Contract

EXHIBIT 10.5 SEVERANCE AGREEMENT WITH GARY F. HOSKINS This SEVERANCE AGREEMENT (this "Agreement") is entered into as of this 17th day of May, 2004, by and between Citizens South Banking Corporation, a Delaware corporation (the "Corporation"), and Gary F. Hoskins, Executive Vice President, Treasurer, and Chief Financial Officer (the "Executive") of Citizens South Bank, a federally chartered savings bank and wholly owned subsidiary of the Corporation. WHEREAS, the Executive is employed by Citizens South Bank and the Executive has made and is expected to continue to make major contributions to the profitability, growth, and financial strength of the Corporation and its subsidiaries, WHEREAS, the Corporation recognizes that, as is the case for most companies, the possibility of a Change in Control (as defined in Section 1(c)) exists, WHEREAS, the Corporation desires to assure itself of the current and future continuity of management and desires to establish minimum severance benefits for certain of its officers, including the Executive, if a Change in Control occurs, WHEREAS, the Corporation wishes to ensure that officers and other key employees are not practically disabled from discharging their duties if a proposed or actual transaction involving a Change in Control occurs, WHEREAS, the Corporation desires to provide additional inducement for the Executive to continue to remain in the ongoing employ of the Corporation and subsidiary, and WHEREAS, none of the conditions or events included in the definition of the term "golden parachute payment" that is set forth in section 18(k)(4)(A)(ii) of the Federal Deposit Insurance Act [12 U.S.C. 1828(k)(4)(A)(ii)] and in Federal Deposit Insurance Corporation Rule 359.1(f)(1)(ii) [12 CFR 359.1(f)(1)(ii)] exists or, to the best knowledge of the Corporation, is contemplated insofar as either of the Corporation or any of its subsidiaries is concerned. NOW THEREFORE, in consideration of these premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows. 91 1. CHANGE IN CONTROL COMBINED WITH EMPLOYMENT TERMINATION (a) Termination of Executive Within 12 Months After a Change in Control. If a Change in Control occurs during the term of this Agreement and if either of the following occurs, the Executive shall be entitled to severance benefits specified in Section 2 of this Agreement - 1) Termination by Citizens South Banking Corporation or Subsidiary: the Executive's employment with the Corporation or its Subsidiary(ies) is involuntarily terminated within 12 months after a Change in Control, except for termination under Section 4 of this Agreement. For purposes of this Agreement, "Subsidiary" means an entity in which the Corporation directly or indirectly beneficially owns 50% or more of the outstanding voting securities, or 2) Termination by the Executive for Good Reason: the Executive terminates his employment with the Corporation or Subsidiary(ies) for Good Reason (as defined in Section 3) within 12 months after a change in control. If the Executive is removed from office or if his or her employment terminates after discussions with a third party regarding a Change in Control commence, and if those discussions ultimately conclude with a Change in Control, then for purposes of this Agreement the removal of the Executive or termination of employment shall be deemed to have occurred after the Change in Control. (b) Definition of Change in Control. For purposes of this Agreement, "Change in Control" means any of the following events occur - 1) Merger: the Corporation merges into or consolidates with another corporation, or merges another corporation into the Corporation, and as a result less than 50% of the combined voting power of the resulting corporation immediately after the merger or consolidation is held by persons who were the holders of the Corporation's voting securities immediately before the merger or consolidation. For purposes of this Agreement, the term person means an individual, corporation, partnership, trust, association, joint venture, pool, syndicate, sole proprietorship, unincorporated organization or other entity, or 2) Acquisition of Significant Share Ownership: a report on Schedule 13D, Schedule TO, or another form or schedule (other than Schedule 13G), is filed or is required to be filed under Sections 13(d) or 14(d) of the Securities Exchange Act of 1934, 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 Corporation's voting securities (but this clause (2) shall not apply to beneficial ownership of voting shares held by a Subsidiary in a fiduciary capacity), or 3) Change in Board Composition: during any period of two consecutive years, individuals who constitute the Corporation's board of directors at the beginning of the two-year period cease for any reason to constitute at least a majority thereof; provided, however, that - for purposes of this clause (3) - each director who is first elected by the board (or first nominated by the board for election by stockholders) by a vote of at least two-thirds (2/3) of the directors who were directors at the beginning of the period shall be deemed to have been a director at the beginning of the two-year period, or 92 4) Sale of Assets: The Corporation sells to a third party substantially all of the Corporation's assets. For purposes of this Agreement, sale of substantially all of the Corporation's assets includes sale of Citizens South Bank alone. 2. SEVERANCE BENEFITS (a) Severance Benefits. The severance benefits to which the Executive is entitled under Section 1 are as follows - 1) Lump Sum Payment: The Corporation shall make or cause to be made a lump sum payment to the Executive in an amount in cash equal to 1.5 times the Executive's annual compensation. For purposes of this Agreement, annual compensation means (a) the Executive's annual base salary on the date of the Change in Control or the Executive's termination of employment, whichever amount is greater, plus (b) any cash bonuses or cash incentive compensation earned for the calendar year immediately before the year in which the Change in Control occurred or immediately before the year in which termination of employment occurred, whichever amount is greater, regardless of when the bonus or incentive compensation is or was paid. The Corporation recognizes that the bonus and incentive compensation earned by the Executive for a particular year's service might be paid in the year after the calendar year in which the bonus or incentive compensation is earned. The amount payable to the Executive hereunder shall not be reduced to account for the time value of money or discounted to present value. The payment required under this Section 2(a)(1) is payable no later than 5 business days after the date the Executive's employment terminates. If the Executive terminates employment for Good Reason, the date of termination shall be the date specified by the Executive in his notice of termination. 2) Retirement Benefit Plans: The Corporation shall cause the Executive to become fully vested in any qualified and non-qualified plans, programs or arrangements in which the Executive participated if the plan, program, or arrangement does not address the effect of a change in control. The Corporation also shall contribute or cause a Subsidiary to contribute to any account of the Executive under a 401(k) plan, retirement plan, or profit-sharing plan the matching and voluntary contributions, if any, that would have been made had the Executive's employment not terminated before the end of the plan year. 3) Other Benefit Plans: The Corporation shall cause to be continued life, medical and dental coverage substantially identical to the coverage maintained by the Corporation for the Executive prior to his severance. Such coverage and payments shall cease after 18 months, or sooner if the Executive becomes employed elsewhere. (c) Mitigation Is Not Required. The Corporation hereby acknowledges that it will be difficult and could be impossible (1) for the Executive to find reasonably comparable employment after his employment terminates, and (2) to measure the amount of damages the Executive suffers as a result of termination. Additionally, the Corporation acknowledges that its general severance pay plans do not provide for mitigation, offset or reduction of any severance payment received thereunder. Accordingly, the Corporation further acknowledges that the payment of severance benefits by the Corporation under this Agreement is reasonable and will be liquidated damages, and the Executive shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or otherwise, nor will any profits, income, earnings or other benefits from any source whatsoever create any mitigation, offset, reduction or any other obligation on the part of the Executive hereunder or otherwise. 93 3. GOOD REASON For purposes of this Agreement, "Good Reason" means the occurrence of any of the events or conditions without the Executive's express written consent - - (a) Reduction in Base Salary: involuntary reduction in the Executive's base salary, or (b) Reduced Participation in Bonus, Incentive, Compensation, and Other Plans: involuntary reduction in the Executive's bonus, incentive, and other compensation award opportunities under the Corporation's or Subsidiary(ies)'s benefit plans, unless a company-wide reduction of all officers' award opportunities occurs simultaneously, or (c) Participation in Benefit Plans: involuntary discontinuance of the Executive's participation in any officer or employee benefit plans maintained by the Corporation or Subsidiary(ies), unless such plans are discontinued by reason of law or loss of tax deductibility to the Corporation with respect to contributions to such plans, or are discontinued as a matter of policy applied equally to all participants in such plans, or (d) Reduction in Responsibilities or Status: assignment to the Executive of duties or responsibilities that are materially inconsistent with the Executive's duties and responsibilities immediately before the Change in Control; any other action by the Corporation or its successor that results in a material reduction or material adverse change in the Executive's position, authority, duties or responsibilities; failure to nominate the Executive as a director of the Corporation if the Executive shall have been a director immediately before the Change in Control; or failure to elect or reelect the Executive or cause the Executive to be elected or reelected to the board of directors of Citizens South Bank if the Executive shall have been a director immediately before the Change in Control, or (e) Failure to Obtain Assumption Agreement: failure to obtain an assumption of the Corporation's obligations under this Agreement by any successor to the Corporation, regardless of whether such entity becomes a successor to the Corporation as a result of a merger, consolidation, sale of assets, or other form of reorganization, or (f) Material Breach: a material breach of this Agreement by the Corporation that is not corrected within a reasonable time, or (g) Relocation of the Executive: relocation of the Corporation's principal executive offices, or requiring the Executive to change his principal work location, to any location that is more than 50 miles from the location of the Corporation's principal executive offices on the date of this Agreement. 4. TERMINATION FOR WHICH NO SEVERANCE BENEFITS ARE PAYABLE (a) No Severance for Termination for Cause. The Bank may terminate the Executive's employment at any time. Anything in this Agreement to the contrary notwithstanding, under no circumstance shall the Executive be entitled to severance benefits if his employment terminates for Cause. 1) Cause Means Commission of Any of the Following Acts: For purposes of this Agreement, "Cause" means the Executive shall have committed any of the following acts - 94 a) Fraud, Embezzlement, Theft or Other Crime: an act of fraud, embezzlement, or theft in connection with his duties or in the course of his employment with the Corporation or a Subsidiary, or commission of a felony or commission of a misdemeanor involving moral turpitude, or b) Damage to Property: intentional wrongful damage to the business or property of the Corporation or Subsidiary(ies), which, in the Corporation's sole judgment, causes material harm to the Corporation or Subsidiary(ies), or c) Negligence and Other Actions: gross negligence, insubordination, disloyalty, or dishonesty in the performance of his duties as an officer of the Corporation or Subsidiary(ies), or d) Violation of Law or Policy: intentional violation of any law or significant policy of the Corporation or Subsidiary(ies) committed in connection with the Executive's employment, which, in the Corporation's sole judgment, has an adverse effect on the Corporation or Subsidiary(ies), or e) Disclosure of Trade Secrets: intentional wrongful disclosure of secret processes or confidential information of the Corporation or a Subsidiary, which, in the Corporation's sole judgment, causes material harm to the Corporation or the Subsidiary, or f) Competing with the Corporation: intentional wrongful engagement in any competitive activity. For purposes of this Agreement, competitive activity means the Executive's participation, without the written consent of a senior executive officer of the Corporation, in the management of any business enterprise if (1) the enterprise engages in substantial and direct competition with the Corporation, (2) the enterprise's revenues derived from any product or service competitive with any product or service of the Corporation or Subsidiary(ies) amounted to 10% or more of the enterprise's revenues for its most recently completed fiscal year, and (3) the Corporation's revenues from the product or service amounted to 10% of the Corporation's revenues for its most recently completed fiscal year. A competitive activity does not include mere ownership of securities in an enterprise and the exercise of rights appurtenant thereto, provided the Executive's share ownership does not give his practical or legal control of the enterprise. For this purpose, ownership of less than 5% of the enterprise's outstanding voting securities shall conclusively be presumed to be insufficient for practical or legal control, and ownership of more than 50% shall conclusively be presumed to constitute practical and legal control. If the Executive is now or hereafter becomes subject to an agreement not to compete with the Corporation or Subsidiary(ies), a breach by the Executive of that other non-competition agreement shall be grounds for denial of severance benefits for Cause under this clause (f) of Section 4(a)(1). But if the Executive engages in a competitive activity under circumstances justifying denial of severance benefits for Cause under this clause (f), that shall not necessarily be grounds for concluding that the Executive has also breached the other 95 non-competition agreement to which he is or may become subject. This clause (f) is not intended to and shall not be construed to supersede or amend any provision of an employment or non-competition agreement to which the Executive is or may become subject. This clause (f) does not grant to the Executive any right or privilege to engage in other activities or enterprises, whether in competition with the Corporation or otherwise, or g) Termination for Cause under an Employment Agreement: any actions that have caused the Executive to be terminated for cause under any employment agreement existing on the date hereof or hereafter entered into between the Executive and the Corporation or a Subsidiary. 2) Definition of "Intentional": For purposes of this Agreement, no act or failure to act on the part of the Executive shall be deemed to have been intentional if it was due primarily to an error in judgment or negligence. An act or failure to act on the Executive's part shall be considered intentional if it is not in good faith and if it is without a reasonable belief that the action or failure to act is in the best interests of the Corporation or a Subsidiary. (b) The Executive's Right to Severance Is Subject to Regulatory Considerations. Payments made to the Executive under this Agreement or otherwise are subject to and conditioned upon their compliance with 12 USC section 1828(k) and any regulations promulgated thereunder. Anything in this Agreement to the contrary notwithstanding, the Executive's entitlement to severance benefits under this Agreement is subject to the following regulatory considerations. 1) If the Executive is suspended from office or temporarily prohibited from participating in the Bank's affairs by a notice served under section 8(e)(3) (12 USC 1818(e)(3)) or 8(g) (12 USC 1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's obligations under this Agreement 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 (a) pay the Executive all or part of the compensation withheld while the obligations under this Agreement were suspended and (b) reinstate in whole or in part any of the obligations that were suspended. 2) If the Executive is removed or permanently prohibited from participating in the Bank's affairs by an order issued under section 8(e) (12 USC 1818(e)) or 8(g) (12 USC 1818(g)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the parties shall not be affected. 3) If the Bank is in default as defined in section 3(x) (12 USC 1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this Agreement shall terminate as of the date of default, but vested rights of the parties shall not be affected. 96 4) All obligations of the Bank under this Agreement shall be terminated, except to the extent determined that continuation of the Agreement is necessary for the continued operation of the Bank, (a) by the Federal Deposit Insurance Corporation when the FDIC enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in section 13(c) (12 USC 1823(c)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, or (b) when the Bank is determined by the FDIC to be in an unsafe or unsound condition. Vested rights of the parties shall not be affected, however. (c) No Severance under this Agreement for the Executive's Death or Disability. Anything in this Agreement to the contrary notwithstanding, under no circumstance shall the Executive be entitled to severance benefits under this Agreement if - 1) Death: the Executive dies while actively employed by the Corporation or a Subsidiary, or 2) Disability: the Executive becomes totally disabled while actively employed by the Corporation or a Subsidiary. For purposes of this Agreement, the term "totally disabled" means that because of injury or sickness the Executive is unable to perform his duties. The benefits, if any, payable to the Executive or his beneficiary(ies) or estate relating to his death or disability shall be determined solely by such benefit plans or arrangements as the Corporation or Subsidiary may have with the Executive relating to death or disability, not by this Agreement. 5. TERM OF AGREEMENT The initial term of this Agreement shall be for a period of three years, commencing May 17, 2004. On the first anniversary of the May 17, 2004 effective date of this Agreement, and on each anniversary thereafter, this Agreement shall be extended automatically for one additional year unless the Corporation's board of directors gives notice to the Executive in writing at least 90 days before the anniversary that the term of this Agreement will not be extended. If the board of directors determines not to extend the term, it shall promptly notify the Executive. References herein to the term of this Agreement mean the initial term and extensions of the initial term. Unless terminated earlier, this Agreement shall terminate when the Executive reaches age 65. If the board of directors decides not to extend the term of this Agreement, this Agreement shall nevertheless remain in force until its term expires. The board's decision not to extend the term of this Agreement shall not - by itself - give the Executive any rights under this Agreement to claim an adverse change in his position, compensation or circumstances or otherwise to claim entitlement to severance benefits under this Agreement. 6. THIS AGREEMENT IS NOT AN EMPLOYMENT CONTRACT The parties hereto acknowledge and agree that (a) this Agreement is not a management or employment agreement and (b) nothing in this Agreement shall give the Executive any rights or impose any obligations to continued employment by the Corporation or any Subsidiary or successor of the Corporation, nor shall it give the Corporation any rights or impose any obligations for the continued performance of duties by the Executive for the Corporation or any Subsidiary or successor of the Corporation. 97 7. WITHHOLDING OF TAXES The Corporation may withhold from any benefits payable under this Agreement all Federal, state, local or other taxes as may be required by law, governmental regulation or ruling. 8. SUCCESSORS AND ASSIGNS (a) This Agreement Is Binding on the Corporation's Successors. This Agreement shall be binding upon the Corporation and any successor to the Corporation, including any persons acquiring directly or indirectly all or substantially all of the business or assets of the Corporation by purchase, merger, consolidation, reorganization, or otherwise. Any such successor shall thereafter be deemed to be "Citizens South Banking Corporation" for purposes of this Agreement. But this Agreement and the Corporation's obligations under this Agreement are not otherwise assignable, transferable or delegable by the Corporation. By agreement in form and substance satisfactory to the Executive, the Corporation shall require any successor to all or substantially all of the business or assets of the Corporation expressly to assume and agree to perform this Agreement in the same manner and to the same extent the Corporation would be required to perform if no such succession had occurred. (b) This Agreement Is Enforceable by the Executive and His Heirs. This Agreement will inure to the benefit of and be enforceable by the Executive's personal or legal representatives, executors, administrators, successors, heirs, distributes and legatees. (c) This Agreement Is Personal in Nature and Is Not Assignable. This Agreement is personal in nature. Without written consent of the other party, neither party shall assign, transfer, or delegate this Agreement or any rights or obligations under this Agreement except as expressly provided in this Section 8. Without limiting the generality or effect of the foregoing, the Executive's right to receive payments hereunder is not assignable or transferable, whether by pledge, creation of a security interest, or otherwise, except for a transfer by Executive's will or by the laws of descent and distribution. If the Executive attempts an assignment or transfer that is contrary to this Section 8, the Corporation shall have no liability to pay any amount to the assignee or transferee. 9. NOTICES All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered by hand or mailed, certified or registered mail, return receipt requested, with postage prepaid (a) to the Corporation at 519 South New Hope Road, P.O. Box 2249, Gastonia, North Carolina 28053-2249, Attn: Corporate Secretary, (b) to the Executive at the address appearing on the Corporation's records, or (c) to such other address as the party may designate by like notice. 10. CAPTIONS AND COUNTERPARTS The headings and subheadings used in this Agreement are included solely for convenience and shall not affect the interpretation of this Agreement. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same agreement. 98 11. AMENDMENTS AND WAIVERS No provision of this Agreement may be modified or amended except in a writing signed by the Executive and by the Corporation. No waiver by either party of any breach by the other or waiver of compliance with any condition or provision of this Agreement shall be deemed a waiver of similar provisions or conditions at the same time or at any other time. 12. SEVERABILITY The provisions of this Agreement shall be deemed severable. The invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions of this Agreement. Any provision held to be invalid or unenforceable shall be reformed to the extent (and only to the extent) necessary to make it valid and enforceable. 13. GOVERNING LAW The validity, interpretation, construction and performance of this Agreement shall be governed by and construed in accordance with the substantive laws of the State of North Carolina, without giving effect to the principles of conflict of laws of such State. 14. ENTIRE AGREEMENT This Agreement constitutes the entire agreement between the Corporation and the Executive concerning the subject matter hereof. No rights are granted to the Executive under this Agreement other than those specifically set forth herein. No agreements or representations, oral or otherwise, expressed or implied concerning the subject matter of this Agreement have been made by either party that are not set forth expressly in this Agreement. Without limiting the generality of the foregoing, the parties hereto acknowledge and agree that this Agreement supersedes in its entirety any prior Merger/Acquisition Protection Agreement entered into by the Executive and the Corporation or by the Executive and Citizens South Bank, as amended or supplemented. Any Merger/Acquisition Protection Agreement entered into prior to this Agreement shall hereafter be void and of no force or effect. IN WITNESS WHEREOF, the parties have executed this Severance Agreement as of the date first written above. CITIZENS SOUTH BANKING CORPORATION By: /s/ Kim S. Price ------------------------------------- Its President and Chief Executive Officer EXECUTIVE /s/ Gary F. Hoskins 99