year following the year of the Participant’s death, reduced by one for each subsequent year.
(II) No Designated Beneficiary. If the Participant dies on or after the date distributions begin and there is no Designated Beneficiary
as of September 30 of the year after the year of the Participant’s death, the minimum amount that will be
-23-
distributed for each Distribution Calendar Year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s
Account Balance by the Participant’s remaining Life Expectancy calculated using the age of the Participant in the year of death, reduced by one for each subsequent year.
(B) Death before Date Distributions Begin.
(I) Participant Survived by Designated Beneficiary. If the Participant dies before the date distributions begin and there is a Designated Beneficiary, the minimum amount that will be distributed for each Distribution
Calendar Year after the year of the Participant’s death is the quotient obtained by dividing the Participant’s Account Balance by the remaining Life Expectancy of the Participant’s Designated Beneficiary, determined as provided in
Section 10.2.3(iv)(A).
(II) No Designated Beneficiary. If the Participant dies before the date distributions begin
and there is no Designated Beneficiary as of September 30 of the year following the year of the Participant’s death, distribution of the Participant’s entire interest will be completed by December 31 of the calendar year
containing the fifth anniversary of the Participant’s death.
(III) Death of Surviving Spouse Before Distributions to
Surviving Spouse Are Required to Begin. If the Participant dies before the date distributions begin, the Participant’s surviving spouse is the Participant’s sole Designated Beneficiary, and the surviving spouse dies before distributions
are required to begin to the surviving spouse under Section 10.2.3(ii)(B)(I), this Section 10.2.3(iv)(B) will apply as if the surviving spouse were the Participant.
(iv) Definitions.
(A) “Designated Beneficiary.” The individual who is designated as the Beneficiary under the Plan and is the Designated Beneficiary under Section 401(a)(9) of the Code and Section 1.401(1)(9)-1, Q&A-4, of the Treasury
Regulations.
(B) “Distribution Calendar Year.” A calendar year for which a minimum distribution is required. For
distributions beginning before the Participant’s death, the first Distribution Calendar Year is the calendar year immediately preceding the calendar year which contains the Participant’s required beginning date. For distributions beginning
after the Participant’s death, the first Distribution Calendar Year is the calendar year in which distributions are required to begin under Section 10.2.3(ii)(B). The required minimum distribution for the Participant’s first
Distribution Calendar Year will be made on or before the Participant’s required beginning date. The required minimum distribution for other Distribution Calendar Years, including the required minimum distribution for the Distribution Calendar
Year in which the Participant’s required beginning date occurs, will be made on or before December 31 of that Distribution Calendar Year.
(C) “Life Expectancy.” Life Expectancy as computed by use of the Single Life Table in Section 1.401(a)(9)-9 of the Treasury Regulations.
(D) “Participant’s Account Balance.” The Account balance as of the last Valuation Date in the calendar year immediately
preceding the Distribution Calendar Year (valuation calendar year) increased by the amount of any contributions made and allocated or
-24-
forfeitures allocated to the Account balance as of dates in the valuation calendar year after the Valuation Date and decreased by distributions made in the
valuation calendar year after the Valuation Date. The Account balance for the valuation calendar year includes any amounts rolled over or transferred to the Plan either in the valuation calendar year or in the Distribution Calendar Year if
distributed or transferred in the valuation calendar year.
(E)
“Required Beginning Date.” The Required Beginning Date shall be, with respect to a 5-percent owner (as defined in Code Section 416), not later than April 1 of the calendar year next following the calendar year in which the
Participant attains age 70
1
/
2
, and (2) with respect to all other Participants, the Required Beginning Date shall be not
later than April 1 of the calendar year following the calendar year in which the Participant attains age 70
1
/
2
, or, if
later, the year in which the Participant retires.
10.3
Marital Status
. The Committee, the Plan, the Trustee,
and the Employers shall be fully protected and discharged from any liability to the extent of any benefit payments made as a result of the Committee’s good faith and reasonable reliance upon information obtained from a Participant and his
Employer as to his marital status.
10.4
Delay in Benefit Determination
. If the Committee is unable to determine the benefits
payable to a Participant or Beneficiary on or before the latest date prescribed for payment pursuant to Section 10.1 or 10.2, the benefits shall in any event be paid within 60 days after they can first be determined, with whatever makeup
payments may be appropriate in view of the delay.
10.5
Accounting for Benefit Payments
. Any benefit payment shall be charged
to the Participant’s Account as of the first day of the Valuation Period in which the payment is made.
10.6
Options to Receive
Stock
. Unless ownership of virtually all Stock is restricted to active Employees and qualified retirement plans for the benefit of Employees pursuant to the certificates of incorporation or by-laws of the Employers issuing Stock, a
terminated Participant or the Beneficiary of a deceased Participant may instruct the Committee to distribute the Participant’s entire vested interest in his Account in the form of Stock. In that event, the Committee shall apply the
Participant’s vested interest in the Investment Fund to purchase sufficient Stock from the Stock Fund or from any owner of Stock to make the required distribution. In all other cases, other than as specifically set forth in Section 10.1,
the Participant’s vested interest in the Stock Fund shall be distributed in shares of Stock, and his vested interest in the Investment Fund shall be distributed in cash. If Stock acquired with the proceeds of a Stock Obligation available for
distribution consist of more than one class of Stock, the Participant (or Beneficiary, if applicable) must receive substantially the same proportion of each such class.
Any Participant who receives Stock pursuant to Section 10.1, and any person who has received Stock from the Plan or from such a Participant by reason of the Participant’s death or incompetence, by reason of
divorce or separation from the Participant, or by reason of a rollover contribution described in Section 402(a)(5) of the Code, shall have the right to require the Employer which issued the Stock to purchase the Stock for its current fair
market value (hereinafter referred to as the “put right”). The put right shall be exercisable by written notice to the Committee during the first 60 days after the Stock is distributed by the Plan, and, if not exercised in that period,
during the first 60 days in the following Plan Year after the Committee has communicated to the Participant its determination as to the Stock’s current fair market value. However, the put right shall not apply to the extent that the Stock, at
the time the put right would otherwise be exercisable, may be sold on an established market in accordance with federal and state securities laws and regulations. Similarly, the put option shall not apply with respect to the portion of a
Participant’s Account which the Employee elected to have reinvested under Code Section 401(a)(28)(B). If the put right is exercised,
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the Trustee may, if so directed by the Committee in its sole discretion, assume the Employer’s rights and obligations with respect to purchasing the
Stock. Notwithstanding anything herein to the contrary, in the case of a plan established by a bank (as defined in Code Section 581), the put option shall not apply if prohibited by a federal or state law and Participants are entitled to elect
their benefits be distributed in cash.
The Employer or the Trustee, as the case may be, may elect to pay for the Stock in equal periodic
installments, not less frequently than annually, over a period beginning not later than 30 days after the exercise of the put right and not exceeding five years, with adequate security and interest at a reasonable rate on the unpaid balance, all
such terms to be set forth in a promissory note delivered to the seller with normal terms as to acceleration upon any uncured default.
Nothing contained herein shall be deemed to obligate any Employer to register any Stock under any federal or state securities law or to create or maintain a public market to facilitate the transfer or disposition of any Stock. The put right
described herein may only be exercised by a person described in the second preceding paragraph, and may not be transferred with any Stock to any other person. As to all Stock purchased by the Plan in exchange for any Stock Obligation, the put right
shall be nonterminable. The put right for Stock acquired through a Stock Obligation shall continue with respect to such Stock after the Stock Obligation is repaid or the Plan ceases to be an employee stock ownership plan.
10.7
Restrictions on Disposition of Stock
. Except in the case of Stock which is traded on an established market, a Participant who receives
Stock pursuant to Section 10.1, and any person who has received Stock from the Plan or from such a Participant by reason of the Participant’s death or incompetence, by reason of divorce or separation from the Participant, or by reason of a
rollover contribution described in Section 402(a)(5) of the Code, shall, prior to any sale or other transfer of the Stock to any other person, first offer the Stock to the issuing Employer and to the Plan at the greater of (i) its current
fair market value, or (ii) the purchase price offered in good faith by an independent third party purchaser. This restriction shall apply to any transfer, whether voluntary, involuntary, or by operation of law, and whether for consideration or
gratuitous. Either the Employer or the Trustee may accept the offer within 14 days after it is delivered. Any Stock distributed by the Plan shall bear a conspicuous legend describing the right of first refusal under this Section 10.7, as well
as any other restrictions upon the transfer of the Stock imposed by federal and state securities laws and regulations.
10.8
Continuing Loan Provisions; Creations of Protections and Rights
.
Except as otherwise provided in Sections 10.6 and 10.7 and this Section, no shares of Employer Stock held or distributed by the Trustee may be subject to a put,
call or other option, or buy-sell arrangement. The provisions of this Section shall continue to be applicable to such Stock even if the Plan ceases to be an employee stock ownership plan under Section 4975(e)(7) of the Code.
10.9
Direct Rollover of Eligible Distribution
. A Participant or distributee may elect, at the time and in the manner prescribed by the
Trustee or the Committee, to have any portion of an eligible rollover distribution paid directly to an eligible retirement plan specified by the Participant or distributee in a direct rollover.
10.9-1 An “eligible rollover” is any distribution that does not include: any distribution that is one of a series of
substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the distributee or the joint lives (or joint life expectancies) of the Participant and the Participant’s Beneficiary, or for a
specified period of ten years or more; any distribution to the extent such distribution is required under Code Section 401(a)(9); any hardship distribution described in Section 401(k)(2)(B)(i)(IV) of the Code; and the portion of any
distribution that is not included in gross income (determined without regard to the exclusion for net unrealized
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appreciation with respect to employer securities). A portion of a distribution shall not fail to be an eligible rollover distribution merely because the
portion consists of after-tax employee contributions which are not includible in gross income. However, such portion may be transferred only to an individual retirement account or annuity described in section 408(a) or (b) of the Code, or to a
qualified defined contribution plan described in section 401(a) or 403(a) of the Code that agrees to separately accounting for the portion of such distribution which is includible in gross income and the portion of such distribution which is not so
includible.
10.9-2 An “eligible retirement plan” is an individual retirement account described in Code
Section 408(a), an individual retirement annuity described in Code Section 408(b), a deemed individual retirement account described in Code Section 408(q), an annuity plan described in Code Section 403(a), a Roth individual
retirement account in accordance with Code Section 408A(e), or a qualified trust described in Code Section 401(a), that accepts the distributee’s eligible rollover distribution. An eligible retirement plan shall also include an
annuity contract described in Section 403(b) of the Code and an eligible plan under Section 457(b) of the Code which is maintained by a state, or any agency or instrumentality of a state or political subdivision of a state and which agrees
to separately account for amounts transferred into such plan from this Plan.
10.9-3 A “direct rollover” is a
payment by the Plan to the eligible retirement plan specified by the distributee.
10.9-4 The term “distributee”
shall refer to a deceased Participant’s Spouse or a Participant’s former Spouse who is the alternate payee under a qualified domestic relations order, as defined in Code Section 414(p), and shall include non-spouse Beneficiaries
pursuant to Code Section 402(c)(11).
10.9-5 The Administrator shall provide Participants or other distributes of
eligible rollover distributions with a written notice designed to comply with the requirements of Code Section 402(f). Such notice shall be provided within a reasonable period of time before making an eligible rollover distribution. Such notice
may be provided up to 180 days before the first day of the first period for which an amount is payable.
10.10
Waiver of 30-Day
Period After Notice of Distribution
.
If a distribution is one to which Sections 401(a)(11) and 417 of the Code do not apply, such distribution may commence less than 30 days after the notice required under Treasury Regulations
Section 1.411(a)-11(c) is given, provided that:
(i) the Trustee or Committee, as applicable, clearly informs the
Participant that the Participant has a right to a period of at least 30 days after receiving the notice to consider the decision of whether or not to elect a distribution (and, if applicable, a particular option), and
(ii) the Participant, after receiving the notice, affirmatively elects a distribution.
Section 11.
Rules Governing Benefit Claims and Review of Appeals
.
11.1
Claim for Benefits
. Any Participant or Beneficiary who qualifies for the payment of benefits shall file a claim for his benefits with the Committee on a form provided by the Committee. The claim,
including any election of an alternative benefit form, shall be filed at least 30 days before the date on which the benefits are to begin. If a Participant or Beneficiary fails to file a claim by the day before the date on which benefits become
payable, he shall be presumed to have filed a claim for payment for the Participant’s benefits in the standard form prescribed by Sections 10.1 or 10.2.
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11.2
Notification by Committee
. Within 90 days after receiving a claim for benefits (or
within 180 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary within 90 days after receiving the claim for benefits), the Committee shall notify the Participant
or Beneficiary whether the claim has been approved or denied. If the Committee denies a claim in any respect, the Committee shall set forth in a written notice to the Participant or Beneficiary:
(i) each specific reason for the denial;
(ii) specific references to the pertinent Plan provisions on which the denial is based;
(iii) a description of any additional material or information which could be submitted by the Participant or Beneficiary to support his claim, with an explanation of the relevance of such information; and
(iv) an explanation of the claims review procedures set forth in Section 11.3.
11.3
Claims Review Procedure
. Within 60 days after a Participant or Beneficiary receives notice from the Committee that his claim for
benefits has been denied in any respect, he may file with the Committee a written notice of appeal setting forth his reasons for disputing the Committee’s determination. In connection with his appeal the Participant or Beneficiary or his
representative may inspect or purchase copies of pertinent documents and records to the extent not inconsistent with other Participants’ and Beneficiaries’ rights of privacy. Within 60 days after receiving a notice of appeal from a prior
determination (or within 120 days, if special circumstances require an extension of time and written notice of the extension is given to the Participant or Beneficiary and his representative within 60 days after receiving the notice of appeal), the
Committee shall furnish to the Participant or Beneficiary and his representative, if any, a written statement of the Committee’s final decision with respect to his claim, including the reasons for such decision and the particular Plan
provisions upon which it is based.
Section 12.
The Committee and its Functions
.
12.1
Authority of Committee
. The Committee shall be the “plan administrator” within the meaning of ERISA and shall have exclusive
responsibility and authority to control and manage the operation and administration of the Plan, including the interpretation and application of its provisions, except to the extent such responsibility and authority are otherwise specifically
(i) allocated to the Bank, the Employers, or the Trustee under the Plan and Trust Agreement, (ii) delegated in writing to other persons by the Bank, the Employers, the Committee, or the Trustee, or (iii) allocated to other parties by
operation of law. The Committee shall have exclusive responsibility regarding decisions concerning the payment of benefits under the Plan. The Committee shall have no investment responsibility with respect to the Investment Fund except to the
extent, if any, specifically provided in the Trust Agreement. In the discharge of its duties, the Committee may employ accountants, actuaries, legal counsel, and other agents (who also may be employed by an Employer or the Trustee in the same or
some other capacity) and may pay their reasonable expenses and compensation.
12.2
Identity of Committee
. The Committee shall
consist of three or more individuals selected by the Bank. Any individual, including a director, trustee, shareholder, officer, or Employee of an Employer, shall be eligible to serve as a member of the Committee. The Bank shall have the power to
remove any individual serving on the Committee at any time without cause upon 10 days written notice, and any individual may resign from the Committee at any time upon 10 days written notice to the Bank. The Bank shall notify the Trustee of any
change in membership of the Committee.
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12.3
Duties of Committee
. The Committee shall keep whatever records may be necessary to
implement the Plan and shall furnish whatever reports may be required from time to time by the Bank. The Committee shall furnish to the Trustee whatever information may be necessary to properly administer the Trust. The Committee shall see to the
filing with the appropriate government agencies of all reports and returns required of the Plan under ERISA and other laws.
Further, the
Committee shall have exclusive responsibility and authority with respect to the Plan’s holdings of Stock and shall direct the Trustee in all respects regarding the purchase, retention, sale, exchange, and pledge of Stock and the creation and
satisfaction of Stock Obligations. The Committee shall at all times act consistently with the Bank’s long-term intention that the Plan, as an employee stock ownership plan, be invested primarily in Stock. Subject to the direction of the board
as to the application of Employer contributions to Stock Obligations, and subject to the provisions of Sections 6.4 and 10.6 as to Participants’ rights under certain circumstances to have their Accounts invested in Stock or in assets other than
Stock, the Committee shall determine in its sole discretion the extent to which assets of the Trust shall be used to repay Stock Obligations, to purchase Stock, or to invest in other assets to be selected by the Trustee or an investment manager. No
provision of the Plan relating to the allocation or vesting of any interests in the Stock Fund or the Investment Fund shall restrict the Committee from changing any holdings of the Trust, whether the changes involve an increase or a decrease in the
Stock or other assets credited to Participants’ Accounts. In determining the proper extent of the Trust’s investment in Stock, the Committee shall be authorized to employ investment counsel, legal counsel, appraisers, and other agents and
to pay their reasonable expenses and compensation.
12.4
Valuation of Stock
. If the valuation of any Stock is not established
by reported trading on a generally recognized public market, the valuation of such Stock shall be determined by an independent appraiser. For purposes of the preceding sentence, the term “independent appraiser” means any appraiser meeting
requirements similar to the requirements of the regulations prescribed under Section 170(a)(1) of the Code.
12.5
Compliance
with ERISA
. The Committee shall perform all acts necessary to comply with ERISA. Each individual member or employee of the Committee shall discharge his duties in good faith and in accordance with the applicable requirements of ERISA.
12.6
Action by Committee
. All actions of the Committee shall be governed by the affirmative vote of a number of members
which is a majority of the total number of members currently appointed, including vacancies.
12.7
Execution of Documents
.
Any instrument executed by the Committee shall be signed by any member or employee of the Committee.
12.8
Adoption of Rules
.
The Committee shall adopt such rules and regulations of uniform applicability as it deems necessary or appropriate for the proper administration and interpretation of the Plan.
12.9
Responsibilities to Participants
. The Committee shall determine which Employees qualify to enter the Plan. The Committee shall furnish
to each Eligible Employee whatever summary plan descriptions, summary annual reports, and other notices and information may be required under ERISA. The Committee also shall determine when a Participant or his Beneficiary qualifies for the payment
of benefits under the Plan. The Committee shall furnish to each such Participant or Beneficiary whatever information is required under ERISA (or is otherwise appropriate) to enable the Participant or Beneficiary to make whatever elections may be
available pursuant to Sections 6 and 10, and the Committee shall provide for the payment of benefits in the proper form and amount from the assets of the Trust Fund. The Committee may decide in its sole discretion to permit modifications of
elections and to defer or accelerate benefits to the extent consistent with applicable law and the best interests of the individuals concerned.
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12.10
Alternative Payees in Event of Incapacity
. If the Committee finds at any time that an
individual qualifying for benefits under this Plan is a minor or is incompetent, the Committee may direct the benefits to be paid, in the case of a minor, to his parents, his legal guardian, or a custodian for him under the Uniform Gifts to Minors
Act, or, in the case of an incompetent, to his spouse, or his legal guardian, the payments to be used for the individual’s benefit. The Committee and the Trustee shall not be obligated to inquire as to the actual use of the funds by the person
receiving them under this Section 12.10, and any such payment shall completely discharge the obligations of the Plan, the Trustee, the Committee, and the Employers to the extent of the payment.
12.11
Indemnification by Employers
. Except as separately agreed in writing, the Committee, and any member or employee of the Committee,
shall be indemnified and held harmless by the Employer, jointly and severally, to the fullest extent permitted by ERISA, and subject to and conditioned upon compliance with 12 C.F.R. Section 545.121, to the extent applicable, against any and
all costs, damages, expenses, and liabilities reasonably incurred by or imposed upon it or him in connection with any claim made against it or him or in which it or he may be involved by reason of its or his being, or having been, the Committee, or
a member or employee of the Committee, to the extent such amounts are not paid by insurance.
12.12
Nonparticipation by Interested
Member
. Any member of the Committee who also is a Participant in the Plan shall take no part in any determination specifically relating to his own participation or benefits, unless his abstention would leave the Committee incapable of acting
on the matter.
Section 13.
Adoption, Amendment, or Termination of the Plan
.
13.1
Adoption of Plan by Other Employers
. With the consent of the Bank, any entity may become a participating Employer under the Plan by
(i) taking such action as shall be necessary to adopt the Plan, (ii) becoming a party to the Trust Agreement establishing the Trust Fund, and (iii) executing and delivering such instruments and taking such other action as may be
necessary or desirable to put the Plan into effect with respect to the entity’s Employees.
13.2
Plan Adoption Subject to
Qualification
. Notwithstanding any other provision of the Plan, the adoption of the Plan and the execution of the Trust Agreement are conditioned upon their being determined initially by the Internal Revenue Service to meet the qualification
requirements of Section 401(a) of the Code, so that the Employers may deduct currently for federal income tax purposes their contributions to the Trust and so that the Participants may exclude the contributions from their gross income and
recognize income only when they receive benefits. In the event that this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a), the Plan may be amended retroactively to the earliest date permitted by U.S.
Treasury Regulations in order to secure qualification under Section 401(a). If this Plan is held by the Internal Revenue Service not to qualify initially under Section 401(a) either as originally adopted or as amended, each Employer’s
contributions to the Trust under this Plan (including any earnings thereon) shall be returned to it and this Plan shall be terminated. In the event that this Plan is amended after its initial qualification and the Plan as amended is held by the
Internal Revenue Service not to qualify under Section 401(a), the amendment may be modified retroactively to the earliest date permitted by U.S. Treasury Regulations in order to secure approval of the amendment under Section 401(a).
13.3
Right to Amend or Terminate
. The Bank intends to continue this Plan as a permanent program. However, each participating
Employer separately reserves the right to suspend, supersede, or terminate the Plan at any time and for any reason, as it applies to that Employer’s Employees, and the Bank
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reserves the right to amend, suspend, supersede, merge, consolidate, or terminate the Plan at any time and for any reason, as it applies to the Employees of
each Employer. No amendment, suspension, supersession, merger, consolidation, or termination of the Plan shall (i) reduce any Participant’s or Beneficiary’s proportionate interest in the Trust Fund, (ii) reduce or restrict,
either directly or indirectly, the benefit provided any Participant prior to the amendment, or (iii) divert any portion of the Trust Fund to purposes other than the exclusive benefit of the Participants and their Beneficiaries prior to the
satisfaction of all liabilities under the Plan. Moreover, there shall not be any transfer of assets to a successor plan or merger or consolidation with another plan unless, in the event of the termination of the successor plan or the surviving plan
immediately following such transfer, merger, or consolidation, each participant or beneficiary would be entitled to a benefit equal to or greater than the benefit he would have been entitled to if the plan in which he was previously a participant or
beneficiary had terminated immediately prior to such transfer, merger, or consolidation. Following a termination of this Plan by the Bank, the Trustee shall continue to administer the Trust and pay benefits in accordance with the Plan as amended
from time to time and the Committee’s instructions.
Section 14.
Miscellaneous Provisions
.
14.1
Plan Creates No Employment Rights
. Nothing in this Plan shall be interpreted as giving any Employee the right to be retained as an
Employee by an Employer, or as limiting or affecting the rights of an Employer to control its Employees or to terminate the Service of any Employee at any time and for any reason, subject to any applicable employment or collective bargaining
agreements.
14.2
Nonassignability of Benefits
. No assignment, pledge, or other anticipation of benefits from the Plan will
be permitted or recognized by the Employer, the Committee, or the Trustee. Moreover, benefits from the Plan shall not be subject to attachment, garnishment, or other legal process for debts or liabilities of any Participant or Beneficiary, to the
extent permitted by law. This prohibition on assignment or alienation shall apply to any judgment, decree, or order (including approval of a property settlement agreement) which relates to the provision of child support, alimony, or property rights
to a present or former spouse, child or other dependent of a Participant pursuant to a state domestic relations or community property law, unless the judgment, decree, or order is determined by the Committee to be a qualified domestic relations
order within the meaning of Section 414(p) of the Code, as more fully set forth in Section 14.12 hereof.
14.3
Limit of
Employer Liability
. The liability of the Employer with respect to Participants under this Plan shall be limited to making contributions to the Trust from time to time, in accordance with Section 4.
14.4
Treatment of Expenses
. All expenses incurred by the Committee and the Trustee in connection with administering this Plan and Trust
Fund shall be paid by the Trustee from the Trust Fund to the extent the expenses have not been paid or assumed by the Employer or by the Trustee. The Committee may determine that, and shall inform the Trustee when, reasonable expenses may be charged
directly to the Account or Accounts of a Participant or group of Participants to whom or for whose benefit such expenses are allocable, subject to the guidelines set forth in Field Assistance Bulletin 2003-03, to the extent not superseded, or any
successor directive issued by the Department of Labor.
14.5
Number and Gender
. Any use of the singular shall be interpreted
to include the plural, and the plural the singular. Any use of the masculine, feminine, or neuter shall be interpreted to include the masculine, feminine, or neuter, as the context shall require.
14.6
Nondiversion of Assets
. Except as provided in Sections 5.2 and 14.12, under no circumstances shall any portion of the Trust Fund
be diverted to or used for any purpose other than the exclusive benefit of the Participants and their Beneficiaries prior to the satisfaction of all liabilities under the Plan.
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14.7
Separability of Provisions
. If any provision of this Plan is held to be invalid or
unenforceable, the other provisions of the Plan shall not be affected but shall be applied as if the invalid or unenforceable provision had not been included in the Plan.
14.8
Service of Process
. The agent for the service of process upon the Plan shall be the president of the Bank, or such other person as may be designated from time to time by the Bank.
14.9
Governing State Law
. This Plan shall be interpreted in accordance with the laws of the State of Hawaii to the extent those laws are
applicable under the provisions of ERISA.
14.10
Employer Contributions Conditioned on Deductibility
.
Employer
Contributions to the Plan are conditioned on deductibility under Code Section 404. In the event that the Internal Revenue Service shall determine that all or any portion of an Employer Contribution is not deductible under that Section, the
nondeductible portion shall be returned to the Employer within one year of the disallowance of the deduction.
14.11
Unclaimed
Accounts
.
Neither the Employer nor the Trustees shall be under any obligation to search for, or ascertain the whereabouts of, any Participant or Beneficiary. The Employer or the Trustees, by certified or registered mail addressed to
his last known address of record with the Employer, shall notify any Participant or Beneficiary that he is entitled to a distribution under this Plan, and the notice shall quote the provisions of this Section. If the Participant or Beneficiary fails
to claim his benefits or make his whereabouts known in writing to the Employer or the Trustees within seven (7) calendar years after the date of notification, the benefits of the Participant or Beneficiary under the Plan will be disposed of as
follows:
(i) If the whereabouts of the Participant is unknown but the whereabouts of the Participant’s Beneficiary is
known to the Trustees, distribution will be made to the Beneficiary.
(ii) If the whereabouts of the Participant and his
Beneficiary are unknown to the Trustees, the Plan will forfeit the benefit, provided that the benefit is subject to a claim for reinstatement if the Participant or Beneficiary make a claim for the forfeited benefit.
Any payment made pursuant to the power herein conferred upon the Trustees shall operate as a complete discharge of all obligations of the Trustees, to
the extent of the distributions so made.
14.12
Qualified Domestic Relations Order
.
Section 14.2 shall not apply
to a “qualified domestic relations order” defined in Code Section 414(p), and such other domestic relations orders permitted to be so treated under the provisions of the Retirement Equity Act of 1984. Further, to the extent provided
under a “qualified domestic relations order,” a former Spouse of a Participant shall be treated as the Spouse or surviving Spouse for all purposes under the Plan.
In the case of any domestic relations order received by the Plan:
(i) The Employer or the
Committee shall promptly notify the Participant and any other alternate payee of the receipt of such order and the Plan’s procedures for determining the qualified status of domestic relations orders, and
(ii) Within a reasonable period after receipt of such order, the Employer or the Committee shall determine whether such order is a
qualified domestic relations order and notify the Participant and each alternate payee of such determination. The Employer or the Committee shall establish reasonable procedures to determine the qualified status of domestic relations orders and to
administer distributions under such qualified orders.
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During any period in which the issue of whether a domestic relations order is a qualified domestic
relations order is being determined (by the Employer or Committee, by a court of competent jurisdiction, or otherwise), the Employer or the Committee shall segregate in a separate account in the Plan or in an escrow account the amounts which would
have been payable to the alternate payee during such period if the order had been determined to be a qualified domestic relations order. If within eighteen (18) months the order (or modification thereof) is determined to be a qualified domestic
relations order, the Employer or the Committee shall pay the segregated amounts (plus any interest thereon) to the person or persons entitled thereto. If within eighteen (18) months it is determined that the order is not a qualified domestic
relations order, or the issue as to whether such order is a qualified domestic relations order is not resolved, then the Employer or the Committee shall pay the segregated amounts (plus any interest thereon) to the person or persons who would have
been entitled to such amounts if there had been no order. Any determination that an order is a qualified domestic relations order which is made after the close of the eighteen (18) month period shall be applied prospectively only. The term
“alternate payee” means any Spouse, former Spouse, child or other dependent of a Participant who is recognized by a domestic relations order as having a right to receive all, or a portion of, the benefit payable under a Plan with respect
to such Participant.
14.13
Use of Electronic Media to Provide Notices and Make Participant Elections
.
Pursuant to
Treasury Regulations Section 1.401(a)-21, the Plan may elect to use electronic media to provide notices required to be provided to Participants under the Plan and will accept elections from Participants communicated to the Plan using such
electronic media.
Section 15.
Top-Heavy Provisions
.
15.1
Top-Heavy Plan
. This Plan is top-heavy if any of the following conditions exist:
(i) If the top-heavy ratio for this Plan exceeds sixty percent (60%) and this Plan is not part of any required aggregation group or permissive aggregation group;
(ii) If this Plan is a part of a required aggregation group (but is not part of a permissive aggregation group) and the aggregate
top-heavy ratio for the group of Plans exceeds sixty percent (60%); or
(iii) If this Plan is a part of a required
aggregation group and part of a permissive aggregation group and the aggregate top-heavy ratio for the permissive aggregation group exceeds sixty percent (60%).
15.2
Definitions
.
In making this determination, the Committee shall use the
following definitions and principles:
15.2-1 The “Determination Date,” with respect to the first Plan Year of any
plan, means the last day of that Plan Year, and with respect to each subsequent Plan Year, means the last day of the preceding Plan Year. If any other plan has a Determination Date which differs from this Plan’s Determination Date, the
top-heaviness of this Plan shall be determined on the basis of the other plan’s Determination Date falling within the same calendar years as this Plan’s Determination Date.
15.2-2 A “Key Employee” means any employee or former employee (including any deceased employee) who at any time during the plan
year that includes the determination date was an officer of the employer having annual compensation greater than $150,000 (as adjusted under section 416(i)(1) of the Code), a 5-percent owner of the employer, or a 1-percent owner of the employer
having annual
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compensation of more than $150,000. For this purpose, annual compensation means compensation within the meaning of section 415(c)(3) of the Code. The
determination of who is a key employee will be made in accordance with section 416(i)(1) of the Code and the applicable regulations and other guidance of general applicability issued thereunder.
15.2-3 A “Non-key Employee” means an Employee who at any time during the five years ending on the top-heavy Determination Date
for the Plan Year has received compensation from an Employer and who has never been a Key Employee, and the Beneficiary of any such Employee.
15.2-4 A “required aggregation group” includes (a) each qualified Plan of the Employer in which at least one Key Employee participates in the Plan Year containing the Determination Date and (b) any
other qualified Plan of the Employer which enables a Plan described in (a) to meet the requirements of Code Sections 401(a)(4) or 410. For purposes of the preceding sentence, a qualified Plan of the Employer includes a terminated Plan
maintained by the Employer within the period ending on the Determination Date. In the case of a required aggregation group, each Plan in the group will be considered a top-heavy Plan if the required aggregation group is a top-heavy group. No Plan in
the required aggregation group will be considered a top-heavy Plan if the required aggregation group is not a top-heavy group. All Employers aggregated under Code Sections 414(b), (c) or (m) or (o) (but only after the Code
Section 414(o) regulations become effective) are considered a single Employer.
15.2-5 A “permissive aggregation
group” includes the required aggregation group of Plans plus any other qualified Plan(s) of the Employer that are not required to be aggregated but which, when considered as a group with the required aggregation group, satisfy the requirements
of Code Sections 401(a)(4) and 410 and are comparable to the Plans in the required aggregation group. No Plan in the permissive aggregation group will be considered a top-heavy Plan if the permissive aggregation group is not a top-heavy group. Only
a Plan that is part of the required aggregation group will be considered a top-heavy Plan if the permissive aggregation group is top-heavy.
15.3
Top-Heavy Rules of Application
.
For purposes of determining the value of Account balances and the present value
of accrued benefits the following provisions shall apply:
15.3-1 The value of Account balances and the present value of
accrued benefits will be determined as of the most recent Valuation Date that falls within or ends with the twelve (12) month period ending on the Determination Date.
15.3-2 For purposes of testing whether this Plan is top-heavy, the present value of an individual’s accrued benefits and an
individual’s Account balances is counted only once each year.
15.3-3 The Account balances and accrued benefits of a
Participant who is not presently a Key Employee but who was a Key Employee in a Plan Year beginning on or after January 1, 1984 will be disregarded.
15.3-4 Employer contributions attributable to a salary reduction or similar arrangement will be taken into account. Employer matching contributions also shall be taken into account for purposes of satisfying the
minimum contribution requirements of Section 416(c)(2) of the Code and the Plan.
15.3-5 When aggregating Plans, the
value of Account balances and accrued benefits will be calculated with reference to the Determination Dates that fall within the same calendar year.
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15.3-6 The present values of accrued benefits and the amounts of account balances of an
employee as of the determination date shall be increased by the distributions made with respect to the employee under the plan and any plan aggregated with the plan under Section 416(g)(2) of the Code during the 1-year period ending on the
determination date. The preceding sentence shall also apply to distributions under a terminated plan which, had it not been terminated, would have been aggregated with the plan under Section 416(g)(2)(A)(i) of the Code. In the case of a
distribution made for a reason other than severance from employment, death, or disability, this provision shall be applied by substituting “five (5) year period” for “one (1) year period.”
15.3-7 Accrued benefits and Account balances of an individual shall not be taken into account for purposes of determining the top-heavy
ratios if the individual has performed no services for the Employer during the one (1) year period ending on the applicable Determination Date. Compensation for purposes of this subparagraph shall not include any payments made to an individual
by the Employer pursuant to a qualified or non-qualified deferred compensation plan.
15.3-8 The present value of the
accrued benefits or the amount of the Account balances of any Employee participating in this Plan shall not include any rollover contributions or other transfers voluntarily initiated by the Employee except as described below. If this Plan transfers
or rolls over funds to another Plan in a transaction voluntarily initiated by the Employee, then this Plan shall count the distribution for purposes of determining Account balances or the present value of accrued benefits. A transfer incident to a
merger or consolidation of two or more Plans of the Employer (including Plans of related Employers treated as a single Employer under Code Section 414), or a transfer or rollover between Plans of the Employer, shall not be considered as
voluntarily initiated by the Employee.
15.4
Minimum Contributions
. For any Top-Heavy Year, each Employer shall make a
special contribution on behalf of each Participant to the extent that the total allocations to his Account pursuant to Section 4 is less than the lesser of:
(i) three percent of his 415 Compensation for that year, or
(ii) the highest ratio of such allocation to 415 Compensation received by any Key Employee for that year. For purposes of the special
contribution of this Section 15.2, a Key Employee’s 415 Compensation shall include amounts the Key Employee elected to defer under a qualified 401(k) arrangement. Such a special contribution shall be made on behalf of each Participant who
is employed by an Employer on the last day of the Plan Year, regardless of the number of his Hours of Service, and shall be allocated to his Account.
If the Employer maintains a qualified plan in addition to this Plan and more than one such plan is determined to be Top-Heavy, a minimum contribution or a minimum benefit shall be provided in one of such other plans,
including a plan that consists solely of a cash or deferred arrangement which meets the requirements of Section 401(k)(12) of the Code and matching contributions with respect to which the requirements of Section 401(m)(11) of the Code are
met.
15.5
Top-Heavy Provisions Control in Top-Heavy Plan
. In the event this Plan becomes top-heavy and a conflict arises
between the top-heavy provisions herein set forth and the remaining provisions set forth in this Plan, the top-heavy provisions shall control.
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Exhibit 10.13
TERRITORIAL SAVINGS BANK
NON-QUALIFIED SUPPLEMENTAL
EMPLOYEE STOCK OWNERSHIP PLAN
1.
Purpose
This Non-Qualified Supplemental Employee Stock Ownership Plan (“Plan”) is intended to provide Participants (as
defined herein) or their Beneficiaries with the economic value of the annual allocations credited to such Participant’s account under The Territorial Savings Bank Employee Stock Ownership Plan (“ESOP”) which may not be accrued under
said ESOP due to the limitations imposed by Section 415 of the Internal Revenue Code (the “Code”) and the limitation on includible compensation imposed by Code Section 401(a)(17). The benefits provided under this Plan (as
described below) are intended to constitute deferred compensation for “a select group of management or highly compensated employees” for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). This
Plan is intended to comply with Section 409A of the Internal Revenue Code (“Code”) and the regulatory guidance and other guidance issued thereunder.
2. Definitions
Where the following words and phrases appear in the Plan, they shall have the
respective meaning as set forth below unless the context clearly indicates the contrary. Except to the extent otherwise indicated herein, and to the extent inconsistent with the definitions provided below, the definitions contained in the ESOP are
applicable under the Plan.
2.1 “
Account
” means the bookkeeping account to which a Participant’s Annual ESOP Credits
and earnings thereon are credited.
2.2 “
Annual ESOP Credit
” means the amount credited to the Participant’s account
in the Plan, determined as set forth in Section 4.1 hereof.
2.3 “
Applicable Limitations
” means one or more of the
following, as applicable: (i) the maximum limitations on annual additions to a tax-qualified defined contribution plan under Code Section 415(c); or (ii) the maximum limitation on the annual amount of compensation that may, under Code
Section 401(a)(17), be taken into account in determining contributions to and benefits under tax-qualified plans.
2.4
“
Bank
” means Territorial Savings Bank.
2.5 “
Beneficiary
” means the person designated by the Participant
under the ESOP to receive the Supplemental ESOP Benefit in the event of the Participant’s death.
2.6 “
Board of
Directors
” means the Board of Directors of Territorial Savings Bank.
2.7 “
Change in Control
” shall mean
(1) a change in ownership of the Company or the Bank under paragraph (i) below, or (2) a change in effective control of the Company or the Bank under paragraph (ii) below, or (3) a change in the ownership of a substantial
portion of the assets of the Company or the Bank under paragraph (iii) below:
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i.
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Change in the ownership of the Bank
.
A change in the ownership of the Bank shall occur on the date that any one person, or more than one person acting as a group (as
defined in Treasury Regulation Section 1.409A-3(i)(5)(v)(B)), acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than 50% of the total fair market value or total voting power
of the stock of such corporation; or
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ii.
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Change in the effective control of the Bank
.
A change in the effective control of the Bank shall occur on the date that either (i) any one person, or more than
one person acting as a group (as defined in Treasury Regulation Section 1.409A-3(i)(5)(vi)(D)), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock
of the Bank possessing 30% or more of the total voting power of the stock of the Bank; or (ii) a majority of members of the Bank’s board of Directors is replaced during any 12-month period by Directors whose appointment or election is not
endorsed by a majority of the members of the corporation’s board of Directors prior to the date of the appointment or election, provided that this sub-section (ii) is inapplicable where a majority shareholder of the Bank is another
corporation; or
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iii.
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Change in the ownership of a substantial portion of the Bank’s assets
. A change in the ownership of a substantial portion of the Bank’s assets shall occur on the
date that any one person, or more than one person acting as a group (as defined in Treasury Regulation Section 1.409A-3(i)(5)(vii)(C)), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by
such person or persons) assets from the Bank that have a total gross fair market value equal to or more than 40% of the total gross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For
this purpose, gross fair market value means the value of the assets of the corporation, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. There is no Change in Control event under
this paragraph (iii) when there is a transfer to an entity that is controlled by the shareholders of the transferring corporation immediately after the transfer; or
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iv.
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For all purposes hereunder, the definition of Change in Control shall be construed to be consistent with the requirements of Treasury Regulation Section 1.409A-3(i)(5), except
to the extent modified herein.
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2.8 “
Code
” means the Internal Revenue Code of 1986, as amended from time to
time. Reference to a specific provision of the Code shall include such provision, any valid regulation or ruling promulgated thereunder and any comparable provision of future law that amends, supplements or supersedes such provision.
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2.9 “
Committee
” means the Compensation Committee of the Board of Directors.
2.10 “
Company
” means Territorial Bancorp, Inc.
2.11 “
Effective Date
” means January 1, 2008.
2.12 “
Employee
” means
an employee of the Employer on whose behalf benefits are payable under the ESOP.
2.13 “
Employer
” means the Bank or the
Company, as applicable, and any successors by merger, purchase, reorganization or otherwise. If a subsidiary or affiliate of the Employer adopts the Plan, it shall be deemed the Employer with respect to its employees.
2.14 “
ERISA
” means the Employee Retirement Income Security Act of 1974, as amended from time to time. Reference to a specific provision
of ERISA shall include such provision, any valid regulation or ruling promulgated thereunder and any comparable provision of future law that amends, supplements or supersedes such provision.
2.15 “
ESOP
” means the tax-qualified Territorial Savings Bank Employee Stock Ownership Plan, and any successor thereto.
2.16 “
Participant
” means an Employee who has been designated for participation in this Plan pursuant to Section 3.1.
2.17 “
Plan
” means Territorial Savings Bank Non-Qualified Supplemental Employee Stock Ownership Plan, as set forth herein and as may be
amended from time to time.
2.18
“Plan Year
” means the period from January 1 to December 31.
2.19 “
Separation from Service
” means the Employee’s death, 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
Employee’s right to reemployment is provided by law or contract. If the leave exceeds six months and the Employee’s right to reemployment is not provided by law or by contract, then the Employee shall have a Separation from Service on the
first date immediately following such six-month period.
Whether a termination of employment has occurred is determined based on whether
the facts and circumstances indicate that the Employer and Employee reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the employee would perform after such date (whether
as an employee or as an independent contractor) would permanently decrease to no more than 20% of the average level of bona fide services performed over the immediately preceding 36 months (or such lesser period of time in
3
which the Participant performed services for the Bank). The determination of whether a Participant has had a Separation from Service shall be made by
applying the presumptions set forth in the Treasury Regulations under Code Section 409A.
2.20 “
Specified Employee
”
means any Participant who also satisfies the definition of “key employee” as such term is defined in Code Section 416(i) (without regard to paragraph 5 thereof). In the event a Participant is a Specified Employee, no distribution
shall be made to such Participant upon Separation from Service (other than due to death or Disability) prior to the first day of the seventh month following Separation from Service.
2.21 “
Stock
” means the common stock of the Company, par value $.01 per share.
2.22 “
Supplemental ESOP Benefit
” means the benefit provided for a Participant under this Plan.
2.23 “
Surviving Spouse
” means the legal spouse of a Participant, living at the time of the death of the Participant.
3.
Participation
3.1
Designation to Participate
. Upon the designation of the Committee, and subject to the approval of the Board of Directors, Employees may become Participants at any time during the Plan Year. Each Employee initially selected by the Committee to
participate in the Plan shall be set forth on Exhibit A attached hereto and made a part hereof.
3.2
Continuation of Participation
.
An Employee who has become a Participant shall remain a Participant so long as benefits are payable to or with respect to such Participant under the Plan.
4.
Benefit Requirements and Payments
4.1
Supplemental ESOP Benefits
. A Participant
shall be entitled to receive as a benefit from this Plan the Supplemental ESOP Benefit determined as set forth herein. In the event of the death of a Participant prior to the commencement of payment of the Supplemental ESOP Benefit, the Surviving
Spouse of the Participant shall be entitled to receive as a benefit from this Plan an amount equal to 100% of the Supplemental ESOP Benefit that would have been payable to the Participant at the time of his death. The Supplemental ESOP Benefit shall
be that benefit earned by a Participant upon the investment of the Annual ESOP Credits allocated to his Account. The Annual ESOP Credit is equal to the sum of the difference (expressed in dollars) between “(a)” and “(b),” where:
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(a)
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is the number of shares of Stock that would have been allocated to the account of the Participant for a Plan Year under the ESOP and the dividends and earnings thereon paid during
the Plan Year, but for the Applicable Limitations, multiplied by the fair market value of such Stock on the last day of the Plan Year for which the allocation is made; and
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(b)
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is the number of shares of Stock actually allocated to the account of the Participant for the relevant ESOP Plan Year, multiplied by the fair market value of such Stock on the last
day of the Plan Year for which the allocation is made, and the dividends and earnings thereon paid during the Plan Year.
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4.2
Investment of Annual ESOP Credits
. Participants shall be entitled to invest the Annual ESOP Credits allocated to their Account among a select group of broadly diversified mutual funds selected by the Committee. For these purposes, an
investment shall be deemed to be made to a mutual fund (whether or not actually made) when the Participant gives such instruction to the Committee that such investment shall be made. The frequency with which such investment instruction may be given
to the Committee shall be determined by the Committee in its sole discretion. If the Employer establishes a rabbi trust and sets aside assets to informally fund the benefit obligation under this Plan, the Committee may permit Participants the
opportunity to direct the investment of their Account under the rabbi trust, but the Committee is not obligated to do so. If the Employer establishes a rabbi trust but the Participants are not permitted to actually invest their Accounts through
investment in the rabbi trust, the value of a Participant’s Account shall nonetheless be determined on the basis of such Participant’s deemed investments.
4.3
Incidents of Supplemental ESOP Payments
. Benefits under this Section 4 shall be payable to the Participant in a lump sum within 90 days of the first to occur of:
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(a)
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the Participant’s “Separation from Service,” other than due to death or Disability;
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(b)
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the Participant’s Disability;
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(c)
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the Participant’s death; or
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(d)
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a Change in Control of the Bank or the Company.
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Notwithstanding anything herein to the contrary, if the Participant is a Specified Employee and the distribution under this Section is due to the Participants Separation from Service, solely to the extent necessary to avoid penalties under
Code Section 409A, the distribution (or any part thereof) shall be delayed until the first day of the seventh month following Separation from Service.
4.4
Form of Supplemental ESOP Payments
. A Participant’s supplemental ESOP benefits under Section 4.1 of this Plan shall be a benefit paid in cash equal to the value of the Participant’s Account.
The Participant’s Account shall be paid to the Participant upon the occurrence of the event and at the time specified in Section 4.3 above.
5.
Administration of the Plan
5.1
Committee; Duties
. This Plan shall be administered
by the Committee which shall consist of not less than three (3) persons appointed by the Board of Directors. The Committee shall have the authority to make, amend, interpret and enforce all appropriate rules
5
and regulations for the administration of the Plan and decide or resolve any and all questions, including interpretations of this Plan, that may arise in
connection with the administration of the Plan; provided, however, that any such interpretations, rules and/or regulations shall be consistent with the requirements of Code Section 409A and any Treasury Regulations or other guidance issued
thereunder. A majority vote of the Committee members shall control any decision. Members of the Committee may be Participants under the Plan, so long as a majority of the members are not Participants.
5.2
Agents
. The Committee may, from time to time, employ other agents and delegate to them such administrative duties as it sees fit, and may from
time to time consult with counsel who may be counsel to the Employer.
5.3
Binding Effect of Decisions
. The decision or action of
the Committee regarding of any question arising out of or in connection with the administration, interpretation and application of the Plan and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all
persons having any interest in the Plan.
5.4
Indemnity of Committee
. The Employer shall indemnify and hold harmless the members of
the Committee against any and all claims, loss, damage, expense or liability arising from any action or failure to act with respect to this Plan, except in the case of gross negligence or willful misconduct.
6.
Claims Procedure
6.1
Claim
. Any person claiming a benefit, requesting an interpretation or ruling under the Plan, or requesting information under the Plan shall present the request in writing to the Committee which shall respond in writing within thirty
(30) days.
6.2
Denial of Claim
. If the claim or request is denied, the written notice of denial shall state:
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(a)
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the reason for denial, with specific reference to the Plan provisions on which the denial is based.
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(b)
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a description of any additional material or information required and an explanation of why it is necessary.
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(c)
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an explanation of the Plan’s claim review procedure.
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6.3
Review of Claim
. Any person whose claim or request is denied or who has not received a response within thirty (30) days may request review by notice given in writing to the Committee. The claim or request shall be reviewed
by the Committee who may, but shall not be required to, grant the claimant a hearing. On review, the claimant may have representation, examine pertinent documents, and submit issues and comments in writing.
6.4
Final Decision
. The decision on review shall normally be made within sixty (60) days. If an extension of time is required for a hearing
or other special circumstances, the claimant shall be notified and the time limit shall be one hundred twenty (120) days. The decision shall be in writing and shall state the reason and the relevant plan provisions. All decisions on review
shall be final and bind all parties concerned.
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7.
Amendment or Termination
7.1
Amendment of Plan
. A majority of the Board of Directors may amend this Plan at any time or from time to time. However, no such amendment shall
adversely affect the benefits of the Participant which have accrued prior to such action.
7.2
Plan Termination
.
(a)
Partial Termination
. The Board may partially terminate the Plan by freezing future accruals if, in its judgment, the tax, accounting, or other
effects of the continuance of the Plan, or potential payments thereunder, would not be in the best interests of the Employer.
(b)
Complete Termination
. Subject to the requirements of Code Section 409A, in the event of complete termination of the Plan, the Plan shall cease to operate and the Employer shall pay out to the Participant his benefit as if the Participant
had terminated employment as of the effective date of the complete termination. Such complete termination of the Agreement shall occur only under the following circumstances and conditions:
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(i)
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The Administrator may terminate the Plan within 12 months of a corporate dissolution taxed under Code Section 331, or with approval of a bankruptcy court pursuant to 11 U.S.C.
§503(b)(1)(A), provided that the amounts deferred under the Plan are included in the Participant’s gross income in the latest of (i) the calendar year in which the Plan terminates; (ii) the calendar year in which the amount is no
longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the payment is administratively practicable.
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(ii)
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The Board may terminate the Plan by Board action taken within the 30 days preceding a Change in Control (but not following a Change in Control), provided that the Plan shall only be
treated as terminated if all substantially similar arrangements sponsored by the Employer are terminated so that the Participant and all participants under substantially similar arrangements are required to receive all amounts of compensation
deferred under the terminated arrangements within 12 months of the date of the termination of the arrangements. For these purposes, “Change in Control” shall be defined in accordance with the Treasury Regulations under Code
Section 409A.
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(iii)
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The Board may terminate the Plan provided that (A) the termination and liquidation does not occur proximate to a downturn in the financial health of the Bank or Company,
(B) all arrangements sponsored by the Bank that would be aggregated with this Plan under Treasury Regulations Section 1.409A-1(c) if the Participant covered by this Plan was also covered by any of those other arrangements are also
terminated; (C) no payments other than payments that would be payable under the terms of the arrangement if the termination had not occurred are made within 12 months of the termination of the arrangement; (D) all payments are made within
24 months of the termination of the arrangements; and (E) the Bank does not adopt a new arrangement that would be aggregated with any terminated arrangement under Treasury Regulations Section 1.409A-1(c) if the Participant participated in
both arrangements, at any time within three years following the date of termination of the arrangement.
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8.
Miscellaneous
8.1
Unfunded Plan
. This Plan is intended to be an unfunded plan maintained primarily to provide deferred
compensation benefits for a select group of management or highly compensated employees. However, the Employer may elect to fund for the benefits of Participants as described in Section 8.3 below. This Plan will continue to be unfunded for tax
purposes and Title I of ERISA even if benefits are funded by the Bank under Section 8.3 below.
8.2
Unsecured General Creditor
.
The Participant and his Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interest or claims in any property or assets of the Employer, nor shall they be beneficiaries of, or have any rights, claims or interests
in any life insurance policies, annuity contracts or the proceeds therefrom owned or which may be acquired by the Employer. Such policies or other assets of the Employer shall not be held under any trust for the benefit of Participants, their
Beneficiaries, heirs, successors or assigns, or held in any way as collateral security for the fulfilling of the obligations of Employer under this Plan. Any and all of the Employer’s assets shall be, and remain, the general, unpledged,
unrestricted assets of the Employer. The Employer’s obligation under the Plan shall be that of an unfunded and unsecured promise of the Employer to pay money in the future.
8.3
Trust Fund
. The Employer shall be responsible for the payment of all benefits provided under the Plan. At its discretion, the Employer may
establish one (1) or more rabbi trusts, with such trustees as the Board may approve, for the purpose of providing for payment of such benefits. Such trust or trusts may be irrevocable, but the assets thereof shall be subject to the claims of
the Employer’s creditors. To the extent any benefits provided under the Plan are actually paid from any such rabbi trust, the Employer shall have no further obligation with respect thereto, but to the extent not so paid, such benefits shall
remain the obligation of, and shall be paid by, the Employer.
8
8.4
Nonassignability
. Neither the Participant nor any other person shall have any right to
commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, which are, and all rights to which are,
expressly declared to be unassignable and nontransferable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony or separate maintenance owed by a
Participant or any other person, nor be transferable by operation of law in the event of a Participant’s or any other person’s bankruptcy or insolvency.
8.5
Expenses of Plan
. All expenses of the Plan will be paid by the Employer.
8.6
Payment of
Employment and Code Section 409A Taxes
. Any distribution under this Plan shall be reduced by the amount of any taxes required to be withheld from such distribution. This Plan shall permit the acceleration of the time or schedule of a
payment to pay employment related taxes as permitted under Treasury Regulation Section 1.409A-3(j) or to pay any taxes that may become due at any time that the arrangement fails to meet the requirements of Code Section 409A and the
regulations and other guidance promulgated thereunder. In the latter case, such payments shall not exceed the amount required to be included in income as the result of the failure to comply with the requirements of Code Section 409A.
8.7
Acceleration of Payments
. Except as specifically permitted herein or in other sections of this Plan, no acceleration of the
time or schedule of any payment may be made hereunder. Notwithstanding the foregoing, payments may be accelerated hereunder by the Bank, in accordance with the provisions of Treasury Regulation Section 1.409A-3(j)(4) and any subsequent guidance
issued by the United States Treasury Department. Accordingly, payments may be accelerated, in accordance with requirements and conditions of the Treasury Regulations (or subsequent guidance) in the following circumstances: (i) as a result of
certain domestic relations orders; (ii) in compliance with ethics agreements with the Federal government; (iii) in compliance with ethics laws or conflicts of interest laws; (iv) in limited cash-outs (but not in excess of the limit
under Code Section 402(g)(1)(B)); (v) to apply certain offsets in satisfaction of a debt of the Participant to the Bank; (vi) in satisfaction of certain bona fide disputes between the Participant and the Bank; or (vii) for any
other purpose set forth in the Treasury Regulations and subsequent guidance.
8.8
Participation by Subsidiaries and Affiliates
. If
any employer is now or hereafter becomes a subsidiary or affiliated company of the Employer and its employees participate in the ESOP, the Board of Directors may authorize such subsidiary or affiliated company to participate in this Plan upon
appropriate action by such employer necessary to adopt the Plan.
8.9
Delivery of Elections to Committee
. All elections,
designation, requests, notices, instructions and other communications required or permitted under the Plan from the Employer, a Participant, Beneficiary or other person to the Committee shall be on the appropriate form, shall be mailed by
first-class mail or delivered to such address as shall be specified by such Committee, and shall be deemed to have been given or delivered only upon actual receipt thereof by such Committee at such location.
9
8.10
Delivery of Notice to Participants
. All notices, statements, reports and other communications
required or permitted under the Plan from the Employer or the Committee to any Officer, Participant, Beneficiary or other person, shall be deemed to have been duly given when delivered to, or when mailed by first-class mail, postage prepaid, and
addressed to such person at this address last appearing on the records of the Committee.
9.
Construction of the Plan
9.1
Construction of the Plan
. The provisions of this Plan shall be construed, regulated, and administered according to the laws
of the State of Hawaii, to the extent not superseded by Federal law.
9.2
Counterparts
. This Plan has been established by the
Employer in accordance with the resolutions adopted by the Board of Directors and may be executed in any number of counterparts, each of which shall be deemed to be an original. All the counterparts shall constitute one instrument, which may be
sufficiently evidenced by any one counterpart.
9.3
Validity
. In case any provision of this Plan shall be held illegal or invalid
for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Plan shall be construed and enforced as if such illegal or invalid provision had never been inserted herein.
[signature page follows]
10
IN WITNESS WHEREOF
, the Bank has adopted this Plan, effective as of January 1, 2009.
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TERRITORIAL SAVINGS BANK
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By:
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Date
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Chairman of the Compensation Committee
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TERRITORIAL SAVINGS BANK
NONQUALIFIED SUPPLEMENTAL
EMPLOYEE STOCK OWNERSHIP PLAN
Exhibit A
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Name of Participant
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Date of Participation
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Exhibit 10.14
Executive Incentive Compensation Plan
Territorial Savings Bank (“Territorial or the Bank”) has
adopted an Executive Incentive Compensation Plan (EICP) to: 1) motivate executive officers upon whose judgment, initiative and efforts Territorial relies to successfully conduct its business; 2) supplement other compensation plans; and 3) assist
Territorial in retaining, attracting and rewarding such officers.
Safety and Soundness Considerations
Incentive compensation under this plan will only be paid if, as of the most recent month end, the Bank meets all of the following capital ratios as defined by OTS
regulation: 1) a leverage ratio of 5% or greater, 2) Tier 1 (core) risk-based capital of 5% or greater, and 3) total capital to risk-based capital of 10% or greater. Incentive compensation will not be paid if 1) the payments would cause the Bank not
to meet the above-referenced capital ratios immediately after such payment, 2) there is an outstanding regulatory order, agreement or directive prohibiting such payment, or 3) such payment would result in a violation of law or regulation. The
Compensation Committee may (but is not required to) consider for future payment under this plan any amounts which would have been otherwise payable under this plan if and when the Bank meets the above-referenced requirements.
Page 1 of 7
The Compensation Committee of the Board of Directors also has the authority not to authorize any payments under the EICP
if the Compensation Committee or Board believes that payments should not be made regardless of whether other conditions in the EICP have been met.
Eligible Employees
Employees who have the position of Chairman of the Board, President and Chief Executive Officer or any Vice Chairman and
Executive Vice President and who are employed by Territorial on November 30 of each year are eligible to participate in the EICP. For participants hired or promoted into a bonus-eligible position after the beginning of the year, the awards will
be prorated based on the date the participant started in the bonus-eligible position. Participants must be employed by Territorial at the time awards are paid (after performance results for the plan year are finalized) in order to be eligible for
payment. The Compensation Committee may waive this pro-ration formula.
Criteria for Determining Incentive Compensation – Plan Provisions
The EICP will range from 0% to 70% of the executive’s salary. The bonus components are :
Return on Assets (ROA) and Return on Equity (ROE)
An award of up to
35% of the executive’s salary amount is based on ROA and ROE targets each year, equally weighted between these two measurements. There will be a threshold, target and maximum calculation for both the ROA and the ROE. These targets
Page 2 of 7
will be reviewed and, if necessary, adjusted by the Compensation Committee or the Board each year, and the Compensation Committee or the Board has the
flexibility to change the targets based on changes in the market as well as changes in the business plan of the Bank.
No award will be paid for a
criterion if performance on that criterion falls below the threshold goal (e.g., if threshold ROA is 0.90% and actual ROA is 0.80%, no award is paid for ROA).
If actual performance falls between goal levels, the award amount is prorated between the levels. For example, if actual ROA is halfway between target and maximum, the ROA portion of the annual incentive award will be halfway between target
and maximum award levels.
When calculating the ROA and ROE, the Compensation Committee shall utilize the financial statements of the Bank as prepared
under Generally Accepted Accounting Principles and have the ability to consider and recommend adjusting such financial statements, for the purposes of this plan, for non-recurring items which do not reflect the core results of the Bank, provided;
however, any such adjustment must be approved by the Board.
Non-Financial Goals
An award of up to 21% of the salary is based on non-financial goals for each year. This percentage will be allocated by the Compensation Committee if more than one goal is established. For example, the Compensation
Committee can establish three goals and
Page 3 of 7
weight one goal at 11%, for example for upgrading the S component in the CAMEL rating, and weight the other two goals at 5% each, for example for opening two
branches and achieving an Outstanding rating for CRA. If only the interest rate risk goal is met and not the other goals, only 11% of salary is awarded. The Compensation Committee decides whether a goal is met. If a goal is not met, the Compensation
Committee will not make an award for that particular goal.
Each goal established by the Compensation Committee is a collective goal for the officers under
this plan and not individual officer goals, unless specified by the Compensation Committee.
Long Term Performance
Up to 14% of the executive’s award is based on the long term performance of the Bank. This component is based
on the Bank’s ROA rolling average for three years (current plus the prior two years) compared to the Bank’s peer group ROA rolling average for three years. This component has a threshold, target and maximum. The target is the Bank’s
peer performance at the 50
th
percentile; the threshold is 85% of this rolling average and the maximum is 115% of the target. The award will be
pro-rated in the same fashion as the annual financial goals.
Award is Separate
The award for each criterion is calculated independently of amounts associated with other criteria. For example, an executive could earn an award based on ROA without earning an award based on ROE, or earn an award
for the non-financial goals without earning an award for the long term performance.
Page 4 of 7
Annual Review and Changing Criterion and Exceptions
The Compensation Committee, as approved by the Board, annually reviews and approves all the goals. The Board of Directors may change criterion any time during the year or decide not to consider an extraordinary event
that adversely impacted any one of the criterion when making its decision on any award. The Board of Directors may also choose to make an exception to this plan that result in either an increase or
decrease
in the compensation awarded under
this plan.
Changes to this Policy
Any changes to this
plan must be approved by the Compensation Committee and the Board of Directors.
The current year’s goals and next year’s goals as well as some
examples of award calculations are attached in appendix A.
Page 5 of 7
Appendix A
2007 Goals
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Performance Goals
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Criteria
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Threshold
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Target
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Maximum
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ROA
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0.68
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%
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0.80
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%
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0.92
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%
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ROE
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8.5
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%
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10.00
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%
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11.5
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%
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Prorating Example
Assume actual ROA is 0.86% and actual ROE is 9.25%. Actual ROA is exactly halfway between target and maximum goals, and actual ROE is exactly halfway between threshold and target goals. The award for the executive is similarly positioned
between target and maximum for ROA and between threshold and target for ROE.
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•
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ROA Award = 13.125% ((midway between 0.8% target and 0.92% max) x 17.5% weighting) x salary = see below
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•
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ROE Award = 4.375% ((midway between 8.5% threshold and 10% target) x 17.5% weighting) x salary = see below
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•
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Total Award for each criterion (Assume executive’s salary is $100,000) = $13,125 is the ROA Award; $4,375 is the ROE Award.
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2007 and 2008 ROA and ROE Goals
For 2007, the target ROA goal is
0.80%; the target ROE goal is 10%.
For 2008, the target ROA is the Bank’s peer group ROA at
the 50
th
percentile; the target ROE is the Bank’s peer group ROE at the 50
th
percentile. By choosing this target, the Bank expects part of its award will be delayed until such time as the peer group ratios are available from Clark Consulting or from some
other source and that the peer bank ratios may be substituted for the holding company ratios.
Page 6 of 7
2007 and 2008 Non-financial goals
For 2007, if management implements those steps required to be taken in 2007 under the Bank’s IRR reduction plan, 14% of the executive’s salary may be awarded. If a business checking implementation plan is
developed by the end of 2007, an additional 7% will be awarded.
For 2008, if management implements those steps required to be taken in 2008 under the
Bank’s IRR reduction plan, 7% of the executive’s salary may be awarded. Another 7% will be awarded if the Bank’s CAMELS Sensitivity rated is upgraded from a 4 to a 3. The other 7% will be awarded if all the steps in the business
checking implementation plan scheduled in 2008 are implemented.
Long Term Component
Implementation of this component is as follows:
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a.
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For the 2007 performance, there is no award;
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b.
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For the 2008 performance, the award will be based on the Bank’s two year ROA rolling average compared to the two year ROA rolling average of the Bank’s peers at the 50th
percentile.
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c.
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For the 2009 performance and beyond, the plan is on the three year rolling average.
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Page 7 of 7
Exhibit 10.15
FIRST AMENDMENT
TERRITORIAL SAVINGS BANK
EXECUTIVE INCENTIVE COMPENSATION PLAN
WHEREAS,
Territorial Savings Bank (the “Bank”) maintains an annual cash bonus plan known as the Executive Incentive Compensation Plan (the “EICP”); and
WHEREAS
, the Section 409A of the Internal Revenue Code of 1986, as amended, (the “Code”) and the final regulations thereunder
necessitate changes to the EICP, which must be adopted no later than December 31, 2008, for the EICP to come into compliance with such changes in the law; and
NOW THEREFORE
,
the EICP is hereby amended by adding the following to the end thereof:
Payment of Awards
Notwithstanding anything in this Plan to the contrary, effective January 1, 2005, payment of all
awards made under the Plan shall be made in a cash lump sum no later than March 15 of the year following the year for which the award is earned. For example, if an award is earned for the 2008 calendar year, the payment shall be made no later
than March 15, 2009. Accordingly, all payments under this Plan are intended to be exempt from Section 409A of the Internal Revenue Code of 1986, as amended, under the “short term deferral rule” set forth in the 2007 final
regulations issued thereunder.
IN WITNESS WHEREOF
,
the Bank has adopted this First Amendment.
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TERRITORIAL SAVINGS BANK
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November 10, 2008
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By:
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/s/ Harold H. Ohama
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Date
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Chairman of the Compensation Committee
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Exhibit 10.16
TERRITORIAL SAVINGS BANK
SEPARATION PAY PLAN
AND
SUMMARY PLAN DESCRIPTION
ARTICLE 1. ESTABLISHMENT OF THE PLAN
Section 1.1
Establishment of the Plan
.
Effective January 1, 2009 (the “Effective Date”), Territorial Savings Bank (the “Bank”) established a self-insured severance
pay plan (the “Plan”), which provides benefits in the event Eligible Employees (as defined below) have an involuntary Separation from Service (as defined below) following a Change in Control (as defined below) of the Bank or Territorial
Bancorp Inc., the holding company of the Bank (the “Company”). This document also is designed to satisfy the requirements of a summary plan description.
Section 1.2
Plan Year
. The Plan Year is the calendar year.
ARTICLE 2.
PARTICIPATION
Section 2.1
Eligible Employees
.
Each Eligible Employee, as hereafter defined,
will become a Participant in the Plan on the later of:
(a) the first day immediately following the date on which the Eligible Employee has
completed one year of continuous service with the Bank; or
(b) the Effective Date.
Notwithstanding the preceding, each officer and department head who is an Eligible Employee will become a Participant on his or her date of hire with the
Bank.
The term “Eligible Employee” means any regular full-time or part-time employee of the Bank, excluding (1) any
employee covered under an employment agreement or a change in control agreement (or similar agreement) providing severance pay and (2) any employee who is not paid a base compensation. For purposes of this Section, continuous service will be
measured from an employee’s most recent date of hire or rehire. If any employee is separated from service for any reason, he or she will be treated as a new employee upon reemployment and will not resume participation in the Plan until the
completion of one year of continuous service following reemployment.
ARTICLE 3. BENEFITS AND PAYMENT OF BENEFITS
Section 3.1
In General
.
Each Participant whose employment is involuntarily terminated, as defined in Treasury
Regulations Section 1.409A-1(n), (other than for personal performance reasons) within 24 months after a Change in Control (as defined below) will be eligible for separation pay benefits described in Section 3.2.
(a) In any event, no benefits will be payable under this Plan to any Participant:
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(1)
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whose employment with the Bank is terminated due to the sale of a business unit or subsidiary if continued employment is offered to the Participant; or
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(2)
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whose position is eliminated for any other reason if the Bank makes any offer of employment to the Participant:
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(i) at a location within 40 miles of the Participant’s current place of employment; and
(ii) for a position for which the Participant holds the minimum qualifications; or
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(3)
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who refuses to sign a release in a form acceptable to the Bank.
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(b) For purposes of this Plan, a “Change in Control” means any of the following:
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(1)
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Merger
: The Company or the Bank merges into or consolidates with another entity, or merges another bank or corporation into the Bank or the Company, and as a result, less
than a majority of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were stockholders of the Company or the Bank immediately before the merger or consolidation;
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(2)
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Acquisition of Significant Share Ownership
: There is filed, or is required to be filed, a report on Schedule 13D or another form or schedule (other than Schedule 13G)
required under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, if the schedule discloses that the filing person or persons acting in concert has or have become the beneficial owner of 25% or more of a class of the
Company’s or the Bank’s voting securities; provided, however, this clause (ii) shall not apply to beneficial ownership of the Company’s or the Bank’s voting shares held in a fiduciary capacity by an entity of which the
Company directly or indirectly beneficially owns 50% or more of its outstanding voting securities;
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(3)
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Change in Board Composition
: During any period of two consecutive years, individuals who constitute the Company’s or the Bank’s Board of Directors
at the beginning of the two-year period cease for any reason to constitute at least a majority of the Company’s or the Bank’s Board of Directors; provided, however,
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2
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that for purposes of this clause (iii), each director who is first elected by the board (or first nominated by the board for election by the stockholders) by
a vote of at least two-thirds (
2
/
3
) of the directors who were directors at the beginning of the two-year period shall be
deemed to have also been a director at the beginning of such period; or
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(4)
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Sale of Assets
: The Company or the Bank sells to a third party all or substantially all of its assets.
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Notwithstanding anything in this Plan to the contrary, in no event shall the merger of any subsidiary or affiliate of the Company into another subsidiary
or affiliate of the Company constitute a “Change in Control” for purposes of this Plan.
3.2
Benefit Amount
.
(a) A Participant’s separation pay benefit will be based on the Participant’s rate of base compensation in effect at the
Participant’s date of Separation from Service, excluding commissions, bonuses, incentive payments and any type of equity or equity-based compensation. The amount of a Participant’s separation pay shall equal one month of separation pay for
each full year of service during which the Participant was employed by the Bank, with a minimum of one month of separation pay and a maximum of 24 months of separation pay; provided, however, that Participants who are at the level of senior vice
president and above on the date of their Separation from Service shall receive a minimum of 12 months of separation pay.
(b)
Notwithstanding section (a) above, in any event, the amount of the separation pay paid to any Participant shall not exceed two times the lesser of: (i) the Participant’s annualized compensation based on his or her annual rate of pay
for the calendar year preceding the year of the Separation from Service (adjusted for any regularly scheduled increase during that year that was expected to continue indefinitely if the Participant had not separated from service); or (ii) the
maximum amount that may be taken into account under a tax-qualified retirement plan under Code Section 401(a)(17) for the year in which the Participant’s Separation from Service occurred (i.e., for 2008, the 401(a)(17) amount was
$230,000). All separation payments shall be paid no later than the last day of the second calendar year following the year in which the Separation from Service occurs. Accordingly, this Plan is intended to be exempt from Code Section 409A under
the exception for separation pay plans set forth in Treasury Regulations Section 1.409A-1(b)(9), as published in the final regulations issued in April 2007.
(c) All payments hereunder are contingent upon the Participant’s involuntary termination of employment qualifying as a “Separation from Service,” as defined in Treasury Regulations
Section 1.409A-1(h). Furthermore, to the extent a Participant is a “Specified Employee,” as defined in Treasury Regulations Section 1.409A-1(i), solely to the extent necessary to avoid penalties under Code Section 409A,
payments shall be delayed until the first day of the seventh month following such Participant’s Separation from Service.
3
Section 3.3
Form of Benefit Payment
.
(a)
Separation Pay
. A Participant will receive separation pay in the form of direct deposit to his or her bank account in accordance with the
normal payroll process over the period of the separation pay. All applicable payroll taxes and withholding will be applied. Separation pay will begin by the second pay period following Separation from Service and upon execution by the Participant of
all required documentation to process payments. Separation pay under this Plan is not eligible to be treated as compensation under any other employee benefit plan maintained by the Bank, unless specifically authorized by such other employee benefit
plan.
(b)
Health Insurance Continuation Coverage
. In addition to separation pay described above, Participants who are at the level
of senior vice president and above on the date of their Separation from Service shall also be eligible to continue to participate in the Bank’s health insurance coverages for a period of up to one year after the date of his or her Separation
from Service. Such health insurance continuation coverage shall be based on the same cost-sharing terms and conditions with respect to the employer-paid and employee-paid portion of such coverages as was in effect on the date of the
Participant’s Separation from Service. If the Participant obtains health insurance coverage from a new employer, coverage under this paragraph shall cease as of the date that coverage under the new employer’s health insurance plan begins.
Any health insurance continuation coverage provided under this paragraph shall not be counted towards federal or state-mandated “COBRA” health care continuation coverage, such that, upon the expiration of coverage under this paragraph, the
Participant shall experience a COBRA qualifying event, effective as of the date that coverage under this paragraph ceases.
Section 3.4
Forfeitures of Benefits
.
A Participant will forfeit his or her right to any unpaid separation pay benefits and health insurance continuation coverage if he or she is reemployed by the Bank in any
position that meets the criteria in Section 3.1(a)(2) above.
Section 3.5
Applying for Benefits
.
Notwithstanding any other provision of the Plan to the contrary, no separation pay or health insurance continuation benefits shall be paid to any Participant unless he or she applies for the benefits by completing and signing forms provided by the
Plan Administrator, including an application for benefits. Uniform rules regarding completion and submission of such forms shall be prescribed by the Plan Administrator.
ARTICLE 4. ADMINISTRATION OF PLAN
Section 4.1
Appointment of Plan
Administrator and Responsibility for Administration of Plan
.
The Bank shall serve as Plan Administrator and Claims Administrator and shall administer this Plan in accordance with its terms. The Plan Administrator may designate other persons
to carry out the responsibilities to control and manage the operation of the Plan.
Section 4.2
Agents
.
The Plan Administrator may employ such agents, including counsel, as it may deem advisable for the administration of the Plan. Such agents need not be Participants under the Plan.
4
Section 4.3
Compensation
.
The Bank shall pay all the expenses of the
Plan Administrator. The Bank shall indemnify the Plan Administrator and any employees of the Bank to whom responsibilities have been delegated under Section 4.1 against any liability incurred in the course of administration of the Plan, except
liability arising from their own gross negligence or willful misconduct.
Section 4.4
Records
.
The acts
and decisions of the Plan Administrator shall be duly recorded. The Plan Administrator shall make a copy of this Plan available for examination by any Participant during the business hours of the Bank.
Section 4.5
Defect or Omission
.
The Plan Administrator shall refer any material defect, omission or inconsistency in the
Plan to the Board of Directors of the Bank for such action as may be necessary to correct such defect, supply such omission or reconcile such inconsistency.
Section 4.6
Liability
.
Except for their own negligence, willful misconduct or breach of fiduciary duty, neither the Plan Administrator nor any agents appointed by the Plan
Administrator shall be liable to anyone for any act or omission in the course of the administration of the Plan.
Section 4.7
Contributions and Financing
.
All benefits required to be paid by the Bank under the Plan shall be paid as due directly by the Bank from its general assets.
ARTICLE 5. CLAIMS PROCEDURES
Section 5.1
Claims
.
(a)
General
. These claims procedures contain administrative processes and
safeguards designed to ensure and to verify that benefit claim determinations are made in accordance with the governing Plan documents and that, where appropriate, the Plan provisions have been applied consistently with respect to similarly situated
claimants. These claims procedures shall not unduly inhibit or hamper the initial or processing of claims for benefits. The Plan Administrator shall be the Claims Administrator.
(i) No fees or costs are required to be paid as a condition to making a claim hereunder or to appeal an adverse benefit determination.
(ii) Claims made hereunder shall not be denied for failure to obtain a prior approval under circumstances that would make obtaining prior approval
impossible or application of the prior approval process could seriously jeopardize the life or health of the claimant.
(iii) Authorized
representatives of the claimant may act on behalf of the claimant in pursuing a benefit claim or appeal of an adverse benefit determination. The Claims Administrator may establish reasonable procedures for determining whether an individual is duly
authorized to act as a representative of a claimant.
5
(b)
Calculating Time Periods
. When establishing the timing of notification of benefit
determinations (either initial claims or review of adverse benefit determinations), the period of time within which a benefit determination is required to be made shall begin at the time a claim is filed in accordance with the Plan’s
procedures, without regard to whether all of the information necessary to make a benefit determination accompanies the filing. In the event that a period of time is extended for making such determinations, as described below, due to a
claimant’s failure to submit information necessary to decide a claim, the period for making the benefit determination shall be tolled from the date on which the notification of the extension is sent to the claimant until the date on which the
claimant responds to the request for additional information.
Section 5.2
Timing of Notification of Benefit
Determination; General Rule
.
If a claim is wholly or partially denied, the Claims Administrator shall notify the claimant, in accordance with section 5.3 below, of the Plan’s adverse benefit determination within a reasonable period of
time, but not later than 90 days after receipt of the claim by the Plan, unless the Claims Administrator determines that special circumstances require an extension of time for processing the claim. If the Claims Administrator determines that an
extension of time for processing is required, written notice of the extension shall be furnished to the claimant prior to the termination of the initial 90-day period. In no event shall such extension exceed a period of 90 days from the end of such
initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan expects to make the benefit determination.
Section 5.3
Manner and Content of Notification of Benefit Determination
.
The Claims Administrator shall provide a
claimant with written or electronic notification of any adverse benefit determination. Any electronic notification shall comply with DOL Regulations section 2520.104b-1(c)(1)(i), (iii) and (iv). The notification shall set forth, in a manner
calculated to be understood by the claimant:
(i) the specific reasons for the adverse determination;
(ii) reference to the specific Plan provisions on which the determination is based;
(iii) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of why such material or
information is necessary;
(iv) a description of the Plan’s review procedures and the time limits applicable to such procedures,
including a statement of the claimant’s right to bring a civil action under ERISA section 502(a) following an adverse benefit determination on review.
Section 5.4
Appeal of Adverse Benefit Determinations
.
(a) Under this section 5.4, claimants shall have a reasonable opportunity to appeal an adverse benefit determination to an
appropriate named fiduciary of the Plan, which shall involve a full and fair review of the claim and adverse benefit determination.
6
(b) Claimants shall have at least 60 days following receipt of a notification of an adverse benefit
determination within which to appeal the determination.
(c) Claimants shall have the opportunity to submit written comments, documents,
records and other information relating to the claim for benefits.
(d) Claimants shall be provided, upon request and free of charge,
reasonable access to, and copies of, all documents, records and other information relevant (as defined below) to the claimant’s claim for benefits.
(e) The review shall take into account all comments, documents, records, and other information submitted by the claimant relating to the claim, without regard to whether such information was submitted or considered in
the initial benefit determination.
Section 5.5
Timing of Notification of Benefit Determinations on
Review
.
(a) Except as provided in subsection (b) below, the Claims Administrator shall notify a claimant in accordance with
section 5.6 of the Plan’s benefit determination on review within a reasonable period of time, but not later than 60 days after receipt of the claimant’s request for review by the Plan, unless the Claims Administrator determines that
special circumstances (such as the need to hold a hearing) require an extension of time for processing the claim. If the Claims Administrator determines that an extension of time for processing the claim is required, written notice of the extension
shall be furnished to the claimant prior to the termination of the initial 60-day period. In no event shall such extension exceed a period of 60 days from the end of the initial period. The extension notice shall indicate the special circumstances
requiring an extension of time and the date by which the Plan expects to render the determination on review.
(b) In the case of a Plan
with a committee or board of trustees designated as the appropriate named fiduciary that holds regularly scheduled meetings at least quarterly, subsection (a) shall not apply and the appropriate named fiduciary shall instead make a benefit
determination no later than the date of the meeting of the committee or board that immediately follows the Plan’s receipt of a request for review, unless the request for review is filed within 30 days preceding the date of such meeting. In such
case, a benefit determination may be made by no later than the date of the second meeting following the Plan’s receipt of the request for review. If special circumstances (such as the need to hold a hearing) require a further extension of time
for processing, a benefit determination shall be rendered not later than the third meeting of the committee or board following the Plan’s receipt of the request for review. If such an extension of time for review is required because of special
circumstances, the Claims Administrator shall provide the claimant with written notice of the extension, describing the special circumstances and the date as of which the benefit determination will be made, prior to the commencement of the
extension. The Claims Administrator shall notify the claimant in accordance with section 5.6 of the benefit determination as soon as possible, but not later than 5 days after the benefit determination is made.
Section 5.6.
Manner and Content of Notification of Benefit Determination On Review
.
The Claims Administrator shall
provide a claimant with written or electronic notification of the Plan’s benefit determination on review. Any electronic notification shall
7
comply with DOL Regulations section 2520.104b-1(c)(1)(i), (iii) and (iv). In case of an adverse benefit determination, the notification shall set forth,
in a manner calculated to be understood by the claimant:
(a) the specific reasons for the adverse determination;
(b) reference to the specific Plan provisions on which the determination is based;
(c) a statement that the claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records
and other information relevant (as defined below) to the claimant’s claim for benefits;
(d) a statement describing any voluntary
appeal procedures offered by the Plan and the claimant’s right to obtain the information about such procedures and a statement of the claimant’s right to bring a civil action under ERISA section 502(a).
Section 5.7
Definitions
.
A document, record or other information is considered “relevant” to a claimant’s
claim if such document, record or other information:
(a) was relied upon in making the benefit determination;
(b) was submitted, considered, or generated in the course of making the benefit determination, without regard to whether such document, record or other
information was relied upon in making the benefit determination; or
(c) demonstrates compliance with the administrative processes and
safeguards of the Plan’s claims procedures in making the benefit determination.
Section 5.8
Limitation on
Time to File Lawsuits
.
Any claimant seeking benefits hereunder must file his or her action in federal court no later than six (6) months following the claimant’s exhaustion of this Plan’s administrative remedies.
ARTICLE 6. MISCELLANEOUS PROVISIONS
Section 6.1
Plan Terms are Legally Enforceable
.
The Bank intends that the terms of this Plan, including those relating to coverage and benefits, are legally enforceable.
Section 6.2
Plan Exclusively Benefits Employees
.
The Bank intends that the Plan is maintained for the exclusive benefit
of employees of the Bank.
Section 6.3
Illegality of Particular Provision
.
The illegality of any
particular provision of the Plan shall not affect the other provisions, and the Plan shall be construed in all other respects as if such invalid provision were omitted.
8
Section 6.4
Applicable Laws
.
To the extent not pre-empted by the Employee
Retirement Income Security Act of 1974, as amended (“ERISA”), the Plan shall be governed by the laws of the State of Hawaii.
Section 6.5
Non-Guaranty of Employment
.
Nothing in this Plan shall be construed as granting any Participant a right to employment with the Bank.
ARTICLE 7. AMENDMENT AND TERMINATION
Section 7.1
Amendment of the Plan
.
The Bank intends to maintain this Plan indefinitely, but reserves the right to amend, modify or terminate the Plan at any time. The Bank may make modifications or amendments to the Plan that are necessary or
appropriate to maintain the Plan as a plan meeting the requirements of the applicable provisions of ERISA.
9
IN WITNESS WHEREOF
, the undersigned duly authorized officer of the Bank has executed this Plan.
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TERRITORIAL SAVINGS BANK
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By:
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Date
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Allan S. Kitagawa, Chairman of the Board,
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President and Chief Executive Officer
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10
SUMMARY PLAN DESCRIPTION DISCLOSURE
The Plan is defined under ERISA as an employee welfare benefit plan. As a welfare benefit plan, the Plan is not insured by the Pension Benefit Guaranty
Corporation (PBGC). Plan records are maintained on an annual basis; December 31 is the end of the Plan Year. The Employer Identification Number assigned to the Plan by the Internal Revenue Service is 99-0056630. The Plan Number assigned by the
Bank is 501.
FORMAL STATEMENT OF ERISA RIGHTS
The following statement of your ERISA rights is required by law and the applicable regulations to be provided to you:
As a Plan participant, you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all Plan participants shall be entitled to:
Receive Information About Your Plan and Benefits
Examine, without charge, at the Plan Administrator’s office and at other specified locations, such as worksites and union halls, all documents governing the Plan, including a copy of the latest annual report
(Form 5500 Series) filed by the Plan with the U.S. Department of Labor and available at the Public Disclosure Room of the Employee Benefits Security Administration.
Obtain, upon written request to the Plan Administrator, copies of documents governing the operation of the Plan, copies of the latest annual report (Form 5500 Series) and updated summary plan description. The Plan
Administrator may make a reasonable charge for the copies (not to exceed $.25 per page).
Prudent Actions by Plan Fiduciaries
In addition to creating rights for Plan participants, ERISA imposes duties upon the people who are responsible for the operation of the
employee benefit plan. The people who operate your plan, called “fiduciaries” of the plan, have a duty to do so prudently and in the interest of you and other Plan participants and beneficiaries. No one, including your employer or any
other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a Plan benefit or exercising your rights under ERISA.
Enforce Your Rights
If your claim for a Plan benefit is denied or ignored, in whole or in part, you
have a right to know why this was done, to obtain copies of documents relating to the decision without charge, and to appeal any denial, all within certain time schedules.
Under ERISA, there are steps you can take to enforce the above rights. For instance, if you request a copy of Plan documents or the latest annual report
from the plan and do not receive
them within 30 days, you may file suit in a Federal court. In such a case, the court may require the Plan Administrator to provide the materials and pay you
up to $110 a day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the Plan Administrator. If you have a claim for benefits which is denied or ignored, in whole or in part, you may file suit
in a state or Federal court. If you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a Federal court. The court will decide who should pay court costs and legal
fees. If you are successful the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees, for example, if it finds your claim is frivolous.
Assistance with Your Questions
If
you have any questions about the Plan, you should contact the Plan Administrator. If you have any questions about this statement or about your rights under ERISA, or if you need assistance in obtaining documents from the Plan Administrator, you
should contact the nearest office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your telephone directory or the Division of Technical Assistance and Inquiries, Employee Benefits Security Administration, U.S.
Department of Labor, 200 Constitution Avenue N.W., Washington, D.C. 20210. You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security
Administration.
The general offices of the Plan Administrator, Territorial Savings Bank, are located at 1132 Bishop Street #2200,
Honolulu, Hawaii 96813. The telephone number is (808) 946-1400. Legal process should be served on the Plan Administrator. The President of the Bank is designated as agent for service of legal process at the above address.
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Exhibit 21
Subsidiaries of the Registrant
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Name
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State of Incorporation
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Territorial Savings Bank
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Federal (direct)
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Territorial Savings Statutory Trust I
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Connecticut (direct)
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Territorial Savings Statutory Trust II
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Connecticut (direct)
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Territorial Savings Statutory Trust III
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Connecticut (direct)
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Territorial Holdings, Inc.
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Hawaii (indirect)
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Territorial Realty, Inc.
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Hawaii (indirect)
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Territorial Financial Services, Inc.
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Hawaii (indirect)
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Territorial Real Estate Co., Inc.
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Hawaii (indirect)
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Exhibit 23.2
[Letterhead of KPMG LLP]
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Territorial Mutual Holding Company:
We consent to the use of our report included herein and to the reference to our firm under the heading “Experts” in the prospectus. Our report refers to the
adoption of Statement of Financial Accounting Standards No. 158,
Employers for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R),
effective December 31, 2006.
/s/ KPMG LLP
Honolulu, Hawaii
November 12, 2008
Exhibit 23.3
November 12, 2008
Board of
Directors
Territorial Mutual Holding Company
Territorial
Savings Bank
1132 Bishop Street, Suite 2200
P.O. Box 1481
Honolulu, HI 96813
Dear Board Members:
We hereby consent to the use of our firm’s name, FinPro, Inc. (“FinPro”) and the inclusion of, summary of and references to our Conversion Valuation
Appraisal Report and the valuation of Territorial Mutual Holding Company provided by FinPro in: (i) the Form S-1 Registration Statement (“Registration Statement”), including the prospectus filed by Territorial Mutual Holding Company
and any amendments thereto and our opinion regarding subscription rights filed as an exhibit to the Registration Statement referenced above and (ii) the Application for Conversion on Form AC to be filed by Territorial Mutual Holding Company
with the Office of Thrift Supervision.
Very Truly Yours,
FinPro, Inc.
20 Church Street • P.O. Box 323 • Liberty Corner, NJ 07938-0323 • Tel: 908.604.9336 • Fax:
908.604.5951
finpro@finpronj.com • www.finpronj.com
Exhibit 99.1
August 13, 2008
Vernon
Hirata
Vice Chairman, Co-Chief Operating Officer, and General Counsel
Territorial Savings Bank
1132 Bishop Street, Suite 2200
Honolulu, HI 96813
P.O. Box 1481
Honolulu, HI 96806
RE: Appraisal Services
Dear Mr. Hirata:
FinPro, Inc. (“FinPro”) would be pleased to assist Territorial Savings Bank (“the Bank”) and Territorial Mutual Holding Company (“the
Company”) in providing appraisal services for the planned full stock offering utilizing September 30, 2008 financials.
Section 1:
Services to be Rendered
As part of the appraisal valuation, the following major tasks will be included:
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conduct financial due diligence, including interviews of senior management and reviews of financial and other records;
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gather an understanding of the Bank’s current and projected financial condition, profitability, risk characteristics, operations and external factors that
might influence or impact the Bank;
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prepare a detailed written valuation report of the Bank and the Company, that is consistent with applicable regulatory guidelines and standard valuation practices;
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prepare and deliver an opinion, in form and substance acceptable to legal and tax counsel of the Bank and the Company, to the effect that the subscription rights
granted to eligible account holders, the applicable stock benefit plans and others in connection with the stock offering, have no value.
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The valuation report will:
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include an in-depth analysis of the operating results and financial condition of the Bank and the Company;
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assess the interest rate risk, credit risk and liquidity risk;
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20 Church Street • P.O. Box 323 • Liberty Corner, NJ 07938-0323 • Tel: 908.604.9336 • Fax: 908.604.5951
finpro@finpronj.com • www.finpronj.com
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describe the business strategies of the Bank and the Company, the market area, competition and potential for the future;
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include a detailed peer analysis of publicly traded savings institutions for use in determining appropriate valuation adjustments based upon multiple factors;
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include a midpoint pro forma valuation along with a range of value around the midpoint value;
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comply, in form and substance to all applicable requirements of regulatory authorities for purposes of its use to establish the estimated pro forma market value of
the common stock of the Company following the Conversion and Stock Offering.
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The valuation report may be periodically updated throughout
the Conversion process and will be updated at the time of the closing of the Stock Offering.
FinPro will perform such other services as are necessary or
required in connection with the regulatory review of the appraisal and will respond to the regulatory comments, if any, regarding the valuation appraisal and any subsequent updates.
Section 2: Information Requirements of the Bank
To accomplish the tasks set forth in Section 1 of
this proposal, the following information and work effort is expected of the Bank and the Company:
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provide FinPro with all financial and other information, whether or not publicly available, necessary to familiarize FinPro with the business and operations of the
Bank and the Company;
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allow FinPro the opportunity, from time to time, to discuss the operations of the Bank and the Company with Bank and Company personnel;
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promptly advise FinPro of any material or contemplated material transactions that may have an effect on the day-to-day operations of the Bank and the Company;
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provide FinPro with all support schedules required to compile Regulatory, Board and Management reports; and
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provide FinPro with offering circular, prospectus and all other materials relevant to the appraisal function for the Conversion.
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Section 3: Project Deliverables
The following is a list
of deliverables that will result from FinPro’s effort:
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2.
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Final Appraisal document
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Section 4: Term of the Agreement and
Staffing
It is anticipated that it will take approximately six months of elapsed time to complete all of the tasks outlined in this proposal.
2.
Section 5: Fees and Expenses
FinPro’s fees for providing the services outlined in this Agreement will be:
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$70,000 for the initial appraisal; and
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$10,000 for all appraisal updates, this includes the final appraisal.
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This fee is payable according to the following schedule:
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A non-refundable retainer of $15,000;
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upon submission of the appraisal to the regulators, a non-refundable fee of $25,000; plus
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upon completion of the Stock Offering, a non-refundable fee equal to the remainder; and
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if appraisal updates are necessary, they will be payable upon delivery.
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In addition to any fees that may be payable to FinPro hereunder, the Bank and the Company hereby agrees to promptly reimburse FinPro for all of FinPro’s travel and other out-of-pocket expenses incurred in
connection with FinPro’s engagement. Such out-of-pocket expenses will consist of travel to and from the Bank’s facilities from FinPro’s offices, normal delivery charges such as Federal Express, and costs associated with the Valuation
documents such as copying. The out-of-pocket expenses will not exceed $5,000, assuming two or less on-site meetings at the Bank’s location. Travel expenses in excess of two meetings will be billed in addition to the expense cap. It is FinPro
policy to provide you with an itemized accounting of the out-of-pocket expenditures.
In the event that the Bank and the Company shall, for any reason,
discontinue the proposed Conversion prior to delivery of the completed documents set forth above, the Bank and Company agrees to compensate FinPro according to FinPro’s standard billing rates for consulting services based on accumulated time
and expenses, not to exceed the respective fee caps noted above. FinPro’s standard hourly rates are as follows:
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• Director Level and Above
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$300
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• Staff Consultant Level
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$150
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If during the course of the proposed transaction, unforeseen events occur so as to materially change the nature or
the work content of the services described in this contract, the terms of said contract shall be subject to renegotiation by the Bank, the Company and FinPro. Such unforeseen events shall include, but not be limited to, major changes in the
conversion regulations, appraisal or processing procedures as they relate to conversion appraisals, major changes in management or procedures, operating policies or guidelines, excessive delays or suspension of processing of conversion applications
by the regulators.
FinPro agrees to execute a suitable confidentiality agreement with the Bank and the Company. The Bank and Company acknowledges that all
opinions, valuations and advice (written or oral) given by FinPro to the Bank and Company in connection with FinPro’s engagement are intended solely for the benefit and use of the Bank and Company (and their directors, management, and
attorneys) in connection with the matters
3.
contemplated hereby, and the Bank and Company agree that no such opinion, valuation, or advice shall be used for any other purpose, except with respect to
the opinion and valuation which may be used for the proper corporate purposes of the client, or reproduced, or disseminated, quoted or referred to at any time, in any manner or for any purpose, nor shall any public references to FinPro be made by
the Bank and Company (or such persons), without the prior written consent of FinPro, which consent shall not be unreasonably withheld.
Section 6: Representations and Warranties
FinPro, the Bank and the Company agree to the following:
1.) The Bank and the Company agree to make available or to supply to FinPro the information set forth in Section 2 of this Agreement.
2.) The Bank and the Company hereby represent and warrant to FinPro that any information provided to FinPro does not and will not, to the best of the Bank’s and
Company’s knowledge, at the times it is provided to FinPro, contain any untrue statement of a material fact or fail to state a material fact necessary to make the statements therein not false or misleading in light of the circumstances under
which they were made.
3.) (a) The Bank and the Company shall: indemnify FinPro and hold it harmless against any and all losses,
claims, damages or liabilities to which FinPro may become subject arising in any manner out of or in connection with the rendering of services by FinPro hereunder (including any services rendered prior to the date hereof) or the rendering of
additional services by FinPro as requested by the Company or the Bank that are related to the services rendered hereunder, unless it is finally judicially determined that such losses, claims, damages or liabilities resulted directly from the gross
negligence or willful misconduct of FinPro; and
(b) reimburse FinPro promptly for any legal or other expenses reasonably incurred by it in
connection with investigating, preparing to defend or defending, or providing evidence in or preparing to serve or serving as a witness with respect to, any lawsuits, investigations, claims or other proceedings arising in any manner out of or in
connection with the rendering of services by FinPro hereunder or the rendering of additional services by FinPro as requested by the Company or the Bank that are related to the services rendered hereunder (including, without limitation, in connection
with the enforcement of this Agreement and the indemnification obligations set forth herein); provided, however, that in the event a final judicial determination is made to the effect specified in subparagraph 3(a) above, FinPro will remit to the
Company or the Bank any amounts reimbursed under this subparagraph 3(b). However, if the Company or the Bank brings legal action against FinPro and FinPro is finally judicially determined as liable, FinPro will reimburse the Company and the Bank for
FinPro’s legal and other expenses.
The Company and the Bank agree that the indemnification and reimbursement commitments set forth in this paragraph
3 shall apply whether or not FinPro is a formal party to any such lawsuits, investigations, claims or other proceedings and that such commitments shall extend upon the terms set forth in this paragraph to any controlling person, affiliate, director,
officer, employee or consultant of FinPro (each, with FinPro, an “Indemnified Person”).
4.
This Agreement constitutes the entire understanding of the Bank, the Company and FinPro concerning the subject matter
addressed herein, and shall be governed and construed in accordance with the laws of the State of New Jersey, unless pre-empted by federal law. This Agreement may not be modified, supplemented or amended except by written agreement executed by both
parties.
The Bank, the Company and FinPro are not affiliated, and neither the Bank, the Company nor FinPro has an economic interest in, or is held in
common with, the other and has not derived a significant portion of its gross revenues, receipts or net income for any period from transactions with the other.
This proposal will expire 30 days from this date unless accepted by you in accordance with the terms below.
Please confirm that the foregoing is
in accordance with your understanding and agreement with FinPro by signing and returning to FinPro the duplicate of the letter enclosed herewith.
Sincerely:
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/s/ Donald J. Musso
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/s/ Vernon Hirata
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Donald J. Musso
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Vernon Hirata
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President
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Vice Chairman, Co-Chief Operating Officer, and
General Counsel
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FinPro, Inc.
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Territorial Savings Bank
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8/13/08
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10/14/08
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Date
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Date
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CC: Lawrence M.F. Spaccasi, Luse Gorman Pomerenk & Schick P.C.
5.
Exhibit 99.2
November 10, 2008
Boards of
Directors
Territorial Bancorp Inc.
Territorial Mutual Holding
Company
1132 Bishop Street, Suite 2200
P.O. Box 1481
Honolulu, HI 96813
Dear Board Members:
All capitalized terms not otherwise defined in this letter have the meanings given such terms in Territorial Mutual Holding Company’s (the “MHC”) Plan of
Conversion and Reorganization (the “Plan”) adopted by the Board of Directors of the MHC. As part of the Plan, Territorial Bancorp Inc. (the “Company”), upon the consummation of the transactions contemplated in the Plan, will
issue 100% of its outstanding common stock to the public.
We understand that in accordance with the Plan, subscription rights to purchase shares of the
common stock are to be issued to (i) Eligible Account Holders; (ii) Tax-Qualified Employee Stock Benefit Plans, including the employee stock ownership plan (“ESOP”); (iii) Supplemental Eligible Account Holders; and
(iv) Other Members (together collectively referred to as the “Recipients”). Based solely on our observation that the subscription rights will be available to such Recipients without cost, will be legally non-transferable and of short
duration, and will afford the Recipients the right only to purchase shares of common stock at the same price as will be paid by members of the general public in the Community Offering, if any, but without undertaking any independent investigation of
state or federal law or the position of the Internal Revenue Service with respect to this issue, we are of the belief that:
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(1)
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the subscription rights will have no ascertainable market value; and
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(2)
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the price at which the subscription rights are exercisable will not be more or less than the pro forma market value of the shares upon issuance.
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Changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural
disasters or significant world events) may occur from time to time, often with great unpredictability and may materially impact the value of thrift stocks as a whole or the Company’s value alone. Accordingly, no assurance can be given that
persons who subscribe to shares of common stock in the Subscription Offering will thereafter be able to buy or sell such shares at the same price paid in the Subscription Offering.
Very Truly Yours,
FinPro, Inc.
20 Church Street • P.O. Box 323 • Liberty Corner, NJ 07938-0323 • Tel: 908.604.9336 • Fax: 908.604.5951
finpro@finpronj.com • www.finpronj.com
Exhibit 99.3
Table of Contents
Territorial Bancorp Inc.
Honolulu, Hawaii
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TABLE OF CONTENTS
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I
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INTRODUCTION
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1
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1. OVERVIEW AND FINANCIAL ANALYSIS
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3
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G
ENERAL
O
VERVIEW
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3
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H
ISTORY
AND
O
VERVIEW
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4
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S
TRATEGIC
D
IRECTION
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5
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B
ALANCE
S
HEET
T
RENDS
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6
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L
OAN
P
ORTFOLIO
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8
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I
NVESTMENTS
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11
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I
NVESTMENTS
AND
M
ORTGAGE
-B
ACKED
S
ECURITIES
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12
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A
SSET
Q
UALITY
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13
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F
UNDING
C
OMPOSITION
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16
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A
SSET
/L
IABILITY
M
ANAGEMENT
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N
ET
W
ORTH
AND
C
APITAL
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P
ROFITABILITY
T
RENDS
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20
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L
EGAL
P
ROCEEDINGS
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S
UBSIDIARIES
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24
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2. MARKET AREA ANALYSIS
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26
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3. COMPARISONS WITH PUBLICLY TRADED THRIFTS
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28
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I
NTRODUCTION
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28
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S
ELECTION
C
RITERIA
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28
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O
VERVIEW
OF
THE
C
OMPARABLES
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31
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4. MARKET VALUE DETERMINATION
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M
ARKET
V
ALUE
A
DJUSTMENTS
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34
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F
INANCIAL
C
ONDITION
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35
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B
ALANCE
S
HEET
G
ROWTH
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39
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E
ARNINGS
Q
UALITY
, P
REDICTABILITY
AND
G
ROWTH
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40
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M
ARKET
A
REA
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45
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C
ASH
D
IVIDENDS
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48
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L
IQUIDITY
OF
THE
I
SSUE
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50
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R
ECENT
R
EGULATORY
M
ATTERS
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51
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5. OTHER FACTORS
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52
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M
ANAGEMENT
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52
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S
UBSCRIPTION
I
NTEREST
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V
ALUATION
A
DJUSTMENTS
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6. VALUATION
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56
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D
ISCUSSION
OF
W
EIGHT
G
IVEN
TO
V
ALUATION
M
ULTIPLES
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56
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F
ULL
O
FFERING
V
ALUE
IN
R
ELATION
TO
C
OMPARABLES
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58
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C
OMPARISON
TO
R
ECENT
MHC C
ONVERSIONS
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60
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V
ALUATION
C
ONCLUSION
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List of Figures
Territorial Bancorp Inc.
Honolulu, Hawaii
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FIGURE 1 - CURRENT FACILITIES LIST
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FIGURE 2 - ASSET AND RETAINED EARNINGS CHART
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FIGURE 3 - KEY BALANCE SHEET DATA
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FIGURE 4 - KEY RATIOS
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FIGURE 5 - NET LOANS RECEIVABLE CHART
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FIGURE 6 - LOAN MIX AS OF SEPTEMBER 30, 2008
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FIGURE 7 - LOAN MIX AT SEPTEMBER 30, 2008
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FIGURE 8 - SECURITIES CHART
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FIGURE 9 - INVESTMENT MIX
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FIGURE 10 - ASSET QUALITY CHART
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FIGURE 11 - NONPERFORMING LOANS
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FIGURE 12 - ALLOWANCE FOR POSSIBLE LOAN AND LEASE LOSSES CHART
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FIGURE 13 - DEPOSIT AND BORROWING TREND CHART
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FIGURE 14 - DEPOSIT MIX
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FIGURE 15 - INTEREST RATE RISK
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FIGURE 16 - CAPITAL ANALYSIS
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FIGURE 17 - NET INCOME CHART
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FIGURE 18 - AVERAGE YIELDS AND COSTS
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FIGURE 19 - SPREAD AND MARGIN CHART
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FIGURE 20 - INCOME STATEMENT TRENDS
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FIGURE 21 - DEPOSIT AND DEMOGRAPHIC DATA FOR HONOLULU
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FIGURE 22 - DEPOSIT AND DEMOGRAPHIC DATA FOR HAWAII
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FIGURE 23 - DEPOSIT AND DEMOGRAPHIC DATA FOR MAUI
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FIGURE 24 - DEPOSIT AND DEMOGRAPHIC DATA FOR KAUAI
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FIGURE 25 - COMPARABLE GROUP
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FIGURE 26 - KEY FINANCIAL INDICATORS
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FIGURE 27 - KEY BALANCE SHEET DATA
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FIGURE 28 - CAPITAL DATA
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FIGURE 29 - ASSET QUALITY TABLE
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FIGURE 30 - BALANCE SHEET GROWTH DATA
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FIGURE 31 - NET INCOME CHART
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FIGURE 32 - PROFITABILITY DATA
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FIGURE 33 - INCOME STATEMENT DATA
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FIGURE 34 - MARKET AREA DATA
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FIGURE 35 - DIVIDEND DATA
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FIGURE 36 - MARKET CAPITALIZATION DATA
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FIGURE 37 - CONVERSIONS (SINCE 1/1/07) PRO FORMA DATA
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FIGURE 38 - CONVERSIONS PRICE APPRECIATION
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54
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FIGURE 39 - VALUE RANGE - FULL OFFERING
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58
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FIGURE 40 - FULL CONVERSION OFFERING PRICING MULTIPLES
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59
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FIGURE 41 - COMPARABLE FULL CONVERSION PRICING MULTIPLES TO THE BANK’S PRO FORMA MIDPOINT
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59
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FIGURE 42 - COMPARABLE FULL CONVERSION PRICING MULTIPLES TO THE BANK’S PRO FORMA SUPER MAXIMUM
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59
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FIGURE 43 - COMPARISON TO FILED AND PENDING STANDARD OFFERINGS
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60
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List of Exhibits
Territorial Bancorp Inc.
Honolulu, Hawaii
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Exhibit
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1.
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Profile of FinPro, Inc. and the Author of the Appraisal
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2.
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Consolidated Statements of Condition
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3.
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Consolidated Statements of Operations
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4.
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Consolidated Statements of Changes in Retained Equity
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5.
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Consolidated Statements of Cash Flows
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6.
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Income Reconciliation of TFR to Consolidated Statements
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7.
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Comparable Group Selection Screens
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8.
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Selected Financial Data
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9.
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Industry Pricing Multiples
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10.
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Standard Conversions September 2007 to Date
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11.
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Appraisal Full Offering No Foundation Pro Forma September 30, 2008 – 12 Months
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12.
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Stub Period Full Offering No Foundation Pro Forma September 30, 2008 – 9 Months
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13.
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Fiscal Year Full Offering No Foundation Pro Forma December 31, 2007 – 12 Months
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Introduction
Territorial Bancorp Inc., a Maryland corporation, is offering shares of common stock for sale in connection with the conversion of Territorial Mutual Holding Company from the mutual to the stock form of organization. Upon completion of the
conversion and the offering, all of the common stock of Territorial Bancorp Inc. will be owned by public stockholders. This report represents FinPro, Inc.’s (“FinPro”) independent appraisal of the estimated pro forma market value of
the common stock (the “Common Stock”) of Territorial Bancorp Inc. (hereafter referred to on a consolidated basis as the “Bank”).
In
compiling the pro formas, FinPro relied upon the assumptions provided by the Bank and its agents. The pro forma assumptions are as follows:
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•
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100% of the total shares will be sold to the depositors and public,
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•
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the stock will be issued at $10.00 per share,
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•
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the conversion expenses will be $3.0 million at the midpoint,
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•
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there will be an ESOP equal to 8% of the shares issued funded internally, amortized over 20 years straight-line,
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•
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there will be an MRP equal to 4% of the shares issued, amortized over 5 years straight-line,
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•
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there will be a Stock Option Plan equal to 10% of the shares issued, expensed at $3.24 per option over 5 years straight-line,
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•
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the tax rate is assumed at 39.00%,
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•
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the Bank will pay down $14.0 million in trust preferred securities at the minimum of the range and $24.0 million at the midpoint, maximum and super maximum, and
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•
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the net proceeds will be invested at the three-year treasury rate of 2.37%, pre-tax.
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It is our understanding that the Bank will offer its stock in a subscription and community offering to Eligible Account Holders, to the Employee Plans and to
Supplemental Eligible Account Holders of the Bank. This appraisal has been prepared in accordance with Regulation 563b.7 and the “Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to
Stock Form of Organization” of the Office of Thrift Supervision (“OTS”) which have been adopted in practice by the Federal Deposit Insurance Corporation (“FDIC”), including the most recent revisions as of October 21,
1994, and applicable regulatory interpretations thereof.
In the course of preparing our report, we reviewed the Bank’s audited financials for the
years ended December 31, 2007 and December 31, 2006 and the unaudited stub period financials as of September 30, 2008. We also reviewed the registration statement on Form S-1 as filed with the Securities and Exchange Commission
(“SEC”). We have conducted due diligence analysis of the Bank and held due diligence related discussions with the Bank’s Management and Board, Keefe Bruyette and Woods, Inc. (the Bank’s underwriter), and Luse Gorman Pomerenk and
Schick, P.C. (the Bank’s special counsel). The valuation parameters set forth in the appraisal were predicated on these discussions but all conclusions related to the valuation were reached and made independent of such discussions.
1
Where appropriate, we considered information based upon other publicly available sources, which we believe to be
reliable; however, we cannot guarantee the accuracy or completeness of such information. We visited the Bank’s primary market area and reviewed the market area’s economic condition. We also reviewed the competitive environment in which the
Bank operates and its relative strengths and weaknesses. We compared the Bank’s performance with selected publicly traded thrift institutions. We reviewed conditions in the securities markets in general and in the market for savings
institutions in particular. Our analysis included a review of the estimated effects of the Conversion of the Bank on the operations and expected financial performance as they related to the Bank’s estimated pro forma value.
In preparing our valuation, we relied upon and assumed the accuracy and completeness of financial and other information provided to us by the Bank and its independent
accountants. We did not independently verify the financial statements and other information provided by the Bank and its independent accountants, nor did we independently value any of the Bank’s assets or liabilities. This estimated valuation
considers the Bank only as a going concern and should not be considered as an indication of its liquidation value.
Our valuation is not intended, and
must not be construed, to be a recommendation of any kind as the advisability of purchasing shares of Common Stock in the stock issuance. Moreover, because such valuation is necessarily based upon estimates and projections of a number of matters,
all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of Common Stock in the stock issuance will thereafter be able to sell such shares at prices related to the foregoing valuation of the
pro forma market value thereof. FinPro is not a seller of securities within the meaning of any federal or state securities laws. Any report prepared by FinPro shall not be used as an offer or solicitation with respect to the purchase or sale of any
securities.
The estimated valuation herein will be updated as appropriate. These updates will consider, among other factors, any developments or
changes in the Bank’s financial condition, operating performance, management policies and procedures and current conditions in the securities market for thrift institution common stock. Should any such developments or changes, in our opinion,
be material to the estimated pro forma market value of the Bank, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any such adjustments will be explained at that time.
2
1. Overview and Financial Analysis
G
ENERAL
O
VERVIEW
As of September 30, 2008, the Bank had $1.2 billion in total assets, $910.3 million in deposits, $622.2 million in net loans and $99.1 million in equity. The following table sets forth information with respect to the Bank’s
full-service banking offices, including the expiration date of leases with respect to leased facilities.
FIGURE 1 - CURRENT FACILITIES
LIST
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ALA MOANA CENTER
1450 Ala Moana Blvd.
Honolulu, Oahu 96814
1/31/2010
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KAILUA
19 Oneawa Street
Kailua, Oahu 96734
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KAPOLEI
Ace Center at Kapolei
480 Kamokila Blvd.
Kapolei, Oahu 96707
7/31/2014
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NUUANU
Nuuanu Shopping Center
1613 Nuuanu Avenue
Honolulu, Oahu 96817
7/22/2016
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DOWNTOWN
1000 Bishop Street
Honolulu, Oahu 96813
12/31/2015
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KAIMUKI
1108 12
th
Avenue
Honolulu, Oahu 96816
12/31/2018
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KAUAI
Kukui Grove Shopping Center
4393 Kukui Grove Street
Lihue, Kauai 96766
2/28/2013
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PEARL CITY
Pearl City Shopping Center
850 Kamehameha Highway
Pearl City, Oahu 96782
9/22/2009
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HAWAII KAI
Hawaii Kai Shopping Center
377 Keahole Street
Honolulu, Oahu 96825
9/30/2013
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KALIHI-KAPALAMA
1199 Dillingham
Boulevard
Honolulu, Oahu 96817
8/31/2012
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KONA
Crossroads Shopping Center
75-1027 Henry Street
Kailua-Kona, Hawaii 96770
8/31/2015
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PEARLRIDGE
98-084 Kamehameha
Highway
Aiea, Oahu 96701
6/30/2012
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HILO
Waiakea Center
315 Makaala Street
Hilo, Hawaii 96720
12/31/2018
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KAMEHAMEHA SHOPPING CENTER
1620 North School St.
Honolulu, Oahu 96817
9/30/2015
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LAHAINA
Old Lahaina Center
170 Papalaua Street
Lahaina, Maui 96761
3/31/2013
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SALT LAKE
Salt Lake Shopping Center
848 Ala Lilikoi Street
Honolulu, Oahu 96818
1/31/2011
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KAHALA
4819 Kilauea Avenue
Honolulu, Oahu 96816
3/16/2015
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KANEOHE
46-005 Kawa Street
Kaneohe, Oahu 96744
12/31/2014
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McCULLY
1111 McCully Street
Honolulu, Oahu 96826
5/31/2013
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WAIPAHU
Waipahu Town Center
94-050 Farrington Highway
Waipahu, Oahu 96797
12/31/2014
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KAHULUI
Kaahumanu Center
275 W. Kaahumanu Ave.
Kahului, Maui 96732
12/31/2009
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KAPAHULU
Kilohana Square
1016 Kapahulu Avenue
Honolulu, Oahu 96816
11/14/2013
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MILILANI
Town Center of Mililani
95-1249 Meheula Park Way
Mililani, Oahu 96789
10/11/2014
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WAIPIO
Laniakea Plaza
94-1221 Ka Uka Blvd.
Waipahu, Oahu 96797
9/30/2016
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Source: Offering Prospectus
3
H
ISTORY
AND
O
VERVIEW
T
ERRITORIAL
S
AVINGS
B
ANK
Territorial Savings Bank is a federally chartered savings bank headquartered in Honolulu, Hawaii. Territorial Savings Bank was organized in 1921, and reorganized into the mutual holding company structure in 2002.
Territorial Savings Bank is currently the wholly owned subsidiary of Territorial Savings Group, Inc., a federal corporation, which is the wholly owned subsidiary of Territorial Mutual Holding Company, a federal mutual holding company. The Bank
provides financial services to individuals, families and businesses through its 24 banking offices located throughout the State of Hawaii.
Territorial
Savings Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in one- to four-family residential mortgage loans and
investment securities. To a much lesser extent, the Bank also originates home equity loans and lines of credit, construction, commercial and other non-residential real estate loans, consumer loans, multi-family mortgage loans and other loans.
Territorial Savings Bank offers a variety of deposit accounts, including passbook and statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts and Super NOW accounts. Through a subsidiary,
Territorial Financial Services, Inc., the Bank engages in insurance agency activities. The Bank also offers various non-deposit investments to its customers, including annuities and mutual funds, through a third-party broker-dealer.
Territorial Savings Bank’s executive offices are located at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii 96813.
T
ERRITORIAL
B
ANCORP
I
NC
.
Territorial Bancorp Inc. is a newly formed Maryland corporation that will own all of the outstanding shares of common stock of Territorial Savings Bank upon completion of the mutual-to-stock conversion and the
offering. Territorial Bancorp Inc. has not engaged in any business to date.
4
S
TRATEGIC
D
IRECTION
The Bank’s business strategy is to grow and improve profitability by:
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•
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remaining a community-oriented financial institution;
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•
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increasing loan production while maintaining high asset quality;
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•
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emphasizing lower cost core deposits to maintain low funding costs; and
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•
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expanding its branch network.
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5
B
ALANCE
S
HEET
T
RENDS
The Bank’s balance sheet increased by $287.3 million between December 31, 2003 and December 31, 2006. Assets declined $137.8 million between
December 31, 2006 and December 31, 2007, but increased $42.8 million between December 31, 2007 and September 30, 2008
Equity was $99.1
million as of September 30, 2008 and the equity to assets ratio was 8.22% at September 30, 2008.[Table Omitted]
F
IGURE
2 - A
SSET
AND
R
ETAINED
E
ARNINGS
C
HART
[Chart Omitted]
6
The following tables set forth certain information concerning the financial position of the Bank at the dates indicated.
F
IGURE
3 - K
EY
B
ALANCE
S
HEET
D
ATA
[Table Omitted]
F
IGURE
4 -
K
EY
R
ATIOS
[Table Omitted]
7
L
OAN
P
ORTFOLIO
The Bank’s loan portfolio has increased by $211.6 million from December 31, 2003 to September 30, 2008, with $67.4 million of the growth coming between
December 31, 2007 and September 30, 2008. As a percent of assets, the loan portfolio has increased from 40.55% to 51.64% between December 31, 2003 and September 30, 2008, respectively.
F
IGURE
5 - N
ET
L
OANS
R
ECEIVABLE
C
HART
[Chart Omitted]
8
The Bank’s lending operations are primarily focused on 1-4 family residential loans. Since December 31, 2003,
the loan portfolio composition has shifted modestly toward home equity loans and lines as well as construction, commercial and other loans.
F
IGURE
6 - L
OAN
M
IX
AS
OF
S
EPTEMBER
30, 2008
[Table Omitted]
9
Over 90% of the loan mix is 1-4 family residential.
F
IGURE
7 - L
OAN
M
IX
AT
S
EPTEMBER
30, 2008
10
I
NVESTMENTS
The investment portfolio has decreased $148.0 million between December 31, 2005 and September 30, 2008. The cash flow from the portfolio has been used to fund
loan growth and compensate for lower deposits during that time frame.
F
IGURE
8 - S
ECURITIES
C
HART
[Chart Omitted]
11
I
NVESTMENTS
AND
M
ORTGAGE
-B
ACKED
S
ECURITIES
The following table provides the Bank’s investment portfolio. As of September 30, 2008, the entire
portfolio is classified as held to maturity. The portfolio is predominately agency sponsored MBS. The unrealized loss on the portfolio is $14.9 million. The Bank has noted in the offering prospectus that it may have to record an impairment charge on
its holdings of trust preferred securities in the future.
F
IGURE
9 - I
NVESTMENT
M
IX
[Table Omitted]
12
A
SSET
Q
UALITY
The Bank’s conservative underwriting culture has resulted in a low level of nonperforming loans and nonperforming assets.
F
IGURE
10 - A
SSET
Q
UALITY
C
HART
[Chart Omitted]
13
At September 30, 2008, the Bank’s nonperforming loans to total loan ratio was 0.00% and the nonperforming
assets to total assets ratio was 0.00%.
F
IGURE
11 - N
ONPERFORMING
L
OANS
Due to the historically low level of charge-offs and nonperforming assets, the Bank’s reserve to loan ratio is 0.12% as of September 30, 2008.
[Table Omitted]
14
F
IGURE
12 - A
LLOWANCE
FOR
P
OSSIBLE
L
OAN
AND
L
EASE
L
OSSES
C
HART
[Chart Omitted]
15
F
UNDING
C
OMPOSITION
Deposits increased $165.6 million between December 31, 2003 and December 31, 2004. This growth was largely reversed between December 31, 2004 and
December 31, 2007. Deposits increased $17.9 million between December 31, 2007 and September 30, 2008. Borrowings have trended upward between December 31, 2003 and September 30, 2008.
F
IGURE
13 - D
EPOSIT
AND
B
ORROWING
T
REND
C
HART
[Chart Omitted]
16
The following chart illustrates the Bank’s deposit mix as of September 30, 2008. The two largest components of
the deposit mix are certificates of deposit and savings accounts.
F
IGURE
14 - D
EPOSIT
M
IX
[Table Omitted]
17
A
SSET
/L
IABILITY
M
ANAGEMENT
The following chart provides the net portfolio value sensitivity in various interest rate shock scenarios provided by the OTS as of September 30, 2008. The
Bank’s interest rate risk position is considered to be “Significant Risk” according to TB-13a.
F
IGURE
15 -
I
NTEREST
R
ATE
R
ISK
[Table Omitted]
18
N
ET
W
ORTH
AND
C
APITAL
At September 30, 2008 the Bank had capital in excess of the minimum requirements for all capital ratios. Approximately, $24.0 million of the
Bank’s capital is currently funded by trust preferred debt at the holding company.
F
IGURE
16 -
C
APITAL
ANALYSIS
[Table Omitted]
19
P
ROFITABILITY
T
RENDS
Net income trended downward between the twelve months ended December 31, 2004 and the twelve months ended December 31, 2007. The decline of $8.2 million over
this time period was primarily attributable to lower net interest income resulting from margin compression, higher noninterest expense and lower noninterest income.
For the nine months ended September 30, 2008 compared to nine months ended September 30, 2007, net income increased $1.6 million or 33.3%. The increase was primarily attributable to an increase in net
interest income of $5.0 million, resulting from lower interest expense. This was partially offset by a $2.0 million increase in noninterest expense and a $1.0 increase in provision for income tax expense.
F
IGURE
17 - N
ET
I
NCOME
C
HART
[Table Omitted]
20
The net interest spread and margin increased between the twelve months ended September 30, 2007 and the twelve
months ended September 30, 2008. The increase was primarily attributable to a lower cost of interest bearing liabilities, which was complemented by a higher yield on earning assets.
F
IGURE
18 - A
VERAGE
Y
IELDS
AND
C
OSTS
[Table Omitted]
21
Spread and margin trended downward between December 31, 2003 and December 31, 2007, due in large part to a
rising cost of funds.
The net interest spread and margin both increased between the nine months ended September 30, 2007, and the twelve months ended
September 30, 2008 for the reasons explained on the previous page.
F
IGURE
19 - S
PREAD
AND
M
ARGIN
C
HART
[Chart Omitted]
22
Net income trended downward between the twelve months ended December 31, 2004 and the twelve months ended
December 31, 2007. The decline of $8.2 million over this time period was primarily attributable to lower net interest income resulting from margin compression, higher noninterest expense and lower noninterest income.
For the nine months ended September 30, 2008 compared to nine months ended September 30, 2007, net income increased $1.6 million or 33.3%. The increase was
primarily attributable to an increase in net interest income of $5.0 million, resulting from lower interest expense. This was partially offset by a $2.0 million increase in noninterest expense and a $1.0 increase in provision for income tax expense.
F
IGURE
20 - I
NCOME
S
TATEMENT
T
RENDS
[Table Omitted]
23
L
EGAL
P
ROCEEDINGS
Territorial Mutual Holding Company, Territorial Savings Group, Inc., Territorial Savings Bank and Territorial Realty, Inc. (the Bank’s real estate investment trust
subsidiary) have filed appeals with the Tax Appeal Court of the State of Hawaii seeking refunds of approximately $4.5 million in taxes paid to the State of Hawaii from 2004 through 2007. The refunds represent 70% of the amount of dividends paid to
Territorial Savings Bank by Territorial Realty, Inc. from 2004 to 2007. The claim for the refunds is based on a 70% dividends-received deduction under Hawaii statutes, these refunds have been denied by the State of Hawaii Department of Taxation. A
hearing has been set for March 2010. At this time, management is unable to predict an outcome, favorable or unfavorable, with respect to these actions.
Other than as disclosed in the preceding paragraph, at September 30, 2008, the Bank was not involved in any legal proceedings the outcome of which it believes would be material to its financial condition or results of operations.
S
UBSIDIARIES
In addition to owning all of the outstanding capital stock of Territorial Savings Bank, Territorial Savings Group, Inc. owns all of the common stock of three statutory trusts formed under the laws of the State of Connecticut: Territorial
Savings Statutory Trust I, Territorial Savings Statutory Trust II and Territorial Savings Statutory Trust III. The three statutory trusts were formed to issue a total of $24.0 million of trust preferred securities. At September 30, 2008,
Territorial Savings Group, Inc.’s investment in the statutory trusts totaled $743,000, and these entities had assets of $24.8 million at that date.
Territorial Savings Bank owns 100% of the common stock of Territorial Holdings, Inc., a Hawaii corporation, which in turn owns 100% of the voting common stock of Territorial Realty, Inc. Territorial Realty, Inc. is a Hawaii real estate
investment trust that holds mortgage loans and mortgage-backed securities. These entities enable Territorial Savings Bank to segregate certain assets for management purposes, and promote Territorial Savings Bank’s ability to raise regulatory
capital in the future through the sale of preferred stock or other capital-enhancing securities by these entities. At September 30, 2008, Territorial Savings Bank’s investment in Territorial Holdings, Inc. was $504.2 million, and
Territorial Holdings, Inc. had assets of $504.2 million at that date. At September 30, 2008, Territorial Holdings, Inc.’s investment in Territorial Realty, Inc. was $504.1 million, and Territorial Realty, Inc. had $524.1 million in assets
at that date.
Territorial Savings Bank owns 100% of the common stock of Territorial Financial Services, Inc., a Hawaii corporation that engages primarily
in insurance activities. At September 30, 2008, Territorial Savings Bank’s investment in Territorial Financial Services, Inc. was $12,000, and
24
Territorial Financial Services, Inc. had assets of $51,000 at that date. Territorial Savings Bank also owns 100% of the common stock of Territorial Real
Estate Co., Inc., an inactive Hawaii corporation that is authorized to manage and dispose of troubled real estate.
25
2. Market Area Analysis
The following tables provide deposit and demographic data for the Bank’s market area.
F
IGURE
21 - D
EPOSIT
AND
D
EMOGRAPHIC
D
ATA
FOR
H
ONOLULU
[Table Omitted]
26
F
IGURE
22 - D
EPOSIT
AND
D
EMOGRAPHIC
D
ATA
FOR
H
AWAII
[Table Omitted]
F
IGURE
23 - D
EPOSIT
AND
D
EMOGRAPHIC
D
ATA
FOR
M
AUI
[Table Omitted]
F
IGURE
24
- D
EPOSIT
AND
D
EMOGRAPHIC
D
ATA
FOR
K
AUAI
[Table Omitted]
27
3. Comparisons with Publicly Traded Thrifts
I
NTRODUCTION
This
section presents an analysis of the Bank’s operations against a selected group (“Comparable Group”) of publicly traded thrifts. The Comparable Group was selected based upon similarity of characteristics to the Bank. The Comparable
Group multiples provide the basis for the valuation of the Bank.
Factors that influence the Bank’s value such as balance sheet structure and size,
profitability, income and expense trends, capital levels, credit risk, and recent operating results can be measured against the Comparable Group. The Comparable Group’s current market pricing, coupled with the appropriate aggregate adjustment
for differences between the Bank and the Comparable Group, will then be utilized as the basis for the pro forma valuation of the Bank’s to-be-issued common stock.
S
ELECTION
C
RITERIA
The goal of the selection criteria process is to
find those institutions with characteristics that most closely match those of the Bank. In an ideal world, all of the Comparable Group would contain the exact characteristics of the Bank. However, none of the Comparables selected will be exact
clones of the Bank.
As of the date of this updated appraisal, there are a total of 203 fully converted thrifts nationally. There are 121 traded on the
NYSE, NASDAQ or AMEX. FinPro limited the Comparable Group to institutions whose common stock is listed on a major exchange, since these companies tend to trade regularly. FinPro believes that thrifts that trade over-the-counter or as pink sheets are
inappropriate for the Comparable Group, due to irregular trading activity and wide bid/ask spreads, which may skew the trading value and make trading multiples less reliable as an indicator of value.
Two announced merger targets were eliminated from the group leaving 119 remaining.
28
FinPro excluded institutions that have recently converted, as the earnings of newly converted institutions do not reflect
a full year’s benefit from the reinvestment of proceeds, and thus the price/earnings multiples and return on equity measures for these institutions tend to be skewed upward and downward, respectively. As such, the 10 institutions that converted
after September 30, 2007 were eliminated.
Institutions with significant asset quality problems are inappropriate comparables relative to an
institution with strong asset quality. FinPro eliminated 15 institutions with NPA/assets greater than 3%, leaving 94 remaining.
Of the remaining 94,
FinPro then eliminated 27 of the institutions with assets less than $600 million as these entities have less financial and managerial resources.
Of the
remaining 67, FinPro then eliminated 20 of the institutions with assets greater than $3.0 billion as these entities have greater financial and managerial resources and a broader branch network.
FinPro then eliminated First Franklin Corporation due to a lack of sufficient public financial data, leaving 46 institutions.
In order to eliminate struggling institutions, FinPro eliminated 6 institutions which were not profitable on an aggregate core net income basis for the trailing twelve
months, leaving 40.
Ideally, all of the Comparables would be located in Hawaii or on the West Coast. However, due to the limited universe and critical
financial characteristics that is not possible. FinPro was forced to expand the geographic screen to include the Western, Southwestern and Midwestern Regions. As such, FinPro eliminated 26 institutions located in the New England, Mid Atlantic and
Southeastern Regions.
This results in a total of 14 Comparables. FinPro reviewed the recent performance and news releases of these 14 companies. FinPro
determined that BofI Holding, Inc. was not appropriate due to its internet strategy. The remaining 13 were acceptable Comparables.
29
F
IGURE
25 - C
OMPARABLE
G
ROUP
[Table Omitted]
30
O
VERVIEW
OF
THE
C
OMPARABLES
The members of the Comparable Group were reviewed against the Bank to ensure comparability based upon the following criteria:
1. Asset Size
Ideally, the Comparable
Group should have a similar asset size to the Bank. The Comparable Group ranged in size from $681.9 million to $2.2 billion in total assets with a median of $1.1 billion. The Bank’s asset size was $1.2 billion as of September 30, 2008. On
a pro forma basis, the Bank’s assets are projected to be $1.3 billion at the midpoint of the estimated value range.
2. Profitability
The Comparable Group had a median core ROAA of 0.60% and a median ROAE of 7.69% for the last twelve months. The Comparable Group profitability measures had a dispersion about the mean for the core ROAA measure ranging from a low of 0.02% to
a high of 1.11%, while the ROAE measure ranged from a low of 0.23% to a high of 12.04%. The Bank had a core ROAA of 0.61% and a core ROAE of 7.66% for the twelve months ended September 30, 2008. On a pro forma basis, the Bank’s ROAA and
ROAE are 0.64% and 4.53%, respectively.
3. Capital Level
The Comparable Group had a median tangible equity to tangible assets
ratio of 6.91% with a high of 10.10% and a low of 4.76%. At September 30, 2008, the Bank had a tangible equity to tangible assets ratio of 8.21%. On a pro forma basis, at the midpoint, the Bank would have a tangible equity to tangible assets
ratio of 14.20%.
4. Balance Sheet Mix
At September 30, 2008, the Bank had a net loan to asset ratio of 51.64%. The median loan
to asset ratio for the Comparables was 81.89%, ranging from a low of 50.08% to a high of 87.82%. On the liability side, the Bank’s deposit to asset ratio was 75.55% at September 30, 2008 while the Comparable median was 70.18%, ranging from
52.92% to 78.40%. The Bank’s borrowing to asset ratio of 13.94% is below the Comparable median of 18.94%.
5. Operating Strategy
An
institution’s operating characteristics are important because they determine future performance. Operational strategy also affects expected rates of return and
31
investors’ general perception of the quality, risk and attractiveness of a given company. Specific operating characteristics include profitability,
balance sheet growth, asset quality, capitalization and non-financial factors such as management strategies and lines of business.
6. Date of
Conversion
Recent conversions, those completed on or after September 30, 2007, were excluded since the earnings of a newly converted institution do not reflect the reinvestment of conversion proceeds. Additionally, new issues tend to
trade at a discount to the market averages.
32
The following table represents key financial indicators for the Bank and the Comparable Group.
F
IGURE
26 - K
EY
F
INANCIAL
I
NDICATORS
[Table Omitted]
33
4. Market Value Determination
M
ARKET
V
ALUE
A
DJUSTMENTS
The estimated pro forma market value of the
Bank, along with certain adjustments to its value relative to market values for the Comparable Group are delineated in this section. The adjustments are made from potential investors’ viewpoint and are adjustments necessary when comparing the
Bank to the Comparable Group. The adjustment factors are subjectively assessed using the appraiser’s knowledge and expertise and an aggregate adjustment is determined. Potential investors include depositors holding subscription rights and
unrelated parties who may purchase stock in the community offering and who are assumed to be aware of all relevant and necessary facts as they pertain to the value of the Bank relative to other publicly traded thrift institutions and relative to
alternative investment opportunities.
There are numerous criteria on which the market value adjustments are based. The major criteria utilized for
purposes of this report include:
Adjustments Relative to the Comparable Group:
|
|
•
|
|
Earnings Quality, Predictability and Growth
|
|
|
•
|
|
Recent Regulatory Matters
|
Adjustments for Other
Factors:
To ascertain the market value
of the Bank, the median trading multiple values for the Comparable Group are utilized as the starting point. The adjustment, up or down, to the Comparable Group median multiple values is made based on the comparison of the Bank to the Comparable
Group.
34
F
INANCIAL
C
ONDITION
The balance sheet strength of an institution is an important market value determinant, as the investment community considers such factors as cash liquidity,
capitalization, asset composition, funding mix, intangible levels and interest rate risk in assessing the attractiveness of investing in the common stock of a thrift. The following figures summarize the key financial elements of the Bank measured
against the Comparable Group.
F
IGURE
27 - K
EY
B
ALANCE
S
HEET
D
ATA
[Table Omitted]
Asset Size
- The Bank, at $1.2 billion, is above the Comparable Group median of $1.1 billion. At the pro forma midpoint of the offering range, the Bank is expected to have assets of $1.3 million.
Asset Composition
- The Bank’s loans to assets ratio of 51.64% is below the Comparable Group median of 81.89%. The Bank has a higher level of
securities as a percentage of assets.
35
Funding Mix
- The Bank funds itself through deposits, 75.55% of assets and borrowings, 13.94% of
assets. The Comparable Group has a deposits to assets ratio of 70.08% and a borrowing to asset ratio of 19.78%.
Securities Portfolio
- As of September 30, 2008, the entire securities portfolio is classified as held to maturity. The portfolio is predominately agency sponsored MBS. The unrealized loss on the portfolio is $14.9 million. The Bank has noted in the offering
prospectus that it may have to record an impairment charge on its holdings of trust preferred securities in the future.
Cash
Liquidity
- The cash liquidity of the Bank and the Comparable Group appear to be sufficient to meet funding requirements and regulatory guidelines.
Interest Rate Risk
- The Bank’s interest rate risk position is illustrated on page 18. The Bank’s interest rate risk position is considered to be “Significant Risk”. The pro forma increase
in capital is expected to reduce the institution’s interest rate risk. No similar data is available for the Comparable Group.
F
IGURE
28 - C
APITAL
D
ATA
[Table Omitted]
36
Capitalization
- The Comparable Group’s median tangible equity to tangible assets ratio of
6.91% is below the Bank’s ratio of 8.21%. The Bank’s pro forma equity to assets ratio is projected to be 14.20% at the midpoint of the valuation range.
The asset quality of an institution is an important determinant of market value. The investment community considers levels of nonperforming loans, Real Estate Owned (“REO”) and levels of Allowance for Loan and Lease Losses
(“ALLL”) in assessing the attractiveness of investing in the common stock of an institution.
F
IGURE
29 -
A
SSET
Q
UALITY
T
ABLE
[Table Omitted]
The Bank has a nominal level of NPLs and NPAs. The Comparable Group NPAs to assets ratio is 1.47%. The Bank’s reserve level, 0.12% to total loans, is substantially
below the Comparable median of 1.08% of loans. The Bank’s level of reserves to NPLs is not meaningful because of the low level of NPLs.
37
The Bank’s asset mix is weaker than the Comparable Group’s mix. The Bank has a higher level of deposits and
lower level of borrowings as a percentage of assets relative to the Comparable Group. The Bank has slightly higher capital levels, but at the midpoint of the range will have higher tangible capital levels after the conversion. The Bank’s
interest rate risk profile is considered “Significant Risk” according to TB13a standards, but is expected to improve due to higher capital levels. The Bank has a lower level of NPLs and NPAs, but has a lower level of reserves as a
percentage of loans relative to the Comparable levels. The Bank has a sizable unrealized loss on its securities portfolio. Taken collectively, a moderate upward adjustment is warranted for financial condition.
38
B
ALANCE
S
HEET
G
ROWTH
The Bank’s assets, loans and deposits have all increased. However, relative to the Comparable Group median, the Bank’s asset and deposit growth rates are lower,
while loan growth is higher.
F
IGURE
30 - B
ALANCE
S
HEET
G
ROWTH
D
ATA
[Table Omitted]
No
adjustment is warranted.
39
E
ARNINGS
Q
UALITY
, P
REDICTABILITY
AND
G
ROWTH
The earnings quality, predictability and growth are critical components in the establishment of market values for
thrifts. Thrift earnings are primarily a function of:
The quality and predictability
of earnings is dependent on both internal and external factors. Some internal factors include the mix of the balance sheet, the interest rate sensitivity of the balance sheet, the asset quality, and the infrastructure in place to deliver the assets
and liabilities to the public. External factors include the competitive market for both assets and liabilities, the global interest rate scenario, local economic factors and regulatory issues.
Investors are focusing on earnings sustainability as interest rate volatility has caused a wide variation in income levels. With the intense competition for both assets
and deposits, banks cannot easily replace lost spread and margin with balance sheet growth.
Each of these factors can influence the earnings of an
institution, and each of these factors is volatile. Investors prefer stability and consistency. As such, solid, consistent earnings are preferred to high but risky earnings. Investors also prefer earnings to be diversified and not entirely dependent
on interest income.
40
Net income trended downward between the twelve months ended December 31, 2004 and the twelve months ended
December 31, 2007. The decline of $8.2 million over this time period was primarily attributable to lower net interest income resulting from margin compression, higher noninterest expense and lower noninterest income.
For the nine months ended September 30, 2008 compared to nine months ended September 30, 2007, net income increased $1.6 million or 33.3%. The increase was
primarily attributable to an increase in net interest income of $5.0 million, resulting from lower interest expense. This was partially offset by a $2.0 million increase in noninterest expense and a $1.0 increase in provision for income tax expense.
F
IGURE
31 - N
ET
I
NCOME
C
HART
[Table Omitted]
41
The Bank’s core ROAA and core ROAE are in-line with the Comparable Group medians. The Bank’s higher
capitalization following the offering is expected to reduce return on equity for the near term. On a pro forma basis, the Bank’s core ROAA and core ROAE are 0.64% and 4.53%, respectively.
F
IGURE
32 - P
ROFITABILITY
D
ATA
[Table Omitted]
42
F
IGURE
33 - I
NCOME
S
TATEMENT
D
ATA
[Table Omitted]
The Bank has a 51 basis
point disadvantage in net margin relative to the Comparable Group. This disadvantage is compounded by a 72 basis point disadvantage in noninterest income. However, noninterest expense as a percentage of average assets is 73bps., lower than the
Comparable Group median.
The Bank’s efficiency ratio of 70.29% is above the Comparable median of 66.83%.
On a forward looking basis, after the conversion the Bank’s operating expenses are expected to rise as a result of the stock benefit plans and additional costs of
being a public company. At the same time, the Bank will have additional capital to deploy and leverage.
43
[Table Omitted]
The Bank’s profitability is in-line with the Comparables on an ROAA and ROAE basis. The Bank’s earnings composition is weaker than the Comparable Group as the Bank has a lower margin and lower noninterest income. However, the Bank
has a lower level of noninterest expense. The Bank’s historical earnings have been trending downward. Taken collectively, no adjustment is warranted for this factor.
44
M
ARKET
AREA
The market area that an institution serves has a significant impact on value, as future success is interrelated with the economic, demographic and competitive aspects of
the market. The location of an institution will have an impact on the trading value of an institution, as many analysts compare the pricing of institutions relative to a state or regional multiples in investor presentations.
The following figure compares the demographic and competitive data for the counties serviced by the Bank, to the county data of the Comparable Group members.
F
IGURE
34 - M
ARKET
A
REA
D
ATA
[Table Omitted]
45
[Table Omitted]
The two largest components of Hawaii’s economy are tourism and the federal government, including the military. However, the State of Hawaii has been striving to diversify the state’s economy by attracting more high-technology
businesses to the state. The Hawaii Department of Business, Economic Development and Tourism reported a 24.2% decline in tourists from August 2007 to August 2008, representing the largest year-to-year reduction recorded in the state’s history.
Some of the largest individual private employers in the state include a staffing company, financial services companies, the University of Hawaii System of higher education and research and health services companies.
46
[Table Omitted]
The Bank’s market area has experienced population growth that is slower than the median for the Comparable Group, however, projected population growth is similar. Household income levels are higher in the Bank’s markets, but are
projected to grow at a rate that is slower than the Comparables. The Bank’s market area has a higher ratio of population to branches than the Comparable Group, indicating slightly lower competition. The unemployment rate in the Bank’s
market area is lower. However, the Hawaiian economy is heavily dependent on the tourist industry which has slowed based upon economic weakness. Based upon these factors, no adjustment is warranted for market area.
47
C
ASH
D
IVIDENDS
The last few years have seen yet another shift away from dividend policies concurrent with conversion. Recent issues have been fully or oversubscribing without the need
for the additional enticement of dividends. After the conversion is another issue, however. Pressures on ROAE and on internal rate of returns to investors prompted the industry toward cash dividends. This trend is exacerbated by the lack of growth
potential. Typically, when institutions are in a growth mode, they issue stock dividends or do not declare a dividend. When growth is stunted, these institutions shift toward reducing equity levels and thus utilize cash dividends as a tool in
managing equity. Recent tax code changes have made cash dividends more attractive to investors.
F
IGURE
35 -
D
IVIDEND
D
ATA
[Table Omitted]
48
All of the Comparable institutions had declared cash dividends. The median dividend payout ratio for the Comparable Group
was 70.65%, ranging from a high of 422.22% to a low of 10.78%. The Bank, on a pro forma basis at the mid point of the value range will have a tangible equity to tangible assets ratio of 14.20%. The Bank will have adequate capital and profits to pay
cash dividends.
As such, no adjustment is warranted for this factor.
49
L
IQUIDITY
OF
THE
I
SSUE
The Comparable Group is by definition composed only of companies that trade in the public markets with all of the Comparables trading on NASDAQ or AMEX. Typically, the
number of shares outstanding and the market capitalization provides an indication of how much liquidity there will be in a given stock. The actual liquidity can be measured by volume traded over a given period of time.
F
IGURE
36 - M
ARKET
C
APITALIZATION
D
ATA
[Table Omitted]
The market capitalization values of the
Comparable Group range from a low of $27.8 million to a high of $223.4 million with a median market capitalization of $54.2 million. The Bank expects to have $95.0 million of market capital at the midpoint on a pro forma basis. It is expected that
the Bank will trade on NASDAQ along with all but one of the Comparables.
No adjustment for this factor appears warranted as both the Bank and the
Comparables are expected to be liquidly traded.
50
R
ECENT
R
EGULATORY
M
ATTERS
Regulatory matters influence the market for thrift conversions. It is expected that industry regulation will increase as a result of the current crisis. Both the Bank and
the Comparable Group are expected to operate in substantially the same regulatory environment.
Taken collectively, no adjustment for this factor is
warranted as both the Bank and the Comparables will operate in the same ownership structure and will be supervised in the same regulatory environment.
51
5. Other Factors
M
ANAGEMENT
The current team has considerable banking experience and has held similar positions in
other financial institutions. The Bank’s organizational chart is reasonable for an institution of its size and complexity. Financial performance and asset quality are strong.
The Board is active and oversees and advises on all key strategic and policy decisions.
As such, no adjustment appears to
be warranted for this factor.
52
S
UBSCRIPTION
I
NTEREST
The pro forma price to tangible book multiple of conversions declined from 2007 to 2008 YTD.
F
IGURE
37 - C
ONVERSIONS
(S
INCE
1/1/07) P
RO
F
ORMA
D
ATA
[Table Omitted]
53
The first day “pop” for 2008 year-to-date is significantly below the performance of 2007 deals and historical
levels.
F
IGURE
38 - C
ONVERSIONS
P
RICE
A
PPRECIATION
[Table Omitted]
A downward adjustment is warranted given
weakness in the market.
54
V
ALUATION
A
DJUSTMENTS
Relative to the Comparables the following adjustments need to be made to the Bank’s pro forma market value.
|
|
|
|
|
Valuation Factor
|
|
Valuation Adjustment
|
|
Financial Condition
|
|
Moderate Upward
|
|
|
|
|
Balance Sheet Growth
|
|
No Adjustment
|
|
|
|
|
Earnings Quality, Predictability and Growth
|
|
No Adjustment
|
|
|
|
|
Market Area
|
|
No Adjustment
|
|
|
|
|
Dividends
|
|
No Adjustment
|
|
|
|
|
Liquidity of the Issue
|
|
No Adjustment
|
|
|
|
|
Recent Regulatory Matters
|
|
No Adjustment
|
Additionally, the following adjustment should be made to the Bank’s market value.
|
|
|
|
|
Valuation Factor
|
|
Valuation Adjustment
|
|
Management
|
|
No Adjustment
|
|
|
|
|
Subscription Interest
|
|
Downward
|
55
6. Valuation
In applying the accepted valuation methodology promulgated by the regulators, i.e., the pro forma market value approach, three key pricing multiples were considered. The four multiples include:
Price to core earnings (“P/E”)
Price to book value (“P/B”) / Price to tangible book value (“P/TB”)
Price to assets (“P/A”)
All of the approaches were calculated on a pro forma basis including the effects of the conversion proceeds. All of the assumptions utilized are presented
in Exhibits 11 through 13.
D
ISCUSSION
OF
W
EIGHT
G
IVEN
TO
V
ALUATION
M
ULTIPLES
To ascertain the pro forma estimated market value of the Bank, the market multiples for the
Comparable Group were utilized. As a secondary check, all publicly traded thrifts and the recent (September 2007 to date) and historical conversions were assessed. The multiples for the Comparable Group, all publicly traded thrifts are shown in
Exhibit 9.
Price to Earnings
– According to the Appraisal Guidelines: “When both the converting institution and the
comparable companies are recording “normal” earnings. A P/E approach may be the simplest and most direct method of valuation. When earnings are low or negative, however, this approach may not be appropriate and the greater consideration
should be given to the P/BV approach.” In this particular case, the Bank’s earnings are “low”. As such, this approach was given very little consideration in this appraisal.
In the pro forma figures for the Bank, FinPro incorporated the impact of SFAS 123, which requires the expensing of stock options. In preparing the fully
converted pro forma figures for the Comparable Group, FinPro also incorporated the impact of SFAS 123.
As the Bank has stated its intention
to pay down some or all of its outstanding trust preferred securities at various points in the value range, FinPro has eliminated the interest expense on the trust preferred securities based upon the expense incurred over the twelve month period
ended September 30, 2008.
56
Price to Book/Price to Tangible Book
– According to the Appraisal Guidelines: “The P/BV
approach works best when the converting institution and the Comparables have a normal amount of book value. The P/BV approach could seriously understate the value of an institution that has almost no book value but has an outstanding future earnings
potential. For converting institutions with high net worth, the appraiser may have difficulty in arriving at a pro forma market value because of pressure placed on the P/E multiple as higher P/BV levels are required to reflect a similar P/BV ratio
as the peer group average. The P/BV approach also suffers from the use of historical cost accounting data.”
Since thrift earnings in
general have had a high degree of volatility over the past decade, the P/B is utilized frequently as the benchmark for market value. A better approach is the P/TB approach. In general, investors tend to price financial institutions on a tangible
book basis, because it incorporates the P/B approach adjusted for intangibles. Initially following conversion, FinPro believes that thrifts often trade on a price to tangible book basis.
Price to Assets
– According to the Appraisal Guidelines: “This approach remedies the problems of a small base that can occur with the
P/BV approach, but the approach has many of the other limitations of the latter approach (the P/BV approach).” FinPro places little weight on this valuation approach due to the lack of consideration of asset and funding mixes and the resulting
earnings impact.
57
F
ULL
O
FFERING
V
ALUE
IN
R
ELATION
TO
C
OMPARABLES
Based upon the adjustments defined in the previous section, the Bank is pricing at
the midpoint as a standard conversion is estimated to be $95,000,000. Based upon a range below and above the midpoint value, the respective values are $80,750,000 at the minimum and $109,250,000 at the maximum respectively. At the super maximum of
the range, the offering value would be $125,637,500.
At the various levels of the estimated value range, the full offering would result in the following
offering data:
F
IGURE
39 - V
ALUE
R
ANGE
- F
ULL
O
FFERING
[Table Omitted]
58
F
IGURE
40 - F
ULL
C
ONVERSION
O
FFERING
P
RICING
M
ULTIPLES
[Table Omitted]
F
IGURE
41 - C
OMPARABLE
F
ULL
C
ONVERSION
P
RICING
M
ULTIPLES
TO
THE
B
ANK
’
S
P
RO
F
ORMA
M
IDPOINT
[Table Omitted]
As Figure 41 demonstrates, at the midpoint of the estimated valuation range the Bank is priced at a premium of 32.41% on a fully converted core earnings basis. On a
price to fully converted tangible book basis, the Bank is priced at a 31.45% discount to the Comparable Group.
F
IGURE
42
- C
OMPARABLE
F
ULL
C
ONVERSION
P
RICING
M
ULTIPLES
TO
THE
B
ANK
’
S
P
RO
F
ORMA
S
UPER
M
AXIMUM
[Table Omitted]
As Figure 42 demonstrates, at the super maximum of the estimated valuation range the Bank is priced at a premium of 77.71% on a core earnings basis. On a price to tangible book basis, the Bank is priced at a 21.07%
discount to the Comparable Group.
59
C
OMPARISON
TO
R
ECENT
MHC C
ONVERSIONS
As a secondary check, to verify and validate that the range created on a comparable basis is appropriate, FinPro compared the pricing of this deal relative
to other MHC conversions.
F
IGURE
43 - C
OMPARISON
TO
F
ILED
AND
P
ENDING
S
TANDARD
O
FFERINGS
[Table Omitted]
60
V
ALUATION
C
ONCLUSION
We believe that the discount on a tangible book basis is appropriate relative to the Comparable Group. This range was confirmed by our analysis of recent offerings and
other filed and pending offerings as secondary checks.
It is, therefore, FinPro’s opinion that as of November 7, 2008, the estimated pro forma
market value of the Bank in a full offering was $95,000,000 at the midpoint of a range with a minimum of $80,750,000 to a maximum of $109,250,000 at 15% below and 15% above the midpoint of the range respectively. Assuming an adjusted maximum value
of 15% above the maximum value, the adjusted maximum value or super maximum value in a full offering is $125,637,500.
The document represents an initial
valuation for the Bank. Due to the duration of time that passes between the time this document is compiled and the time the offering closes, numerous factors could lead FinPro to update or revise the appraised value of the Bank. Some factors that
could lead FinPro to adjust the appraised value include: (1) changes in the Bank’s operations and financial condition; (2) changes in the market valuation or financial condition of the Comparable Group; (3) changes in the broader
market; and (4) changes in the market for thrift conversions. Should there be material changes to any of these factors, FinPro will prepare an appraisal update to appropriately adjust the value of the Bank. At the time of closing, FinPro will
prepare a final appraisal to determine if the valuation range is still appropriate and determine the exact valuation amount appropriate for the Bank.
61
Exhibit 99.4
, 2009
Dear Member:
We are pleased to announce that Territorial Savings Bank is converting from the mutual holding company to the stock holding company form of ownership subject to approval
by the members of Territorial Mutual Holding Company at a Special Meeting of Members. Territorial Savings Bank will be the wholly-owned subsidiary of a newly formed stock holding company to be known as Territorial Bancorp Inc., Inc. In connection
with the conversion, Territorial Bancorp is offering shares of its common stock in a subscription and community offering pursuant to a Plan of Conversion and Reorganization.
To complete the conversion, we need your participation in an important vote. Enclosed are a proxy statement and a prospectus describing the Plan of Conversion and Reorganization and your voting and subscription
rights.
YOUR VOTE IS VERY IMPORTANT.
Enclosed, as part of the proxy materials, is your proxy card, the detachable section on top of the
order form bearing your name and address. This proxy card should be signed, dated and returned to us before the Special Meeting of Members to be held on
, 2009. Please
take a moment now to sign and date the enclosed proxy card and return it to us in the postage-paid envelope provided.
FAILURE TO VOTE HAS THE SAME EFFECT AS VOTING AGAINST THE CONVERSION.
The Board of Directors believes the conversion will offer a number of advantages, such as an opportunity for depositors of Territorial Savings Bank to become
shareholders of Territorial Bancorp Inc. Please remember:
|
|
•
|
|
Your deposit accounts will continue to be insured up to the maximum legal limit by the Federal Deposit Insurance Corporation (“FDIC”).
|
|
|
•
|
|
There will be no change in the balance, interest rate or maturity of any deposit account or loan because of the conversion.
|
|
|
•
|
|
Members have a right, but not an obligation, to buy Territorial Bancorp Inc. common stock and may do so without the payment of a commission or fee before it is
offered to the general public.
|
|
|
•
|
|
Like all stock, shares of Territorial Bancorp Inc.’s common stock issued in this offering will not be insured by the FDIC.
|
The enclosed prospectus contains a complete discussion of the conversion and stock offering. We urge you to read this document carefully. If you are interested in
purchasing the common stock of Territorial Bancorp Inc., you must submit your Stock Order and Certification Form and payment before 3:00 p.m., Hawaii time, on
, 2009.
If you have questions regarding the conversion and the stock offering, please call us at (
) _________, Monday – Friday
from 8:30 a.m. to 4:00 p.m., Hawaii time, or stop by our Stock Information Center located at
.
Sincerely,
Allan S. Kitagawa
Chairman of the Board
President and Chief Executive Officer
The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other
governmental agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
, 2009
Dear Friend:
We are pleased to announce that Territorial Savings Bank is
converting from the mutual holding company to the stock holding company form of ownership subject to approval by the members of Territorial Mutual Holding Company. Territorial Savings Bank will be the wholly-owned subsidiary of a newly formed stock
holding company to be known as Territorial Bancorp Inc. In connection with the conversion, Territorial Bancorp Inc. is offering shares of its common stock in a subscription and community offering pursuant to a Plan of Conversion and Reorganization.
Because we believe you may be interested in learning more about an investment in the common stock of Territorial Bancorp Inc., we are sending you the
following materials which describe the conversion and stock offering.
PROSPECTUS
:
This document provides detailed information
about Territorial Savings Bank’s operations and the proposed conversion and offering of Territorial Bancorp Inc. common stock.
STOCK ORDER AND CERTIFICATION FORM
:
This form is used to purchase stock by returning it with your payment in the enclosed business reply envelope. The deadline for ordering stock is 3:00 p.m., Hawaii time, on
, 2009.
As a friend of Territorial Savings Bank, you will have the
opportunity to buy common stock directly from Territorial Bancorp Inc. in the offering without paying a commission or fee, subject to our members’ priority subscription rights. If you have questions regarding the conversion and the stock
offering, please call us at (
)
, Monday – Friday from 8:30 a.m. to 4:00 p.m., Hawaii
time, or stop by our Stock Information Center located at
We are pleased to offer you this opportunity to become a shareholder of Territorial Bancorp Inc.
Sincerely,
Allan S. Kitagawa
Chairman of the Board
President and Chief Executive Officer
The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other
governmental agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
, 2009
Dear Prospective Investor:
We are pleased to announce that Territorial
Savings Bank is converting from the mutual holding company to the stock holding company form of ownership subject to approval of the members of Territorial Hold Company. Territorial Savings Bank will be the wholly-owned subsidiary of a newly formed
stock holding company to be known as Territorial Bancorp Inc. In connection with the conversion, Territorial Bancorp Inc. is offering shares of its common stock in a subscription and community offering pursuant to a Plan of Conversion and
Reorganization.
We have enclosed the following materials that will help you learn more about an investment in the common stock of Territorial Bancorp Inc.
Please read and review the materials carefully.
PROSPECTUS
:
This document provides detailed information about the operations
at Territorial Savings Bank and a complete discussion on the proposed conversion and stock offering.
STOCK ORDER AND CERTIFICATION
FORM
:
This form is used to purchase stock by returning it with your payment in the enclosed business reply envelope. The deadline for ordering stock is 3:00 p.m., Hawaii time, on
, 2009.
We invite you and other local community members to become
shareholders of Territorial Bancorp Inc. Through this offering, you have the opportunity to buy stock directly from Territorial Bancorp Inc. without paying a commission or a fee.
If you have questions regarding the conversion and the stock offering, please call us at (
)
, Monday – Friday from 8:30 a.m. to 4:00 p.m., Hawaii time, or stop by our Stock Information Center located at
.
Sincerely,
Allan S. Kitagawa
Chairman of the Board
President and Chief Executive Officer
The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other
governmental agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
, 2009
To Members and Friends
of Territorial Savings Bank
Keefe, Bruyette & Woods, Inc., a member of the Financial Industry Regulatory Authority, is assisting Territorial Savings Bank in converting from the mutual holding company to the stock holding company form of
ownership, subject to approval by the members of Territorial Mutual Holding Company. Upon completion of the conversion and reorganization, Territorial Savings Bank will be a wholly-owned subsidiary of the newly formed stock holding company,
Territorial Bancorp Inc. In connection with the conversion, Territorial Bancorp Inc. is offering shares of its common stock in a subscription and community offering pursuant to a Plan of Conversion and Reorganization.
At the request of Territorial Bancorp Inc., we are enclosing materials explaining this process and your options, including an opportunity to invest in the shares of
Territorial Bancorp Inc. common stock being offered to customers of Territorial Savings Bank and various other persons until 3:00 p.m., Hawaii time, on
, 2009. Please
read the enclosed prospectus carefully for a complete description of the stock offering. Territorial Bancorp Inc. has asked us to forward the prospectus and accompanying documents to you in view of certain requirements of the securities laws in your
state.
If you have additional questions regarding the conversion, please call us at (
)
, Monday – Friday from 8:30 a.m. to 4:00 p.m. Hawaii time, or stop by our Stock Information Center located at 1132 Bishop Street, Suite 2200,
Honolulu, Hawaii 96813.
Very truly yours,
Keefe,
Bruyette & Woods, Inc.
The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal
Deposit Insurance Corporation or any other governmental agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The
offer is made only by the prospectus.
F
ACTS
A
BOUT
C
ONVERSION
The Board of Directors of Territorial Mutual Holding Company unanimously adopted a Plan of Conversion and Reorganization (the “Plan”) pursuant to which
Territorial Savings Bank will convert from the mutual holding company to the stock holding company form of ownership.
This brochure answers some of the
most frequently asked questions about the conversion and about your opportunity to invest in the common stock of Territorial Bancorp Inc., the newly-formed corporation that will become the holding company for Territorial Savings Bank following the
conversion.
Investment in the common stock of Territorial Bancorp Inc. involves certain risks. For a discussion of these risks and other factors,
including a complete description of the offering,
investors are urged to read the accompanying prospectus,
especially the discussion under the heading “Risk Factors.”
W
HY
IS
T
ERRITORIAL
S
AVINGS
B
ANK
CONVERTING
TO
THE
STOCK
HOLDING
COMPANY
FORM
OF
ORGANIZATION
?
A conversion to the stock holding company form of organization will
enable Territorial Savings Bank to access additional capital through the sale of common stock by Territorial Bancorp Inc. This additional capital will support future lending and operational growth, enhance profitability and earnings through
reinvesting and leveraging the proceeds, support future expansion of operations through the establishment or acquisition of banking offices or other financial service providers and implement equity compensation plans to retain and attract qualified
directors and employees.
W
HAT
EFFECT
WILL
THE
CONVERSION
HAVE
ON
EXISTING
DEPOSIT
AND
LOAN
ACCOUNTS
AND
CUSTOMER
RELATIONSHIPS
?
The conversion will have no effect on existing deposit or loan accounts and customer relationships. Deposits will continue to be federally insured by the Federal Deposit Insurance Corporation to the maximum legal limit. Interest rates and
existing terms and conditions on deposit accounts will remain the same upon completion of the conversion. Contractual obligations of borrowers of Territorial Savings Bank will not change and there will be no change in the amount, interest rate,
maturity, security or any other condition relating to the respective loans of customers.
A
RE
T
ERRITORIAL
S
AVINGS
B
ANK
’
S
DEPOSITORS
REQUIRED
TO
PURCHASE
STOCK
IN
THE
CONVERSION
?
No depositor or other person is required to purchase stock. However, depositors and other eligible persons will be provided the opportunity to purchase stock consistent with the established priority of subscription
rights, should they so desire. The decision to purchase stock will be exclusively that of each person. Whether an individual decides to purchase stock or not will have no positive or negative impact on his or her standing as a customer of
Territorial Savings Bank. The conversion will allow depositors of Territorial Savings Bank an opportunity to buy common stock and become shareholders of Territorial Bancorp Inc.
W
HO
IS
ELIGIBLE
TO
PURCHASE
COMMON
SHARES
IN
THE
SUBSCRIPTION
OFFERING
?
Certain past and present depositors as well as specified borrowers of Territorial Savings Bank are eligible to purchase common stock in the subscription offering.
H
OW
MANY
COMMON
SHARES
ARE
BEING
OFFERED
AND
AT
WHAT
PRICE
?
Territorial Bancorp Inc. is offering up to 10,925,000 shares of
common stock, subject to adjustment as described in the prospectus, at a price of $10.00 per share, through the prospectus.
H
OW
MANY
SHARES
MAY
I
BUY
?
The minimum order is 25 shares. The maximum individual purchase is
50,000 shares. No person, together with associates of, and persons acting in concert with such person, may purchase more than 100,000 shares of common stock, as further discussed in the prospectus.
W
ILL
THE
COMMON
STOCK
BE
INSURED
?
No. Like any other common stock, Territorial Bancorp Inc.’s common stock will not be insured.
H
OW
DO
I
ORDER
THE
COMMON
STOCK
?
You must complete the enclosed Stock Order and Certification Form.
Instructions for completing your Stock Order and Certification Form are contained on the back of the stock order form. Your order must be received by 3:00 p.m., Hawaii time, on
, 2009.
H
OW
MAY
I
PAY
FOR
MY
COMMON
STOCK
?
First, you may pay for common stock by check or money order made
payable to Territorial Bancorp Inc. Interest will be paid by Territorial Bancorp Inc. on these funds at Territorial Savings Bank’s passbook savings rate from the day the funds are received until the completion or termination of the conversion.
Second, you may authorize us to withdraw funds from your deposit account or certificate of deposit at Territorial Savings Bank for the amount of funds you specify for payment. You will not have access to these funds from the day we receive your
order until completion or termination of the conversion.
There is no penalty for early withdrawal from a certificate of deposit.
C
AN
I
PURCHASE
STOCK
USING
FUNDS
IN
MY
T
ERRITORIAL
S
AVINGS
BANK
IRA
ACCOUNT
?
Yes. To do so, however, you must first establish a self-directed IRA account at an unaffiliated brokerage firm or trust department and transfer a portion or all of the
funds in your IRA account at Territorial Savings Bank. Please contact your broker or self-directed IRA provider as soon as possible if you want to explore this option, as these transactions take time.
W
ILL
DIVIDENDS
BE
PAID
ON
THE
COMMON
STOCK
?
Following the offering, Territorial Bancorp Inc.’s board of directors will consider a policy of paying regular cash dividends. However, whether or not dividends will be paid, and the timing and amount of such
dividends is currently undetermined.
H
OW
WILL
THE
COMMON
STOCK
BE
TRADED
?
Territorial Bancorp Inc.’s stock is expected to trade on the Nasdaq Global Select Market under the ticker symbol “TBNK.” However, no assurance can be given
that an active and liquid market will develop.
A
RE
EXECUTIVE
OFFICERS
AND
DIRECTORS
OF
T
ERRITORIAL
S
AVINGS
B
ANK
PLANNING
TO
PURCHASE
STOCK
?
Yes! The executive officers and directors of Territorial Savings Bank plan to purchase, in the aggregate, $
worth
of stock or approximately
% of the common stock offered at the maximum of the offering range.
M
UST
I
PAY
A
COMMISSION
?
No. You will not be charged a commission or fee on the purchase of
common stock in the conversion.
S
HOULD
I
VOTE
TO
APPROVE
THE
P
LAN
OF
C
ONVERSION
?
Your Board of Directors unanimously recommends a vote
“FOR” the Plan of Conversion and Reorganization. Your “YES” vote is very important!
PLEASE VOTE, SIGN, DATE AND RETURN ALL PROXY
CARDS!
W
HY
DID
I
GET
SEVERAL
PROXY
CARDS
?
If you have more than one account, you could receive more than one proxy card, depending on the ownership structure of your accounts. Please vote all of the proxy cards you receive.
H
OW
MANY
VOTES
DO
I
HAVE
?
Every depositor is entitled to cast one vote for each $100, or fraction thereof, on deposit as of the voting record date, up to 1,000 votes. Each borrower as of September 18, 2002 is entitled to one vote if such borrowing is still in
existence.
M
AY
I
VOTE
IN
PERSON
AT
THE
SPECIAL
MEETING
?
Yes, but we would still like you to sign, date and mail your proxy today. If you decide to revoke your proxy, you may do so at any time before such proxy is exercised by
executing and delivering a later dated proxy or by giving notice of revocation in writing or by voting in person at the special meeting. Attendance at the special meeting will not, of itself, revoke a proxy.
For additional information you may visit or call our stock information center Monday – Friday, from 8:30 a.m. to 4:00 p.m. Hawaii time, located in Territorial
Savings Bank’s office
at 1132 Bishop Street, Suite 2200, Honolulu, Hawaii 96813.
(
)
QUESTIONS
AND
ANSWERS
{
Holding Company Logo
}
Proposed Holding Company for
Territorial Savings Bank
The shares of common
stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
PROXY GRAM
PLEASE VOTE TODAY…
We recently sent you a proxy statement and related materials regarding a proposal to
convert Territorial Savings Bank from a mutual holding company to a stock holding company form of ownership.
Your vote on the Plan of
Conversion and Reorganization has not yet been received.
Voting for the Conversion does not obligate you to purchase stock and will
not
affect your accounts or FDIC Insurance Coverage.
Not Returning Your Proxy Cards has the Same Effect as Voting
“Against” the Conversion…and
Your Board of Directors Unanimously Recommends a Vote “FOR” the
Conversion
Your Vote Is Important To Us!
Please sign and date the enclosed proxy card and return it in the postage-paid envelope provided
TODAY
!
If you received more than one proxy card, please be sure to
sign, date and return all cards you received.
Thank you,
Allan S. Kitagawa,
Chairman of the Board
President
and Chief Executive Officer
Territorial Savings Bank
Honolulu, Hawaii
If you have already mailed your proxy card(s), please accept our thanks and disregard this notice.
For further information call (
)
.
The
shares of common stock being offered are not deposits or savings accounts and are not insured or guaranteed by the
Federal Deposit
Insurance Corporation or any other governmental agency.
This is not an offer to sell or a solicitation of an offer to buy common
stock. The offer is made only by the prospectus.
PROXY GRAM II
PLEASE VOTE TODAY…
We recently sent you a proxy statement and related materials regarding a proposal to
convert Territorial Savings Bank from a mutual holding company to a stock holding company form of ownership.
Your vote on the Plan of
Conversion and Reorganization has not yet been received.
Voting for the Conversion does not obligate you to purchase stock and will
not affect your accounts or FDIC Insurance Coverage.
Not Returning Your Proxy Cards has the Same Effect as Voting “Against”
the Conversion…and
Your Board of Directors Unanimously Recommends a Vote “FOR” the Conversion
Our Reasons for the Corporate Change
As a Stock Institution we will be able to
:
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•
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Increase the capital of Territorial Savings Bank to support future lending and operational growth.
|
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•
|
|
Enhance profitability and earnings through reinvesting and leveraging the proceeds, primarily through traditional funding and lending activities.
|
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•
|
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Support future branching activities and/or the acquisition of other financial institutions or financial services companies.
|
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•
|
|
Implement equity compensation plans to retain and attract qualified directors, officers and staff to enhance current incentive-based compensation programs.
|
Your Vote Is Important To Us!
Please sign and date the enclosed proxy card and return it in the postage-paid envelope provided
TODAY
!
If you received more than one proxy card, please be sure to sign, date and return all
cards you received.
Thank you,
Allan S. Kitagawa
Chairman of the Board
President and Chief Executive Officer
Territorial Savings Bank
Honolulu, Hawaii
If you have already mailed your proxy card(s), please accept our thanks and disregard this notice.
For further information call (
)
.
The shares of common stock being offered are not deposits or savings accounts and are not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other governmental agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
{logo} Territorial Savings Bank
, 2009
Dear Valued Territorial Savings Bank Customer:
We recently forwarded you a proxy statement and related materials regarding a proposal to convert Territorial Savings Bank from the mutual holding company to the stock
holding company form of ownership. This conversion will allow us to operate in essentially the same manner as we currently operate, but provide us with the flexibility to add capital, increase our lending capacity, and continue to grow and expand
our operations by adding new products and services.
As of today, your vote on our Plan of Conversion and Reorganization has not yet been received.
Your
Board of Directors unanimously recommends a vote “FOR” the Plan of Conversion and Reorganization.
If you mailed your proxy, please accept our thanks and disregard this request.
We would sincerely appreciate you signing and dating the enclosed proxy card and returning it promptly in the enclosed postage-paid envelope or dropping it off at your
Territorial Savings Bank office. Our meeting on
, 2009 is fast approaching and we’d like to receive your vote as soon as possible.
Voting “FOR” the conversion does not affect the terms or insurance on your accounts. For further information, call our Stock Information Center at
(
)
.
Best regards and thank you,
Allan S. Kitagawa
Chairman of the Board
President and Chief Executive Officer
The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
Territorial Savings Bank Website Message:
Plan of Conversion
and
Reorganization
Information
Territorial Savings Bank is pleased to announce that materials were mailed on
, 2009
regarding Territorial Mutual Holding Company’s Plan of Conversion and Reorganization and the stock offering by Territorial Bancorp Inc. If you were a depositor as of September 30, 2007 or December 31, 2008, you should be receiving a
packet of materials soon. We encourage you to read the information carefully.
If you were a member of Territorial Mutual Holding Company’s as of the
Voting Record Date,
, 2009, a proxy card(s) is included. We encourage you to sign, date and return
ALL
proxy cards as promptly as possible… and THANK YOU!
Information, including a prospectus in regards to Territorial Bancorp Inc.’s stock offering, was also enclosed. The subscription offering has
commenced and continues until 3:00 p.m., Hawaii time, on
, 2009, at which time your order
must
be received if you want to take part in the offering.
Depending upon the outcome of the subscription offering that expires on
, 2009, our best
estimate at this time for trading of the Territorial Bancorp Inc. stock on the NASDAQ Global Select Market is
. As
described in the prospectus, it could be later. The stock will trade under the ticker symbol “TBNK”. We will keep you as informed as possible on this site.
Our telephone number at the Stock Information Center is (
)
.
The shares of
common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency. An investment in the shares of common stock is subject to investment risks, including
possible loss of the principal invested.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made
only by the prospectus.
End of Offering Territorial Savings Bank Website Message
Stock Issuance Information
The Territorial Bancorp
Inc. stock offering closed on
, 2009. The results of the offering are as follows:
.
Interest and refund checks [if applicable] will be
mailed to subscribers on
, 2009 by regular mail to the name and address provided on the Stock Order and Certification Form submitted. No special mailing instructions will
be accepted.
Allocations will be made available beginning at
on
, 2009. [If applicable] You can view your allocation online by visiting https://allocations.kbw.com and typing in your order number and the last four digits of your
social security number.
Notice to Subscribers not receiving all shares: Please be aware that while we believe this to be a final allocation, we reserve
the right to amend this amount up to the time of trading and recommend you verify the number of shares you received on the face of the certificate you will receive prior to trading your shares. [if applicable]
The transfer agent for Territorial Bancorp Inc. will be
and the phone number for its Investor Relations Department is
(
)
.
We anticipate trading to begin on
, 2009 on the NASDAQ Global Select Market under the symbol “TBNK.”
The shares of common stock being offered are not deposits or savings accounts and are not insured by the Federal Deposit Insurance Corporation or any other
governmental agency. An investment in the shares of common stock is subject to investment risks, including possible loss of the principal invested.
This is not an offer to sell or a solicitation of an offer to buy common stock. The offer is made only by the prospectus.
What Investors Need to Know
Key concepts for investors to bear in mind when considering whether to participate in a conversion offering, or a stock offering by a subsidiary of a mutual holding company, include the following:
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•
|
|
Know the Rules
By law, accountholders cannot sell or transfer their priority subscription rights, or the stock itself, prior to the completion of a financial
institution’s conversion. Moreover, accountholders cannot enter into agreements or arrangements to sell or transfer either their subscription rights or the underlying conversion stock.
|
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•
|
|
“Neither a Borrower nor a Lender Be”
If someone offers to lend you money so that you can participate or participate more fully in a conversion, be
extremely wary. Be even more wary if the source of the money is someone you do not know. The loan agreement may make you unable to certify truthfully that you are the true holder of the subscription rights and the true purchaser of the stock and
that you have no agreements regarding the sale or transfer of the stock.
|
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•
|
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Watch Out for Opportunists
The opportunist may tell you that he or she is a lawyer or a consultant or a professional investor or some similarly impressive
tale who has experience with similar mutual conversion transactions. The opportunist may go to extreme lengths to assure you that the arrangement you are entering into is legitimate. They might tell you that they have done scores of these
transactions and that this is simply how they work. Or they might downplay the warnings or restrictions in the prospectus or order form, telling you that “everyone” enters into such agreements or that the deal they are offering is
legitimate. They may also tell you that you have no risk in the transaction. The cold, hard truth is that these are lies, and if you participate, you are breaking the law.
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Get the Facts from the Source
If you have any questions about the securities offering, ask the savings bank or savings association for more information. If
you have any doubts about a transaction proposed to you by someone else, ask the financial institution whether the proposed arrangement is proper. You may be able to find helpful resources on the institution’s website or by visiting a branch
office.
|
The bottom line for investors is always to remember that if an opportunity
sounds
too good to be true, it
probably is too good to be true.
Read This First
Office of Thrift Supervision Guidance for Accountholders
Your financial institution is in the process of
selling stock to the public, in either a mutual-to-stock conversion or a stock issuance by a subsidiary of a mutual holding company. As an accountholder at this institution, you have certain priority subscription rights to purchase stock in the
offering. These priority subscription rights are non-transferable. If you subscribe for stock, you will be asked to sign a statement that the purchase is for your own account, and that you have no agreement or understanding regarding the subsequent
sale or transfer of any shares you receive.
On occasion, unscrupulous people attempt to persuade accountholders to transfer subscription
rights, or to purchase shares in the offering based on the understanding that the shares will subsequently be transferred to others. Such arrangements violate federal regulations. If you participate in these schemes, you are breaking the law and may
be subject to prosecution. If someone attempts to persuade you to participate in such a scheme, please contact the Office of Thrift Supervision (OTS) at (202) 906-6202. OTS is very interested in ensuring that the prohibitions on transfer of
subscription rights are not violated.
How will you know if you are being approached illegally? Typically, a fraudulent opportunist will
approach you and offer to “loan” you money to purchase a significant amount of stock in the offering. In exchange for that “loan” you most likely will be asked either to transfer control of any stock purchased with that money to
an account the other person controls, or sell the stock and give the majority of the profits to the other person. You may be told, untruthfully, that there is no risk to you, that the practice is common, and even if you are caught, that your legal
expenses will be covered.
On the back of this page is a list of some key concepts that you should keep in mind when considering whether to
participate in a mutual-to-stock conversion. If you have questions, please contact the stock information center listed elsewhere in the literature you are receiving. Alternatively, you can contact us at:
ombudsman@ots.treas.gov.
Territorial
Mutual Holding Company Bank REVOCABLE PROXY
Any member giving a proxy may revoke it at any time before it is voted by
delivering to the Secretary of Territorial Mutual Holding Company either a written revocation of the proxy, a duly executed proxy bearing a later date, or by voting in person at the Special Meeting.
The undersigned hereby acknowledges receipt of a Notice of Special Meeting of Members to be held on the , 2009 and a Proxy Statement for
the Special Meeting prior to signing this proxy.
Signature: Date:
Signature: Date:
NOTE: Please sign exactly as your name(s) appear(s) on this Proxy. Only one signature is required in the case of a joint account. When signing in a representative capacity, please give title.
IMPORTANT: Please Detach, Sign and Return ALL proxies from ALL packets received in the enclosed postage paid envelope. FAILURE TO VOTE HAS
THE SAME EFFECT AS A VOTE AGAINST THE PLAN
COMPANY LOGO SEND OVERNIGHT PACKAGES TO: Attn: Stock Information Center
(1) Number of Shares Price Per Share (2) Total Amount Due
x $10.00 = $ .00
Minimum Number of Shares: 25 ($250). Maximum Number of Shares: 50,000 ($500,000). See instructions on Reverse Side
ORDER DEADLINE: The Subscription Offering ends at 3:00 PM, Hawaii time, on , 2009. Your original Stock Order and Certification Form, properly executed and with the correct payment, must be received (not postmarked) at the address on
the top of this form by the deadline or it will be considered void. Faxes or copies of this form will not be accepted. Territorial Bancorp Inc. reserves the right to accept or reject improper order forms.
(3a) Method of Payment- Check or Money Order
Enclosed is a personal check, bank check or money order made payable to Territorial Bancorp Inc. $ .00
(3b) Method of Payment- Deposit Account Withdrawal
Territorial Savings Bank
Deposit Account Number(s) Withdrawal Amount(s)
(4) Purchaser Information (check one)
a. Eligible Account Holder - Check here if you were a depositor with at least $50 on deposit with Territorial Savings Bank as of Sept. 30,
2007. Enter information in Section 9 for all deposit accounts that you had at Territorial Savings Bank on Sept. 30, 2007.
b. Supplemental Eligible Account Holder - Check here if you were a depositor with at least $50 on deposit with Territorial Savings Bank as of December 31, 2008 but not an Eligible Account Holder. Enter information in
Section 9 for all deposit accounts that you had at Territorial Savings Bank as of December 31, 2008.
c. Other Members
- Check here if you were a depositor of Territorial Savings Bank as of , 2009, or a borrower as of September 18, 2002 whose borrowings remain outstanding as of , who were not able to subscribe for shares under the Eligible or Supplemental
Account Holders Categories.
d. Local Community – People or trusts for the benefit of people who are residents of
Hawaii will receive preference in a community offering
e. General Public
MARK THE ACCOUNT TYPE Savings CD $ .00
MARK THE ACCOUNT TYPE Savings CD $ .00
MARK THE ACCOUNT TYPE Savings CD $
.00
Total Withdrawal $ .00
(5) Check if you (or a household family member) are a: Director or Officer of Territorial Savings Bank or Territorial Bancorp Inc. Employee of Territorial Savings Bank or Territorial Bancorp Inc.
(6) Maximum Purchaser Identification: Check here if you, individually or together with others (see section 7), are
subscribing for the maximum purchase allowed and are interested in purchasing more shares if the two maximum purchase limitations are increased. See Section 1 of the Stock Order Form Instructions on the reverse side.
(7) Associates/Acting in Concert: Check here if you, or any associates or persons acting in concert with you, have submitted other orders
for shares. If you check this box, list below all other orders submitted by you or your associates or by persons acting in concert with you.
Name(s) listed in Section 8 on other Order Forms Number of Shares Ordered Name(s) listed in Section 8 on other Order Forms Number of Shares Ordered
(8) Stock Registration - Please Print Legibly and Fill Out Completely: (Note: The stock certificate and all correspondence related to this
stock order will be mailed to the address provided below.)
Individual Individual Retirement Account Corporation
Joint Tenants Uniform Transfer to Minors Act Partnership
Tenants in Common Uniform Gift to Minors Act Trust - Under Agreement Dated
Name SS# or Tax ID
Name SS# or Tax ID
Address Daytime Telephone #
City State Zip Code County Evening Telephone #
(9) Qualifying Accounts: You should list any accounts that
you may have or had with Territorial Savings Bank in the box below. SEE THE STOCK ORDER FORM INSTRUCTION GUIDE ON THE REVERSE SIDE OF THE ORDER FORM FOR FURTHER DETAILS. All subscription orders are subject to the provisions of the stock offering.
NAMES ON ACCOUNTS ACCOUNT NUMBER
Please Note: Failure to list all of your accounts may result in the loss of part or all of your subscription rights.
(10) Acknowledgment and Signature: I understand that this Order Form, with full payment and properly executed, must be received by Territorial Bancorp Inc. no later than 3:00 PM, Hawaii time, on ,
2009. Otherwise, this Order Form will be voidable. I agree that after receipt by Territorial Bancorp Inc., this Order Form may not be modified or cancelled without Territorial Bancorp Inc.,’s consent, and that if withdrawal from a deposit
account has been authorized above, the amount will not otherwise be available for withdrawal by me. Under penalty of perjury, I certify that (1) the Social Security or Tax ID information and all other information provided hereon are true, correct
and complete, (2) I am purchasing solely for my own account, and there is no agreement or understanding regarding the sale or transfer of the shares, or my right to subscribe for shares, and (3) I am not subject to backup withholding tax
[cross out (3) if you have been notified by the IRS that you are subject to backup withholding.] I acknowledge that this security is not a deposit or savings account, is not federally insured, and is not guaranteed by Territorial Bancorp Inc.,
Territorial Savings Bank, or by the federal government. If anyone asserts that the shares of common stock are federally insured or guaranteed, or are as safe as an insured deposit, I should call at the Office of Thrift Supervision’s West
Regional Office at ( ) . I further certify that, before purchasing the common stock of Territorial Bancorp Inc., I received the Prospectus dated , 2009. The Prospectus that I received, dated , 2009 contains disclosure concerning the nature of the
common stock being offered by Territorial Bancorp Inc. and describes, in the Risk Factors section beginning on page 16 of the Prospectus, the risks involved in the investment in this common stock, including, but not limited to, the following:
1. Future changes in interest rates could reduce our profits.
2. Our lending activities provide lower interest rates than financial institutions that originate more commercial loans.
3. We could record future losses on our holdings of trust preferred securities.
4. Recent negative developments in the financial industry and the domestic and international credit markets may adversely affect our
operations and results.
5. Non-residential real estate loans increase our exposure to credit risks.
6. Strong competition within our market area may limit our growth and profitability.
7. If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.
8. Concentration of loans in our primary market area may increase risk.
9. Our local economy relies heavily on the tourism industry. Continued downturns in this industry could affect our operations and results.
10. We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.
11. Severe weather, natural disasters, and other external events could significantly affect our operations and results.
12. The future price of the shares of common stock may be less than the purchase price in the stock.
13. The capital we raise in the stock offering will reduce our return on equity. This could negatively affect the trading price of our
shares of common stock.
14. We will need to implement additional finance and accounting systems, procedures and controls in
order to satisfy our new public company reporting requirements.
15. Our stock-based benefit plans will increase our costs,
which will reduce our income.
16. The implementation of stock-based benefit plans will dilute your ownership interest.
17. We have not determined whether we will adopt stock-based benefit plans more than one year following the stock offering.
Stock-based benefit plans adopted more than one year following the stock offering may exceed regulatory restrictions on the
size of stock-based benefit plans adopted within one year, which would increase our costs.
18. We will enter into
employment agreements that may increase our compensation costs.
19. We have broad discretion in using the proceeds of the
stock offering. Our failure to effectively use such proceeds could reduce our profits.
20. Our stock value may be
negatively affected by federal regulations that restrict takeovers.
21. The corporate governance positions in our articles
of incorporation and bylaws, and the corporate governance provisions under Maryland law, may prevent or impede the holders of our common stock from obtaining representation on our board of directors and may impede takeovers of the company that our
board might conclude are not in the best interest of Territorial Bancorp Inc. or its stockholders.
22. We have never issued
common stock and there is no guarantee that a liquid market will developed.
23. We may take other actions to meet the
minimum required sales of shares if we cannot find enough purchasers in the community.
24. The distribution of subscription
rights could have adverse income tax consequences.
YOUR ORDER IS NOT VALID UNLESS SIGNED
ONE SIGNATURE REQUIRED, UNLESS SECTION (3b) OF THIS FORM INCLUDES ACCOUNTS REQUIRING MORE THAN ONE SIGNATURE TO AUTHORIZE WITHDRAWAL.
IF SIGNING AS A CUSTODIAN, CORPORATE OFFICER, ETC., PLEASE INCLUDE YOUR FULL TITLE
Signature (title, if applicable) (Date) Signature (title, if applicable) (Date)
For Internal Use Only
REC’D / CHECK# $ CHECK# $ BATCH # ORDER # CATEGORY
Territorial
Mutual Holding Company REVOCABLE PROXY
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS OF TERRITORIAL MUTUAL HOLDING
COMPANY FOR USE AT A SPECIAL MEETING OF MEMBERS TO BE HELD ON, 2009, AND ANY ADJOURNMENTS OF THAT MEETING, FOR THE PURPOSES SET FORTH IN THE FOREGOING NOTICE OF SPECIAL MEETING. YOUR BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS YOU TO VOTE
“FOR” THE APPROVAL OF THE PLAN OF CONVERSION AND REORGANIZATION.
The undersigned, being a member of Territorial
Mutual Holding Company, hereby authorizes the Board of Directors of Territorial Mutual Holding Company or any successors in their respective positions, as proxy, with full powers of substitution, to represent the undersigned at the Special Meeting
of Members of Territorial Savings Bank to be held at the, and at any adjournment of said meeting, to act with respect to all votes that the undersigned would be entitled to cast, if then personally present, as set forth below:
(1) The approval of the Plan of Conversion and Reorganization (the “Plan”) to convert Territorial Mutual Holding Company from
the Mutual to the stock form of organization, including the adoption of a Federal Stock Charter and By-Laws, with the simultaneous issuance of its common stock to a Maryland corporation (the “Company”) and sale by Company of shares of its
common stock.
FOR AGAINST
This proxy, if properly executed, will be voted in accordance with your instructions. If no instructions are given, this proxy, properly signed and dated, will be voted “FOR” adoption of the
plan of conversion and reorganization, and if necessary, for adjournment of the Special Meeting. Please date and sign this proxy on the reverse side and return it in the enclosed envelope.
Territorial Bancorp Inc.
Order Form Instructions
Item 1 and 2 - Fill in the number of shares that you wish to purchase and the total
payment due. The amount due is determined by multiplying the number of shares ordered by the subscription price of $10.00 per share. The minimum purchase is 25 shares. Generally, the maximum purchase for any person is 50,000 shares (50,000 shares x
$10.00 per share = $500,000). No person, together with “associates”, as defined in the prospectus, and persons “acting in concert”, as defined in the prospectus, may purchase more than 100,000 shares (100,000 shares x $10.00 per
share = $1,000,000) of the common stock offered in the stock offering. For additional information, see “The Conversion; Plan of Distribution - Limitations on Common Stock Purchases” in the prospectus.
Item 3a – Payment for shares may be made in cash (only if delivered by you in person, although we request you to exchange the cash
for a check with any of the tellers at our Territorial Savings Bank branches) or by check, bank draft or money order payable to Territorial Bancorp Inc. DO NOT MAIL CASH. Your funds will earn interest at Territorial Savings Bank’s passbook
savings rate until the stock offering is completed.
Item 3b - To pay by withdrawal from a deposit account or certificate of
deposit at Territorial Savings Bank insert the account number(s) and the amount(s) you wish to withdraw from each account. If more than one signature is required for a withdrawal, all signatories must sign in the signature box on the front of the
Stock
Order form. To withdraw from an account with checking privileges, please write a check. Territorial Savings Bank will
waive any applicable penalties for early withdrawal from certificate of deposit accounts (CDs). A hold will be placed on the account(s) for the amount(s) you indicate to be withdrawn. Payments will remain in account(s) until the Stock Offering
closes and earn their respective rate of interest, but will not be available for your use until the completion of the transaction.
Item 4 - Please check the appropriate box to tell us the earliest of the three dates that apply to you, or the local community or general public boxes if you were not a depositor on any of the key dates.
Item 5 - Please check one of these boxes if you are a director, officer or employee of Territorial Savings Bank or Territorial Bancorp
Inc., or a member of such person’s household.
Item 6 - Please check the box, if applicable. If you check the box but
have not subscribed for the maximum amount and did not complete Item 7, you may not be eligible to purchase more shares.
Item 7 - Check the box, if applicable, and provide the requested information. Attach a separate page, if necessary. In the Prospectus dated, 2009, please see the section entitled “The Conversion; Plan of Distribution -
Limitations on Stock Purchases” for more information regarding the definition of “associate” and “acting in concert.”
Item 8 - The stock transfer industry has developed a uniform system of shareholder registrations that we will use in the issuance of Territorial Bancorp Inc. common stock. Please complete this section as fully and accurately
as possible, and be certain to supply your social security or Tax I.D. number(s) and your daytime and evening phone numbers. We will need to call you if we cannot execute your order as given. If you have any questions regarding the registration of
your stock, please consult your legal advisor or contact the Stock Information Center at (). Subscription rights are not transferable. If you are an eligible or supplemental eligible account holder or other depositor, to protect your priority over
other purchasers as described in the prospectus, you must take ownership in at least one of the account holder’s names.
Individual - The stock is to be registered in an individual’s name only. You may not list beneficiaries for this ownership.
Joint Tenants - Joint tenants with rights of survivorship identifies two or more owners. When stock is held by joint tenants with rights of survivorship, ownership automatically passes to the surviving joint tenant(s) upon
the death of any joint tenant. You may not list beneficiaries for this ownership.
Tenants in Common - Tenants in common may
also identify two or more owners. When stock is to be held by tenants in common, upon the death of one co-tenant, ownership of the stock will be held by the surviving co-tenant(s) and by the heirs of the deceased co-tenant. All parties must agree to
the transfer or sale of shares held by tenants in common. You may not list beneficiaries for this ownership.
Individual
Retirement Account - Individual Retirement Account (“IRA”) holders may only make stock purchases from their existing IRA if it is a self-directed IRA or through a prearranged “trustee-to-trustee” transfer if their IRA is
currently at Territorial Savings Bank. The stock cannot be held in your Territorial Savings
Bank account. Please contact
your broker or self-directed IRA account provider as quickly as possible to explore this option, as it may take several days to complete a trustee-to-trustee transfer.
Registration for IRA’s: On Name Line 1 - list the name of the broker or trust department followed by CUST or TRUSTEE.
On Name Line 2 - FBO (for benefit of) YOUR NAME [IRA a/c #].
Address will
be that of the broker / trust department to where the stock certificate will be sent.
The Social Security / Tax I.D.
number(s) will be either yours or your trustee’s, as the trustee directs.
Please list your phone numbers.
Uniform Transfers To Minors Act - For residents of Hawaii and most states, stock may be held in the name of a custodian for the benefit
of a minor under the
Uniform Transfers to Minors Act (“UTMA”). For residents of California, Delaware, Puerto
Rico, South Carolina and Vermont, stock may be held in a similar type of ownership under the Uniform Gifts to Minors Act (“UGMA”) of the individual state. For either ownership, the minor is the actual owner of the stock with the adult
custodian being responsible for the investment until the child reaches legal age. Only one custodian and one minor may be designated.
Registration for UTMA or UGMA: On Name Line 1 – print the name of the custodian followed by the abbreviation “CUST”
On Name Line 2 – FBO (for benefit of) followed by the name of the minor, followed by UTMA-HI (or your state’s abbreviation) or UGMA-CA (or your state’s abbreviation)
List only the minor’s social security number on the form.
Corporation/Partnership – Corporations/Partnerships may purchase stock. Please provide the Corporation/Partnership’s legal name
and Tax I.D. To have priority subscription rights, the Corporation/Partnership must have an account in the legal name. Please contact the Stock Information Center to verify subscription rights and purchase limitations.
Fiduciary/Trust - Generally, fiduciary relationships (such as Trusts, Estates, Guardianships, etc.) are established under a form of trust
agreement or a court order. Without a legal document establishing a fiduciary relationship, your stock may not be registered in a fiduciary capacity.
Instructions: On the first name line, print the first name, middle initial and last name of the fiduciary if the fiduciary is an individual. If the fiduciary is a corporation, list the corporate title
on the first name line. Following the name, print the fiduciary title, such as trustee, executor, personal representative, etc. On the second name line, print the name of the maker, donor or testator or the name of the beneficiary. Following the
name, indicate the type of legal document establishing the fiduciary relationship (agreement, court order, etc.). In the blank after “Under Agreement Dated,” fill in the date of the document governing the relationship. The date of the
document need not be provided for a trust created by a will.
Item 9 – You should list any qualifying accounts that you
have or may have had with Territorial Savings Bank in the box located under the heading “Qualifying Accounts”. For example, if you are ordering stock in just your name, you should list all of your account numbers as of the earliest of the
three dates that you were a depositor. Similarly, if you are ordering stock jointly with another depositor, you should list all account numbers under which either of you are owners, i.e. individual accounts, joint accounts, etc. If you are ordering
stock in your minor child’s or grandchild’s name under the Uniform Transfers to Minors Act, the minor must have had an account number on one of the three dates and you should list only their account number(s). If you are ordering stock as
a corporation, you need to list just that corporation’s account number, as your individual account number(s) do not qualify. Failure to list all of your qualifying deposit account numbers may result in the loss of part or all of your
subscription rights.
Item 10 - Sign and date the form where indicated. Before you sign please read carefully and review the
information which you have provided and read the acknowledgement. Only one signature is required, unless any account listed in section 3b of this form requires more than one signature to authorize a withdrawal. Please review the Prospectus dated,
2009 carefully before making an investment decision.
Should you have any questions, please call our Stock Information
Center at () Monday – Friday from 8:30 a.m. to 4:00
p.m., Hawaii time, except bank holidays.
Exhibit 99.6
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RP
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FINANCIAL, LC.
Financial Services Industry Consultants
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September 8, 2008
Mr. Vernon Hirata
Vice Chairman and Co-Chief Operating Officer
Territorial Mutual Holding Company
Territorial Savings Group, Inc.
Territorial Savings Bank
1132 Bishop Street, Suite 2200
Honolulu, Hawaii 96813
Dear Mr. Hirata:
This letter sets forth the agreement between Territorial Savings Bank, Honolulu, Hawaii (the
“Company”), the wholly-owned subsidiary of Territorial Savings Group, Inc. (the mid-tier stock holding company) and the second-tier subsidiary of Territorial Mutual Holding Company (the “MHC”), and RP
®
Financial, LC. (“RP Financial”), whereby RP Financial will prepare the regulatory business plan and financial projections in conjunction with the proposed stock offering (“Stock Offering”)
concurrent with the conversion of the Bank from a “no-stock” mutual holding company to a 100% publicly-held stock holding company (the “Company”). These services are described in greater detail below.
Description of Proposed Services
RP
Financial’s business planning services will include the following areas: (1) evaluating the Bank’s current financial and operating condition, business strategies and anticipated strategies in the future; (2) analyzing and
quantifying the impact of the business strategies of both the Company and the Bank, incorporating the use of net offering proceeds both in the short and long term; (3) making strategic recommendations to the Company, if appropriate, in certain
operating or financial areas to enhance franchise value or improve financial performance; (4) preparing detailed financial projections on a quarterly basis for a period of at least three fiscal years to reflect the impact of Board approved
business strategies and use of proceeds; (5) preparing the written business plan document to conform with applicable regulatory guidelines, including a description of the use of proceeds, prospective expansion opportunities provided by the
proceeds and stock form of organization, and how the convenience and needs of the community will be addressed; and (6) preparing the detailed schedules of the capitalization of the Company and the Bank and related inter-company cash flows.
Consistent with the regulatory requirements, the contents of the business plan will include the following sections: Executive Summary;
Description of Business; Marketing Plan; Management Plan; Records, Systems and Controls; Financial Management Plan; Monitoring and Revising the Plan; Alternative Business Strategy; and Financial Projections. RP Financial agrees to prepare the
business plan and accompanying financial projections in writing such that the business plan can be filed with the appropriate regulatory agencies prior to filing the appropriate applications.
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Washington Headquarters
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1700 North Moore Street, Suite 2210
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Direct: (703) 647-6546
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Arlington, VA 22209
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Telephone: (703) 528-1700
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www.rpfinancial.com
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Fax No.: (703) 528-1788
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E-Mail: wpommerening@rpfinancial.com
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Toll-Free No.: (866) 723-0594
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Mr. Vernon Hirata
September 8, 2008
Page
2
Fee Structure and Payment Schedule
The Bank agrees to compensate RP Financial for preparation of the business plan on a fixed fee basis of $40,000, and $5,000 for each business plan update
that may be required, if any, following the regulatory filing of the original business plan. Payment of the professional fees shall be made to RP Financial as follows: $5,000 upon engagement of RP Financial’s services and $35,000 upon delivery
of the completed business plan.
The Bank also agrees to reimburse RP Financial for out-of-pocket expenses in preparation of the business
plan. Reimbursable expenses will likely include travel, printing, telephone, facsimile, shipping, computer and data services, and shall be paid to RP Financial as incurred and billed. RP Financial will agree to limit reimbursable expenses to $7,500
in conjunction with this business planning engagement, inclusive of up to two on-site visits to the Bank, subject to written authorization from the Bank to exceed such level.
In the event the Bank shall, for any reason, discontinue this business planning engagement prior to the delivery of the completed original business
planning document, or subsequent required updates, and payment of the related progress payment fees, the Bank agrees to compensate RP Financial according to RP Financial’s standard billing rates for consulting services based on accumulated and
verifiable time expenses, not to exceed the $40,000 for the preparation of the business plan or $5,000 for the preparation of each required update. RP Financial’s standard billing rates range from $75 per hour for research associates to $400
per hour for managing directors.
If during the course of the planning engagement, unforeseen events occur so as to materially change the
nature or the work content of the business planning services described in this engagement letter, the terms of said engagement letter shall be subject to renegotiation by the Bank and RP Financial. Such unforeseen events shall include, but not be
limited to, major changes in the conversion regulations, business plan guidelines or processing procedures as they relate to business plans, or subsequent transaction announcements that will dramatically impact the Bank, such as a pending
acquisition, branch transaction or material balance sheet restructuring, major changes in management or procedures, operating policies or philosophies, regulatory enforcement proceedings against the Bank, and/or excessive delays or suspension of
processing of conversion applications by the regulators such that completion of the Stock Offering requires the preparation by RP Financial of a new or substantially updated business plan or financial projections.
* * * * * * * * * * *
Mr. Vernon Hirata
September 8, 2008
Page 3
Please acknowledge your agreement to the foregoing by signing as indicated below and returning to RP
Financial a signed copy of this letter, together with the initial retainer fee of $5,000.
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Sincerely,
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/s/ William E. Pommerening
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William E. Pommerening
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Chief Executive Officer and Managing Director
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Agreed To and Accepted By:
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Vernon Hirata
/s/ Vernon Hirata
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Vice Chairman and Co-Chief Operating Officer
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Upon Authorization by the Board of Directors For:
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Territorial Mutual Holding Company
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Territorial Savings Group, Inc.
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Territorial Savings Bank
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Honolulu, Hawaii
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Date Executed: 9/9/08
Exhibit 99.7
September 5, 2008
Mr. Allan S. Kitagawa
Chairman and Chief Executive Officer
Territorial Savings Bank
1132 Bishop Street, Suite 2200
Honolulu, HI 96813
Dear Mr. Kitagawa:
This letter confirms the engagement of Keefe, Bruyette and Woods, Inc. (“KBW”) to act as the Conversion Agent to Territorial Savings Bank (the “Bank”) in connection with the Bank’s proposed
conversion from mutual to stock form of ownership, including the offer and sale of common stock of a newly organized holding company of the Bank (the “Offering”).
Conversion Agent Services
: As Conversion Agent, and as the Bank may reasonably request, KBW will provide the following services:
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1.
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Consolidation of Accounts and Development of a Central File, including, but not limited to the following:
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•
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Consolidate accounts having the same ownership and separate the consolidated file information into necessary groupings to satisfy mailing requirements;
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•
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Create the master file of account holders as of key record dates; and
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Provide software for the operation of the Bank’s Stock Information Center, including subscription management and proxy solicitation efforts
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2.
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Preparation of Proxy Forms; Proxy Solicitation and Special Meeting Services, including, but not limited to the following:
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•
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Assist the Bank’s financial printer with labeling of proxy materials for voting and subscribing for stock;
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Provide support for any follow-up mailings to members, as needed, including proxy grams and additional solicitation materials;
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Proxy and ballot tabulation; and
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Act as Inspector of Election for the Bank’s special meeting of members, if requested, and the election is not contested
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Mr. Allan S. Kitagawa
September 5, 2008
Page 2 of 4
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3.
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Subscription Services, including, but not limited to the following:
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•
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Assist the Bank’s financial printer with labeling of stock offering materials for subscribing for stock;
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•
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Provide support for any follow-up mailings to members, as needed, including additional solicitation materials;
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Stock order form processing and production of daily reports and analysis;
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Provide supporting account information to the Bank’s legal counsel for ‘blue sky’ research and applicable registration;
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Assist the Bank’s transfer agent with the generation and mailing of stock certificates;
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Perform interest and refund calculations and provide a file to enable the Bank to generate interest and refund checks;
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Create 1099-INT forms for interest reporting, as well as magnetic media reporting to the IRS, for subscribers paid $10 or more in interest for subscriptions paid by
check
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Fees
: For the Conversion Agent services outlined above, the Bank agrees to pay KBW a fee of $100,000
.
This fee is
based upon the requirements of current banking regulations, the Bank’s Plan of Conversion as currently contemplated, and the expectation that member data will be processed as of three key record dates. Any material changes in regulations or the
Plan of Conversion, or delays requiring duplicate or replacement processing due to changes to record dates, may result in additional fees. All fees under this agreement shall be payable as follows: (a) $10,000 payable upon execution of this
agreement, which shall be non-refundable; and (b) the balance upon the completion of the Offering.
Costs and Expenses
: In addition to any fees
that may be payable to KBW hereunder, the Bank agrees to reimburse KBW, upon request made from time to time, for its reasonable out-of-pocket expenses incurred in connection with its engagement hereunder, regardless of whether the Offering is
consummated, including, without limitation, travel, lodging, food, telephone, postage, listings, forms and other similar expenses; provided, however, that KBW shall document such expenses to the reasonable satisfaction of the Bank.
Reliance on Information Provided
: The Bank agrees to provide KBW with such information as KBW may reasonably require to carry out its services under this
agreement. The Bank recognizes and confirms that KBW (a) will use and rely on such information in performing the services contemplated by this agreement without having independently verified the same, and (b) does not assume responsibility
for the accuracy or completeness of the information or to conduct any independent verification or any appraisal or physical inspection of properties or assets.
Limitations
: KBW, as Conversion Agent hereunder, (a) shall have no duties or obligations other than those specifically set forth herein; (b) will be regarded as making no representations and having no responsibilities as to
the validity, sufficiency, value or genuineness of any order form or any stock certificates or the shares represented thereby,
Mr. Allan S. Kitagawa
September 5, 2008
Page 3 of 4
and will not be required to and will make no representations as to the validity, value or genuineness of the offer; (c) shall not be obliged to take any
legal action hereunder which might in its judgment involve any expense or liability, unless it shall have been furnished with reasonable indemnity satisfactory to it; and (d) may rely on and shall be protected in acting in reliance upon any
certificate, instrument, opinion, notice, letter, telex, telegram, or other document or security delivered to it and in good faith believed by it to be genuine and to have been signed by the proper party or parties.
The Company also agrees neither KBW , nor any of its affiliates nor any officer, director, employee or agent of KBW or any of its affiliates, nor any
person controlling KBW or any of its affiliates, shall be liable to any person or entity, including the Bank, by reason of any error of judgment, or for any act done by it in good faith, or for any mistake of law or fact in connection with this
agreement and the performance hereof, unless caused by or arising primarily out of KBW’s bad faith or gross negligence. The foregoing agreement shall be in addition to any rights that KBW, the Company or any Indemnified Party (as defined
herein) may have at common law or otherwise, including, but not limited to, any right to contribution.
Anything in this agreement to the contrary
notwithstanding, in no event shall KBW be liable for special, indirect or consequential loss or damage of any kind whatsoever (including but not limited to lost profits), even if KBW has been advised of the likelihood of such loss or damage and
regardless of the form of action.
Indemnification
: The Bank agrees to indemnify and hold harmless KBW and its affiliates, the respective partners,
directors, officers, employees, and agents of KBW and its affiliates and each other person, if any, controlling KBW or any of its affiliates and each of their successors and assigns (KBW and each such person being an “Indemnified Party”)
to the fullest extent permitted by law, from and against any and all losses, claims, damages and liabilities, joint or several, to which such Indemnified Party may become subject under applicable federal or state law, or otherwise, related to or
arising out of the engagement of KBW pursuant to, and the performance by KBW of the services contemplated by, this letter, and will reimburse any Indemnified Party for all expenses (including reasonable counsel fees and expenses) as they are
incurred, including expenses incurred in connection with investigation, preparing for or defending any such action or claim whether or not in connection with pending or threatened litigation, or any action or proceeding arising therefrom, whether or
not KBW is a Party. The Bank will not be liable under the foregoing indemnification provision to the extent that any loss, claim, damage, liability or expense is found in a final judgment by a court of competent jurisdiction to have resulted
primarily from KBW’s bad faith, willful misconduct or gross negligence.
If the indemnification provided for in the foregoing
paragraph is judicially determined to be unavailable (other than in accordance with the terms hereof) to any person otherwise entitled to indemnity in respect of any losses, claims, damages or liabilities referred to herein, then, in lieu of
indemnifying such person hereunder, the
Mr. Allan S. Kitagawa
September 5, 2008
Page 4 of 4
Bank shall contribute to the amount paid or payable by such person as a result of such losses, claims, damages or liabilities (and expenses relating thereto)
(i) in such proportion as is appropriate to reflect the relative benefits to the Bank, on the one hand, and KBW, on the other hand, of the engagement provided for in this Agreement or (ii) if the allocation provided for in clause
(i) above is not available, in such proportion as is appropriate to reflect not only the relative benefits referred to in such clause (i) but also the relative fault of each of the Bank and KBW, as well as any other relevant equitable
considerations;
provided
,
however
, in no event shall KBW’s aggregate contribution to the amount paid or payable exceed the aggregate amount of fees actually received by KBW under this Agreement. For the purposes of this Agreement,
the relative benefits to the Bank and to KBW of the engagement under this Agreement shall be deemed to be in the same proportion as (a) the total value paid or contemplated to be paid or received or contemplated to be received by the Bank in
the Conversion and the Offerings that are the subject of the engagement hereunder, whether or not consummated, bears to (b) the fees paid or to be paid to KBW under this Agreement.
This letter constitutes the entire Agreement between the parties with respect to the subject matter hereof and can be altered only by written consent signed by the parties. This Agreement is governed by the laws of
the State of New York.
If the foregoing correctly sets forth our mutual understanding, please so indicate by signing and returning the original copy of
this letter to the undersigned.
Very truly yours,
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KEEFE, BRUYETTE & WOODS, INC.
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By:
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/s/ Patricia A. McJoynt
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Patricia A. McJoynt
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Managing Director
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TERRITORIAL SAVINGS BANK
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By:
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/s/ Allan S. Kitagawa
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Date: 10/10/08
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Allan S. Kitagawa
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Chairman and Chief Executive Officer
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