# EDGAR Filing Document

**Accession Number:** 0001698022
**File Stem:** 0001437749-23-004638
**Filing Date:** 2023-2
**Character Count:** 61242
**Document Hash:** a2dd32d167f89fae1e608fedce5bf28f
**Contains OCR:** False
**Source Format:** 

## Filing Content

## Filing Summary
**0001437749-23-004638.hdr.sgml**: 20230227

**ACCESSION NUMBER**: 0001437749-23-004638

**CONFORMED SUBMISSION TYPE**: 8-K

**PUBLIC DOCUMENT COUNT**: 14

**CONFORMED PERIOD OF REPORT**: 20220808

**ITEM INFORMATION**: Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers: Compensatory Arrangements of Certain Officers

**ITEM INFORMATION**: Financial Statements and Exhibits

**FILED AS OF DATE**: 20230227

**DATE AS OF CHANGE**: 20230227

**FILER**: 

**COMPANY DATA:**
- **COMPANY CONFORMED NAME:** Farmers & Merchants Bancshares, Inc.
- **CENTRAL INDEX KEY:** 0001698022
- **STANDARD INDUSTRIAL CLASSIFICATION:** SAVINGS INSTITUTIONS, NOT FEDERALLY CHARTERED [6036]
- **IRS NUMBER:** 813605835
- **STATE OF INCORPORATION:** MD
- **FISCAL YEAR END:** 1231

**FILING VALUES:**
- **FORM TYPE:** 8-K
- **SEC ACT:** 1934 Act
- **SEC FILE NUMBER:** 000-55756
- **FILM NUMBER:** 23670164

**BUSINESS ADDRESS:**
- **STREET 1:** 4510 LOWER BECKLEYSVILLE ROAD
- **STREET 2:** SUITE H
- **CITY:** HAMPSTEAD
- **STATE:** MD
- **ZIP:** 21074
- **BUSINESS PHONE:** 4103741510

**MAIL ADDRESS:**
- **STREET 1:** 4510 LOWER BECKLEYSVILLE ROAD
- **STREET 2:** SUITE H
- **CITY:** HAMPSTEAD
- **STATE:** MD
- **ZIP:** 21074

fmfg20230224_8k.htm

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM **8-K**

**CURRENT REPORT**

**PURSUANT TO SECTION 13 OR 15(d) OF THE** 

**SECURITIES EXCHANGE ACT OF 1934**

Date of Report (Date of earliest event reported): August 8, 2022

**<u>Farmers and Merchants Bancshares, Inc.</u>**

(Exact name of registrant as specified in its charter)

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| | | |
|:---|:---|:---|
| <u>Maryland</u> | <u>000-55756</u> | <u>81-3605835</u> |
| (State or other jurisdiction of | (Commission file number) | (IRS Employer |
| incorporation or organization) |  | Identification No.) |

---

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| | |
|:---|:---|
| <u>4510 Lower Beckleysville Road, Suite H</u><u>, <u>Hampstead</u>, <u>MD</u></u> | <u>21074</u> |
| (Address of principal executive offices) | (Zip Code) |

---

Registrant's telephone number, including area code: <u>(<u>410</u>) <u>374-1510</u></u>

<u>N/A</u>

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligations of the registrant under any of the following provisions:

☐ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

☐ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

☐ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

☐ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Securities registered pursuant to Section 12(b) of the Exchange Act: None

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (17 CFR §230.405) or Rule 12b-2 of the Securities Exchange Act of 1934 (17 CFR §240.12b-2). Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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| | |
|:---|:---|
| **Item 5.02.** | **Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.** |

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(e) <u>Material Compensatory Plan</u>.

On August 8, 2022, Farmers and Merchants Bank (the "Bank"), the wholly-owned subsidiary of Farmers and Merchants Bancshares, Inc. (the "Company"), entered into a Supplemental Executive Retirement Agreement with Gary A. Harris, who, as of such date, served as the President of the Bank and the Company (the "SERP Agreement"). Under the SERP Agreement, benefits will be paid as follows:

● <u>Retirement Benefit</u>. Mr. Harris will be entitled to an annual cash benefit for 20 years if he suffers a Separation from Service (as defined in the SERP Agreement) after reaching the retirement age of 65. The amount of this benefit will be equal to 35% of the average of Mr. Harris' three highest base salaries for the three-year period preceding the date on which the payment obligation is triggered, including the year in which the Separation of Service occurs. This benefit will be paid in 12 equal monthly installments commencing in the month that follows the month in which the Separation of Service occurs.

● <u>Early Termination Benefit</u>. If Mr. Harris suffers a Separation from Service that constitutes an Early Termination, then he will be entitled to receive the Accrued Benefit, which will be paid over 20 years in equal monthly installments commencing in the month that follows the month in which the Separation of Service occurs, with interest credited on the unpaid balance at the Discount Rate (as defined in the SERP Agreement) in effect at the time of the Separation from Service. The term "Early Termination" means a Separation from Service that occurs prior to Mr. Harris reaching the age of 65 and not within 24 months of a Change in Control (as defined in the SERP Agreement). The term "Accrued Benefit" means the dollar value of the liability that should be accrued by the Bank, under Generally Accepted Accounting Principles, for the Bank's obligation to Mr. Harris under the SERP Agreement, calculating by applying Financial Accounting Standards Board's Accounting Standards Codification 710-10 and the Discount Rate.

● <u>Disability Benefit</u>. If Mr. Harris suffers a Disability (as defined in the SERP Agreement) prior to reaching the age of 65, then he will be entitled to receive the Accrued Benefit, which will be paid over 20 years in equal monthly installments commencing in the month that follows the month in which the Disability occurs, with interest credited on the unpaid balance at the Discount Rate (as defined in the SERP Agreement) in effect at the time the Disability occurs.

● <u>Change in Control Benefit</u>. If a Change in Control (as defined in the SERP Agreement) occurs and, prior to reaching the age of 65, Mr. Harris suffers a Separation from Service within 24 months of such Change in Control, then Mr. Harris will be entitled to receive cash in an amount equal to the present value of a 20-year payment stream equal to 35% of the average of Mr. Harris' three highest base salaries for the three-year period preceding the date on which the payment obligation is triggered, including the year in which the Separation of Service occurs, calculated using a 4.0% discount rate (the "CiC Benefit"). The CiC Benefit will be paid over five years in equal monthly installments commencing in the month that follows the month in which the Separation from Service occurs, with interest credited on the unpaid balance at an annual rate of 4%, compounded monthly.

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● <u>Death Benefit</u>. If Mr. Harris dies prior to a Separation from Service, then his designated beneficiaries will be entitled to cash in an amount equal to the greater of (i) the Accrual Benefit and (ii) $2,127,275. This benefit will be paid in a single lump sum during the month that follows the month in which Mr. Harris dies.

● <u>Benefit Upon Termination of the SERP Agreement</u>. If the Bank terminates the SERP Agreement (i) in connection with a Change in Control following the commencement of benefit payments, (ii) upon its dissolution or in connection with its bankruptcy, or (iii) in connection with the termination of all other compensatory arrangements that would be aggregated with the SERP Agreement pursuant to Section 409A of the Internal Revenue Code (to the extent that Mr. Harris participated in such other arrangements), then, subject to certain conditions specified in the Harris SERP Agreement, including compliance with Section 409A of the Internal Revenue Code, Mr. Harris will be entitled to the Accrued Benefit. If the Bank terminates the SERP Agreement in connection with a Change in Control before the commencement of benefit payments, then Mr. Harris will be entitled to the CiC Benefit.

If benefit payments have begun and an executive dies before all payments have been made, then the Bank will distribute the remaining benefits to the executive's designated beneficiaries, at the same times and in the same manner as if the executive had not died. If an executive becomes entitled to benefits but dies before payments begin, then the Bank will pay the benefits, in a single lump sum on the first day of the fourth month following death, to the executive's designated beneficiaries.

No benefits will be paid if an executive's employment is terminated by the Bank for cause or if he is subject to a final removal or prohibition order issued by an appropriate federal banking agency pursuant to Section 8(e) of the Federal Deposit Insurance Act. Additionally, no benefit will be paid to the extent it constitutes an excess golden parachute payment under Section 280G of the Internal Revenue Code or is determined to be a prohibited golden parachute payment pursuant to 12 C.F.R. § 359.2.

The timing of the distribution of some or all of the foregoing benefits may be subject to a six-month waiting period under Section 409A of the Internal Revenue Code to the extent that Mr. Harris is considered to be a "specified employee" of the Company. Section 409A of the Internal Revenue Code places restrictions on the ability of the Bank and/or the executives to change the form or timing of the payment of the benefits, and the SERP Agreement provides that any such change must be consistent with the requirements and limitations of Section 409A of the Internal Revenue Code. Notwithstanding the foregoing, if Mr. Harris becomes subject to tax on the benefits that could be paid under the SERP Agreement, then the Bank may, subject to the requirements of Section 409A of the IRC, make a limited distribution to Mr. Harris to cover such taxes. Any such distribution will reduce the benefits that are otherwise payable under the SERP Agreement.

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The SERP Agreement provides that, subject to certain exceptions, Mr. Harris will forfeit any undistributed benefits in the event that he engages in certain activities that compete with the Bank, interferes with certain of the Bank's employee and/or customer relationships, or improperly divulges the Bank's confidential information.

The foregoing information relating to the SERP Agreement is intended only as a summary and is qualified in its entirety by reference to the terms of the Harris SERP Agreement. A copy of the Harris SERP Agreement is filed herewith as Exhibit 10.1.

**Item 9.01. Financial Statements and Exhibits.**

(d) Exhibits.

The exhibits furnished with this report are listed in the following Exhibit Index:

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| | |
|:---|:---|
| <u>Exhibit No.</u> | <u>Description</u> |
| 10.1 | [Supplemental Executive Retirement Agreement dated August 8, 2022 between Farmers and Merchants Bank and Gary A. Harris (filed herewith)](ex_480745.htm) |
| 104 | Cover page interactive data file (embedded within the iXBRL document) |

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**SIGNATURES**

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

---

| | | |
|:---|:---|:---|
|  | FARMERS AND MERCHANTS BANCSHARES, INC. | FARMERS AND MERCHANTS BANCSHARES, INC. |
| Dated: February 27, 2023 | By:  | /s/ Gary A. Harris |
|  |  | Gary A. Harris |
|  |  | President & CEO |

---

## Exhibit 10.1

**Exhibit 10.1**

**SUPPLEMENTAL EXECUTIVE RETIREMENT AGREEMENT**

This Supplemental Executive Retirement Agreement (the "Agreement") by and between Farmers and Merchants Bank, a state-chartered commercial bank located in Upperco, Maryland (the "Employer"), and Gary A. Harris (the "Executive"), made this 8<sup>th</sup> day of August 2022*,* 2022, formalizes the agreements and understanding between the Employer and the Executive.

**WITNESSETH:**

WHEREAS, the Executive is employed by the Employer;

WHEREAS, the Employer recognizes the valuable services the Executive has performed for the Employer and wishes to encourage the Executive's continued employment and to provide the Executive with additional incentive to achieve corporate objectives;

WHEREAS, the Employer wishes to provide the terms and conditions upon which the Employer shall pay additional retirement benefits to the Executive;

WHEREAS, the Employer and the Executive intend this Agreement shall at all times be administered and interpreted in compliance with Code Section 409A; and

WHEREAS, the Employer intends this Agreement shall at all times be administered and interpreted in such a manner as to constitute an unfunded nonqualified deferred compensation arrangement, maintained primarily to provide supplemental retirement benefits for the Executive, a member of select group of management or highly compensated employee of the Employer;

NOW THEREFORE, in consideration of the premises and of the mutual promises herein contained, the Employer and the Executive agree as follows:

**ARTICLE 1** <br> **DEFINITIONS**

For the purpose of this Agreement, the following phrases or terms shall have the indicated meanings:

1.1 "*Accrued Benefit*" means the dollar value of the liability that should be accrued by the Employer, under Generally Accepted Accounting Principles, for the Employer's obligation to the Executive under this Agreement, calculated by applying Accounting Standards Codification 710-10 and the Discount Rate.

1.2 "*Administrator*" means the Board or its designee.

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1.3 "*Affiliate*" means any business entity with whom the Employer would be considered a single employer under Code Section 414(b) and 414(c). Such term shall be interpreted in a manner consistent with the definition of "service recipient" contained in Code Section 409A.

1.4 "*Base Salary*" means the highest annualized pay during any Plan Year, excluding distributions from nonqualified deferred compensation plans, bonuses, commissions, overtime, fringe benefits, stock options, relocation expenses, incentive payments, non-monetary awards, and other fees, and automobile and other allowances paid to the Executive for employment rendered (whether or not such allowances are included in the Executive's gross income). Base Salary shall be calculated before reduction for compensation voluntarily deferred or contributed by the Executive pursuant to all qualified or non-qualified plans of the Employer and shall be calculated to include amounts not otherwise included in the Executive's gross income under Code Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by the Employer; provided, however, that all such amounts will be included in compensation only to the extent that had there been no such plan, the amount would have been payable in cash to the Executive.

1.5 "*Beneficiary*" means the person or persons designated in writing by the Executive to receive benefits hereunder in the event of the Executive's death.

1.6 "*Board*" *means* the Board of Directors of the Employer.

*1.7* "*Cause*" *means* any of the following acts or circumstances: gross negligence or gross neglect of duties to the Employer; conviction of a felony or of a gross misdemeanor involving moral turpitude in connection with the Executive's employment with the Employer; or fraud, disloyalty, dishonesty or willful violation of any law or significant Employer policy committed in connection with the Executive's employment and resulting in a material adverse effect on the Employer.

1.8 "*Change in Control*" means a change in the ownership or effective control of the Employer, or in the ownership of a substantial portion of the assets of the Employer, as such change is defined in Code Section 409A and regulations thereunder.

1.9 "*Claimant*" means a person who believes that he or she is being denied a benefit to which he or she is entitled hereunder.

1.10 "*Code*" *means* the Internal Revenue Code of 1986, as amended.

1.11 "*Disability*" means a condition of the Executive whereby the Executive either: (i) 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 can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment that 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 Employer. The Administrator will determine whether the Executive has incurred a Disability based on its own good faith determination and may require the Executive to submit to reasonable physical and mental examinations for this purpose. The Executive will also be deemed to have incurred a Disability if determined to be totally disabled by the Social Security Administration or in accordance with a disability insurance program, provided that the definition of disability applied under such disability insurance program complies with the initial sentence of this Section.

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1.12 "*Discount Rate*" means the rate used by the Administrator for determining the Accrued Benefit. The Discount Rate will be the Moody's 20 year AA Corporate Bond rate less one quarter percent (.25%). The Administrator, in its discretion, may adjust the Discount Rate to maintain the rate within reasonable standards according to generally accepted accounting principles and applicable bank regulatory guidance. Additionally, any accounting entries will be adjusted if the calculated Discount Rate changes by one percent (1%) or more during any applicable reporting period.

1.13 "*Early Involuntary Termination*" means a Separation from Service before Normal Retirement Age due to the independent exercise of the Employer's unilateral authority to terminate the Executive's employment, other than for Cause or due to the Executive's implicit or explicit request, where the Executive was willing and able to continue performing services.

1.14 "*Early Termination*" means Separation from Service before Normal Retirement Age except when such Separation from Service occurs within twenty-four (24) months following a Change in Control, due to death or for Cause.

1.15 "*Effective Date*" means August 1, 2022.

1.16 "*ERISA*" means the Employee Retirement Income Security Act of 1974, as amended.

1.17 "*High 3 Average Pay*" means the average of the Executive's highest three (3) Base Salaries for any three (3) years prior to Separation from Service, including the year such Separation from Service occurs.

1.18 "*Normal Retirement Age*" means the date the Executive attains age sixty-five (65).

1.19 "*Plan Year*" means each twelve (12) month period commencing on January 1 and ending on December 31 of each year. The initial Plan Year shall commence on the Effective Date and end on the following December 31.

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1.20 "*Separation from Service*" means a termination of the Executive's employment with the Employer and its Affiliates for reasons other than death or Disability. A Separation from Service may occur as of a specified date for purposes of the Agreement even if the Executive continues to provide some services for the Employer or its Affiliates after that date, provided that the facts and circumstances indicate that the Employer and the Executive reasonably anticipated at that date that either no further services would be performed after that 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 less than fifty percent (50%) of the average level of bona fide services performed over the immediately preceding thirty-six (36) month period (or the full period during which the Executive performed services for the Employer, if that is less than thirty-six (36) months). A Separation from Service will not be deemed to have occurred while the Executive is on 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, the period for which a statute or contract provides the Executive with the right to reemployment with the Employer. If the Executive's leave exceeds six (6) months but the Executive is not entitled to reemployment under a statute or contract, the Executive incurs a Separation from Service on the next day following the expiration of such six (6) month period. In determining whether a Separation from Service occurs the Administrator shall take into account, among other things, the definition of "service recipient" and "employer" set forth in Treasury Regulation Section 1.409A-1(h)(3). The Administrator shall have full and final authority, to determine conclusively whether a Separation from Service occurs, and the date of such Separation from Service.

1.21 "*Specified Employee*" means an individual that satisfies the definition of a "key employee" of the Employer as such term is defined in Code Section 416(i) (without regard to Code Section 416(i)(5)), provided that the stock of the Employer is publicly traded on an established securities market or otherwise, as defined in Treasury Regulation Section 1.897-1(m). If the Executive is a key employee at any time during the twelve (12) months ending on December 31, the Executive is a Specified Employee for the twelve (12) month period commencing on the first day of the following April.

**ARTICLE 2**

**PAYMENT OF BENEFITS**

2.1 *Normal Retirement Benefit.* Upon Separation from Service following Normal Retirement Age, the Employer shall pay the Executive an annual benefit equal to thirty-five percent (35%) of High 3 Average Pay in lieu of any other benefit hereunder. The annual benefit will be paid in equal monthly installments commencing the month following Separation from Service and continuing for twenty (20) years.

2.2 *Early Termination Benefit.* If Early Termination occurs, the Employer shall pay the Executive the Accrued Benefit in lieu of any other benefit hereunder. The benefit shall be paid in two hundred forty (240) equal monthly installments commencing the month following Separation from Service, with interest credited on the unpaid balance at the Discount Rate in effect at Separation from Service.

2.3 *Disability Benefit* In the event the Executive suffers a Disability prior to Normal Retirement Age the Employer shall pay the Executive the Accrued Benefit in lieu of any other benefit hereunder. The benefit shall be paid in two hundred forty (240) equal monthly installments commencing the month following Disability, with interest credited on the unpaid balance at the Discount Rate in effect at Disability.

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2.4 *Change in Control Benefit.* If a Change in Control occurs, followed within twenty-four (24) months by Separation from Service prior to Normal Retirement Age, the Employer shall pay the Executive a benefit equal to the present value, calculated using a four percent (4%) discount rate, of twenty (20) year stream of monthly payments of an annual benefit of thirty-five percent (35%) of High 3 Average Pay in lieu of any other benefit hereunder. This benefit will be paid in equal monthly installments commencing the month following Separation from Service and continuing for sixty (60) months, with interest credited on the unpaid balance at an annual rate of four percent (4%), compounded monthly.

2.5 *Death Prior to Commencement of Benefit Payments.* In the event the Executive dies prior to Separation from Service, the Employer shall pay the Beneficiary the greater of (i) the Accrued Benefit or (ii) Two Million One Hundred Twenty-Seven Thousand Two Hundred Seventy-Five Dollars ($2,127,275) in lieu of any other benefit hereunder. The benefit shall be paid in a lump sum the month following the Executive's death.

2.6 *Death Subsequent to Commencement of Benefit Payments.* In the event the Executive dies while receiving payments, but prior to receiving all payments due and owing hereunder, the Employer shall pay the Beneficiary the same amounts at the same times as the Employer would have paid the Executive had the Executive survived.

2.7 *Termination for Cause.* If the Employer terminates the Executive's employment for Cause, then the Executive shall not be entitled to any benefits under the terms of this Agreement.

2.8 *Restriction on Commencement of Distributions.* Notwithstanding any provision of this Agreement to the contrary, if the Executive is considered a Specified Employee at the time of Separation from Service, the provisions of this Section shall govern all distributions hereunder. Distributions which would otherwise be made to the Executive due to Separation from Service shall not be made during the first six (6) months following Separation from Service. Rather, any distribution which would otherwise be paid to the Executive during such period shall be accumulated and paid to the Executive in a lump sum on the first day of the seventh month following Separation from Service, or if earlier, upon the Executive's death. All subsequent distributions shall be paid as they would have had this Section not applied.

2.9 *Acceleration of Payments.* Except as specifically permitted herein, no acceleration of the time or schedule of any payment may be made hereunder. Notwithstanding the foregoing, payments may be accelerated, in accordance with the provisions of Treasury Regulation Section 1.409A-3(j)(4) 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 the ethics laws or conflicts of interest laws; (iv) in limited cashouts (but not in excess of the limit under Code Section 402(g)(1)(B)); (v) to pay employment-related taxes; or (vi) to pay any taxes that may become due at any time that the Agreement fails to meet the requirements of Code Section 409A.

2.10 *Delays in Payment by Employer.* A payment may be delayed to a date after the designated payment date under any of the circumstances described below, and the provision will not fail to meet the requirements of establishing a permissible payment event. The delay in the payment will not constitute a subsequent deferral election, so long as the Employer treats all payments to similarly situated employees on a reasonably consistent basis.

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(a) <u>Payments that would violate Federal securities laws or other applicable law</u>. A payment may be delayed where the Employer reasonably anticipates that the making of the payment will violate Federal securities laws or other applicable law provided that the payment is made at the earliest date at which the Employer reasonably anticipates that the making of the payment will not cause such violation. The making of a payment that would cause inclusion in gross income or the application of any penalty provision of the Internal Revenue Code is not treated as a violation of law.

(b) <u>Solvency.</u> Notwithstanding the above, a payment may be delayed where the payment would jeopardize the ability of the Employer to continue as a going concern.

2.11 *Treatment of Payment as Made on Designated Payment Date.* Solely for purposes of determining compliance with Code Section 409A, any payment under this Agreement made after the required payment date shall be deemed made on the required payment date provided that such payment is made by the latest of: (i) the end of the calendar year in which the payment is due; (ii) the 15th day of the third calendar month following the payment due date; (Hi) if Employer cannot calculate the payment amount on account of administrative impracticality which is beyond the Executive's control, the end of the first calendar year which payment calculation is practicable; and (iv) if Employer does not have sufficient funds to make the payment without jeopardizing the Employer's solvency, in the first calendar year in which the Employer's funds are sufficient to make the payment

2.12 *Facility of Payment.* If a distribution is to be made to a minor, or to a person who is otherwise incompetent, then the Administrator may make such distribution: (i) to the legal guardian, or if none, to a parent of a minor payee with whom the payee maintains his or her residence; or (H) to the conservator or administrator or, if none, to the person having custody of an incompetent payee. Any such distribution shall fully discharge the Employer and the Administrator from further liability on account thereof.

2.13 *Excise Tax Limitation.* Notwithstanding any provision of this Agreement to the contrary, if any benefit payment hereunder would be treated as an "excess parachute payment" under Code Section 280G, the Employer shall reduce such benefit payment to the extent necessary to avoid treating such benefit payment as an excess parachute payment. The Executive shall be entitled to only the reduced benefit and shall forfeit any amount over and above the reduced amount.

2.14 *Changes in Form or Timing of Benefit Payments.* The Employer and the Executive may, subject to the terms hereof, amend this Agreement to delay the timing or change the form of payments. Any such amendment:

(a) must take effect not less than twelve (12) months after the amendment is made;

(b) must, for benefits distributable due solely to the arrival of a specified date, or on account of Separation from Service or Change in Control, delay the commencement of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made;

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(c) must, for benefits distributable due solely to the arrival of a specified date, be made not less than twelve (12) months before distribution is scheduled to begin; and

(d) may not accelerate the time or schedule of any distribution.

**ARTICLE 3**

**BENEFICIARIES**

3.1 *Designation of Beneficiaries.* The Executive may designate any person to receive any benefits payable under the Agreement upon the Executive's death, and the designation may be changed from time to time by the Executive by filing a new designation. Each designation will revoke all prior designations by the Executive, shall be in the form prescribed by the Administrator, and shall be effective only when filed in writing with the Administrator during the Executive's lifetime. If the Executive names someone other than the Executive's spouse as a Beneficiary, the Administrator may, in its sole discretion, determine that spousal consent is required to be provided in a form designated by the Administrator, executed by the Executive's spouse and returned to the Administrator. 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.

3.2 *Absence of Beneficiary Designation.* In the absence of a valid Beneficiary designation, or if, at the time any benefit payment is due to a Beneficiary, there is no living Beneficiary validly named by the Executive, the Employer shall pay the benefit payment to the Executive's spouse. If the spouse is not living then the Employer shall pay the benefit payment to the Executive's living descendants *per stirpes,* and if there are no living descendants, to the Executive's estate. In determining the existence or identity of anyone entitled to a benefit payment, the Employer may rely conclusively upon information supplied by the Executive's personal representative, executor, or administrator.

**ARTICLE 4**

**ADMINISTRATION**

4.1 *Administrator Duties.* The Administrator shall be responsible for the management, operation, and administration of the Agreement. When making a determination or calculation, the Administrator shall be entitled to rely on information furnished by the Employer, Executive or Beneficiary. No provision of this Agreement shall be construed as imposing on the Administrator any fiduciary duty under ERISA or other law, or any duty similar to any fiduciary duty under ERISA or other law.

4.2 *Administrator Authority.* The Administrator shall enforce this Agreement in accordance with its terms, shall be charged with the general administration of this Agreement, and shall have all powers necessary to accomplish its purposes.

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4.3 *Binding Effect of Decision.* The decision or action of the Administrator with respect to any question arising out of or in connection with the administration, interpretation or application of this Agreement and the rules and regulations promulgated hereunder shall be final, conclusive and binding upon all persons having any interest in this Agreement.

4.4 *Compensation, Expenses and Indemnity.* The Administrator shall serve without compensation for services rendered hereunder. The Administrator is authorized at the expense of the Employer to employ such legal counsel and/or recordkeeper as it may deem advisable to assist in the performance of its duties hereunder. Expense and fees in connection with the administration of this Agreement shall be paid by the Employer.

4.5 *Employer Information.* The Employer shall supply full and timely information to the Administrator on all matters relating to the Executive's compensation, death, Disability or Separation from Service, and such other information as the Administrator reasonably requires.

4.6 *Termination of Participation.* If the Administrator determines in good faith that the Executive no longer qualifies as a member of a select group of management or highly compensated employees, as determined in accordance with ERISA, the Administrator shall have the right, in its sole discretion, to cease further benefit accruals hereunder.

4.7 *Compliance with Code Section 409A.* The Employer and the Executive intend that the Agreement comply with the provisions of Code Section 409A to prevent the inclusion in gross income of any amounts deferred hereunder in a taxable year prior to the year in which amounts are actually paid to the Executive or Beneficiary. This Agreement shall be construed, administered and governed in a manner that affects such intent, and the Administrator shall not take any action that would be inconsistent therewith.

**ARTICLE 5**

**CLAIMS AND REVIEW PROCEDURES**

5.1 *Claims Procedure.* A Claimant who has not received benefits under this Agreement that he or she believes should be distributed shall make a claim for such benefits as follows.

(a) <u>Initiation - Written Claim.</u> The Claimant initiates a claim by submitting to the Administrator a written claim for the benefits. If such a claim relates to the contents of a notice received by the Claimant, the claim must be made within sixty (60) days after such notice was received by the Claimant. All other claims must be made within one hundred eighty (180) days of the date on which the event that caused the claim to arise occurred. The claim must state with particularity the determination desired by the Claimant.

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(b) <u>Timing of Administrator Response.</u> The Administrator shall respond to such Claimant within forty-five (45) days after receiving the claim. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional thirty (30) days by notifying the Claimant in writing, prior to the end of the initial forty-five (45) day period, that an additional period is required. The extension notice shall specifically explain the standards on which entitlement to a disability benefit is based, the unresolved issues that prevent a decision on the claim and the additional information needed from the Claimant to resolve those issues, and the Claimant shall be afforded at least forty-five (45) days within which to provide the specified information.

(c) <u>Notice of Decision.</u> If the Administrator denies all or a part of the claim, the Administrator shall notify the Claimant in writing of such denial in a culturally and linguistically appropriate manner. The Administrator shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth: (i) the specific reasons for the denial; (ii) a reference to the specific provisions of this Agreement on which the denial is based; (iii) a notice that the Claimant has a right to request a review of the claim denial and an explanation of the Agreement's review procedures and the time limits applicable to such procedures; (iv) a statement of the Claimant's right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review, and a description of any time limit for bringing such an action; (v) for any Disability claim, a discussion of the decision, including an explanation of the basis for disagreeing with or not following: (A) the views presented by the Claimant of health care professionals treating the Claimant and vocational professionals who evaluated the Claimant; (B) the views of medical or vocational experts whose advice was obtained on behalf of the Employer in connection with a Claimant's adverse benefit determination, without regard to whether the advice was relied upon in making the benefit determination; or (C) a disability determination regarding the Claimant presented by the Claimant made by the Social Security Administration (vi) for any Disability claim, the specific internal rules, guidelines, protocols, standards or other similar criteria relied upon in making the adverse determination or, alternatively, a statement that such rules, guidelines, protocols, standards or other similar criteria do not exist; and (viii) for any Disability claim, 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 to the Claimant's claim for benefits. Whether a document, record, or other information is relevant to a claim for benefits shall be determined by Department of Labor Regulation Section 2560.503-1(m)(8).

5.2 *Review Procedure.* If the Administrator denies all or a part of the claim, the Claimant shall have the opportunity for a full and fair review by the Administrator of the denial as follows.

(a) <u>Additional Evidence.</u> Prior to the review of the denied claim, the Claimant shall be given, free of charge, any new or additional evidence considered, relied upon, or generated by the Administrator, or any new or additional rationale, as soon as possible and sufficiently in advance of the date on which the notice of adverse benefit determination on review is required to be provided, to give the Claimant a reasonable opportunity to respond prior to that date.

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(b) <u>Initiation - Written Request.</u> To initiate the review, the Claimant, within sixty (60) days after receiving the Administrator's notice of denial, must file with the Administrator a written request for review.

(c) <u>Additional Submissions - Information Access.</u> After such request the Claimant may submit written comments, documents, records and other information relating to the claim. The Administrator 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.

(d) <u>Considerations on Review.</u><u> </u><u>In considering the review, the</u> Administrator shall consider 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. Additional considerations shall be required in the case of a claim for Disability benefits. The claim shall be reviewed by an individual or committee who did not make the initial determination that is subject of the appeal and who is not a subordinate of the individual who made the determination. Additionally, the review shall be made without deference to the initial adverse benefit determination. If the initial adverse benefit determination was based in whole or in part on a medical judgment, the Administrator will consult with a health care professional with appropriate training and experience in the field of medicine involving the medical judgment. The health care professional who is consulted on appeal will not be the same individual who was consulted during the initial determination and will not be the subordinate of such individual. If the Administrator obtained the advice of medical or vocational experts in making the initial adverse benefits determination (regardless of whether the advice was relied upon), the Administrator will identify such experts.

(e) <u>Timing of Administrator Response.</u> The Administrator shall respond in writing to such Claimant within forty-five (45) days after receiving the request for review. If the Administrator determines that special circumstances require additional time for processing the claim, the Administrator can extend the response period by an additional forty-five (45) days by notifying the Claimant in writing, prior to the end of the initial forty-five (45) day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Administrator expects to render its decision.

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(f) <u>Notice of Decision.</u> The Administrator shall notify the Claimant in writing of its decision on review. The Administrator shall write the notification in a culturally and linguistically appropriate manner calculated to be understood by the Claimant. The notification shall set forth: (i) the specific reasons for the denial; (ii) a reference to the specific provisions of this Agreement on which the denial is based; (iii) 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; (iv) a statement of the Claimant's right to bring a civil action under ERISA Section 502(a); (v) for any Disability claim, a discussion of the decision, including an explanation of the basis for disagreeing with or not following: (A) the views presented by the Claimant of health care professionals treating the Claimant and vocational professionals who evaluated the Claimant; (B) the views of medical or vocational experts whose advice was obtained on behalf of the Employer in connection with a Claimant's adverse benefit determination, without regard to whether the advice was relied upon in making the benefit determination; or (C) a disability determination regarding the Claimant presented by the Claimant made by the Social Security Administration; and (vi) for any Disability claim, the specific internal rules, guidelines, protocols, standards or other similar criteria relied upon in making the adverse determination or, alternatively, a statement that such rules, guidelines, protocols, standards or other similar criteria do not exist.

5.3 *Exhaustion of Remedies.* The Claimant must follow these claims review procedures and exhaust all administrative remedies before taking any further action with respect to a claim for benefits.

5.4 *Failure to Follow Procedures.* In the case of a claim for Disability benefits, if the Administrator fails to strictly adhere to all the requirements of this claims procedure with respect to a Disability claim, the Claimant is deemed to have exhausted the administrative remedies available under the Agreement, and shall be entitled to pursue any available remedies under ERISA Section 502(a) on the basis that the Administrator has failed to provide a reasonable claims procedure that would yield a decision on the merits of the claim, except where the violation was: (a) de minimis; (b) non-prejudicial; (c) attributable to good cause or matters beyond the Administrator's control; (d) in the context of an ongoing good-faith exchange of information; and (e) not reflective of a pattern or practice of noncompliance. The Claimant may request a written explanation of the violation from the Administrator, and the Administrator must provide such explanation within ten (10) days, including a specific description of its basis, if any, for asserting that the violation should not cause the administrative remedies to be deemed exhausted. If a court rejects the Claimant's request for immediate review on the basis that the Administrator met the standards for the exception, the claim shall be considered as re-filed on appeal upon the Administrator's receipt of the decision of the court. Within a reasonable time after the receipt of the decision, the Administrator shall provide the claimant with notice of the resubmission.

**ARTICLE 6**

**AMENDMENT AND TERMINATION**

6.1 *Agreement Amendment Generally.* Except as provided in Section 6.2, this Agreement may be amended only by a written agreement signed by both the Employer and the Executive.

6.2 *Amendment to Ensure Proper Characterization of Agreement.* Notwithstanding anything in this Agreement to the contrary, the Agreement may be amended by the Employer at any time, if found necessary in the opinion of the Employer, (i) to ensure that the Agreement is characterized as plan of deferred compensation maintained for a select group of management or highly compensated employees as described under ERISA, (ii) to conform the Agreement to the requirements of any applicable law or (iii) to comply with the written instructions of the Employer's auditors or banking regulators.

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6.3 *Agreement Termination Generally.* Except as provided in Section 6.4, this Agreement may be terminated only by a written agreement signed by the Employer and the Executive. Such termination shall not cause a distribution of benefits under this Agreement. Rather, upon such termination benefit distributions will be made at the earliest distribution event permitted under Article 2.

6.4 *Effect of Complete Termination.* Notwithstanding anything to the contrary in Section 6.3, and subject to the requirements of Code Section 409A and Treasury Regulation Section 1.409A-3(j)(4)(ix), at certain times the Employer may completely terminate and liquidate the Agreement. In the event of a complete termination under subsection (a) or (c) below, or under subsection (b) following the commencement of benefit payments hereunder, the Employer shall pay the Executive the Accrued Benefit. In the event of a complete termination under subsection (b) prior to the commencement of benefit payments hereunder, the Employer shall pay the Executive the present value, calculated using a discount rate of four percent (4%), of the benefit described in Section 2.4. In any event, such complete termination of the Agreement shall occur only under the following circumstances and conditions.

(a) <u>Corporate Dissolution or Bankruptcy.</u> The Employer may terminate and liquidate this Agreement within twelve (12) months of a corporate dissolution taxed under Code Section 331, or with the approval of a bankruptcy court, provided that all benefits paid under the Agreement are included in the Executive's gross income in the latest of: (i) the calendar year which the termination occurs; (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.

(b) <u>Change in Control.</u> The Employer may terminate and liquidate this Agreement by taking irrevocable action to terminate and liquidate within the thirty (30) days preceding or the twelve (12) months following a Change in Control. This Agreement will then be treated as terminated only if all substantially similar arrangements sponsored by the Employer which are treated as deferred under a single plan under Treasury Regulation Section 1.409A-1(c)(2) are terminated and liquidated with respect to each participant who experienced the Change in Control so that the Executive and any participants in any such similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of the date the Employer takes the irrevocable action to terminate the arrangements.

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(c) <u>Discretionary Termination.</u> The Employer may terminate and liquidate this Agreement provided that: (i) the termination does not occur proximate to a downturn in the financial health of the Employer; (ii) all arrangements sponsored by the Employer and Affiliates that would be aggregated with any terminated arrangements under Treasury Regulation Section 1.409A-1(c) are terminated; (iii) no payments, other than payments that would be payable under the terms of this Agreement if the termination had not occurred, are made within twelve (12) months of the date the Employer takes the irrevocable action to terminate this Agreement; (iv) all payments are made within twenty-four (24) months following the date the Employer takes the irrevocable action to terminate and liquidate this Agreement; and (v) neither the Employer nor any of its Affiliates adopt a new arrangement that would be aggregated with any terminated arrangement under Treasury Regulation Section 1.409A-1(c) if the Executive participated in both arrangements, at any time within three (3) years following the date the Employer takes the irrevocable action to terminate this Agreement.

**ARTICLE 7**

**MISCELLANEOUS**

*7.1 No Effect on Other Rights.* This Agreement constitutes the entire agreement between the Employer 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. Nothing contained herein will confer upon the Executive the right to be retained in the service of the Employer nor limit the right of the Employer to discharge or otherwise deal with the Executive without regard to the existence hereof

7.2 *State Law.* To the extent not governed by ERISA, the provisions of this Agreement shall be construed and interpreted according to the internal law of the State of Maryland without regard to its conflicts of laws principles.

7.3 *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 or invalid provision had never been inserted herein.

7.4 *Nonassignability.* Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.

7.5 *Unsecured General Creditor Status.* Payment to the Executive or any Beneficiary hereunder shall be made from assets which shall continue, for all purposes, to be part of the general, unrestricted assets of the Employer and no person shall have any interest in any such asset by virtue of any provision of this Agreement. The Employer's obligation hereunder shall be an unfunded and unsecured promise to pay money in the future. In the event that the Employer purchases an insurance policy insuring the life of the Executive to recover the cost of providing benefits hereunder, neither the Executive nor the Beneficiary shall have any rights whatsoever in said policy or the proceeds therefrom.

7.6 *Life Insurance.* If the Employer chooses to obtain insurance on the life of the Executive in connection with its obligations under this Agreement, the Executive hereby agrees to take such physical examinations and to truthfully and completely supply such information as may be required by the Employer or the insurance company designated by the Employer.

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*7.7 Unclaimed Benefits.* The Executive shall keep the Employer informed of the Executive's current address and the current address of the Beneficiary. If the location of the Executive is not made known to the Employer within three years after the date upon which any payment of any benefits may first be made, the Employer shall delay payment of the Executive's benefit payment(s) until the location of the Executive is made known to the Employer; however, the Employer shall only be obligated to hold such benefit payment(s) for the Executive until the expiration of three (3) years. Upon expiration of the three (3) year period, the Employer may discharge its obligation by payment to the Beneficiary. If the location of the Beneficiary is not made known to the Employer by the end of an additional two (2) month period following expiration of the three (3) year period, the Employer may discharge its obligation by payment to the Executive's estate. If there is no estate in existence at such time or if such fact cannot be determined by the Employer, the Executive and Beneficiary shall thereupon forfeit all rights to any benefits provided under this Agreement.

7.8 *Suicide or Misstatement.* No benefit shall be distributed hereunder if the Executive commits suicide within two (2) years after the Effective Date, or if an insurance company which issued a life insurance policy covering the Executive and owned by the Employer denies coverage (i) for material misstatements of fact made by the Executive on an application for life insurance, or (ii) for any other reason.

7.9 *Removal.* Notwithstanding anything in this Agreement to the contrary, the Employer shall not distribute any benefit under this Agreement if the Executive is subject to a final removal or prohibition order issued pursuant to Section 8(e) of the Federal Deposit Insurance Act. Furthermore, any payments made to the Executive pursuant to this Agreement shall, if required, comply with 12 U.S.C. 1828, FDIC Regulation 12 CFR Part 359 and any other regulations or guidance promulgated thereunder.

7.10 *Forfeiture Provision.* The Executive shall forfeit any non-distributed benefits under this Agreement if the Executive, directly or indirectly, either as an individual or as a proprietor, stockholder, partner, officer, director, employee, agent, consultant or independent contractor of any individual, partnership, corporation or other entity (excluding an ownership interest of three percent (3%) or less in the stock of a publicly-traded company):

(i) becomes employed by, participates in, or becomes connected in any manner with the ownership, management, operation or control of any bank, savings and loan or other similar financial institution if the Executive's responsibilities will include providing banking or other financial services within twenty-five (25) miles of any office maintained by the Employer as of the date of the termination of the Executive's employment;

(ii) participates in anyway in hiring or otherwise engaging, or assisting any other person or entity in hiring or otherwise engaging, on a temporary, part-time or permanent basis, any individual who was employed by the Employer as of the date of termination of the Executive's employment;

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(iii) assists, advises, or serves in any capacity, representative or otherwise, any third party in any action against the Employer or transaction involving the Employer;

(iv) sells, offers to sell, provides banking or other financial services, assists any other person in selling or providing banking or other financial services, or solicits or otherwise competes for, either directly or indirectly, any orders, contract, or accounts for services of a kind or nature like or substantially similar to the financial services performed or financial products sold by the Employer (the preceding hereinafter referred to as "Services"), to or from any person or entity from whom the Executive or the Employer, to the knowledge of the Executive provided banking or other financial services, sold, offered to sell or solicited orders, contracts or accounts for Services during the three (3) year period immediately prior to the termination of the Executive's employment;

(v) divulges, discloses, or communicates to others in any manner whatsoever, any confidential information of the Employer, to the knowledge of the Executive, including, but not limited to, the names and addresses of customers or prospective customers, of the Employer, as they may have existed from time to time, of work performed or services rendered for any customer, any method and/or procedures relating to projects or other work developed for the Employer, earnings or other information concerning the Employer. The restrictions contained in this subparagraph (v) apply to all information regarding the Employer, regardless of the source who provided or compiled such information. Notwithstanding anything to the contrary, all information referred to herein shall not be disclosed unless and until it becomes known to the general public from sources other than the Executive.

Following a Change in Control or an Early Involuntary Termination the restrictions in subsection (i) above shall not apply and the restrictions in subsections (ii), (iii) and (iv) shall only apply for twelve (12) months.

7.11 *Notice.* Any notice, consent or demand required or permitted to be given to the Employer or Administrator under this Agreement shall be sufficient if in writing and hand-delivered or sent by registered or certified mail to the Employer's principal business office. Any notice or filing required or permitted to be given to the Executive or Beneficiary under this Agreement shall be sufficient if in writing and hand-delivered or sent by mail to the last known address of the Executive or Beneficiary, as appropriate. Any 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 on the receipt for registration or certification.

7.12 *Headings and Interpretation.* Headings and sub-headings in this Agreement are inserted for reference and convenience only and shall not be deemed part of this Agreement. 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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7.13 *Alternative Action.* In the event it becomes impossible for the Employer or the Administrator to perform any act required by this Agreement due to regulatory or other constraints, the Employer or Administrator may perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Employer, provided that such alternative act does not violate Code Section 409A.

7.14 *Coordination with Other Benefits.* The benefits provided for the Executive or the Beneficiary under this Agreement are in addition to any other benefits available to the Executive under any other plan or program for employees of the Employer. This Agreement shall supplement and shall not supersede, modify, or amend any other such plan or program except as may otherwise be expressly provided herein.

7.15 *Inurement.* This Agreement shall be binding upon and shall inure to the benefit of the Employer, its successor and assigns, and the Executive, the Executive's successors, heirs, executors, administrators, and the Beneficiary.

7.16 *Tax Withholding.* The Employer may make such provisions and take such action as it deems necessary or appropriate for the withholding of any taxes which the Employer is required by any law or regulation to withhold in connection with any benefits under the Agreement.

*7.17 Responsibility for Taxes.* The Executive shall be responsible for the payment of all individual tax liabilities relating to any benefits paid hereunder. The Executive acknowledges that in no event will the Employer be liable to the Executive for any taxes resulting from the Executive's participation in the Agreement, including any additional penalty, excise or other taxes that might be imposed as a result of Code Section 409A.

7.18 *Aggregation of Agreement.* If the Employer offers other non-qualified deferred compensation plans in addition to this Agreement, this Agreement and those plans shall be treated as a single plan to the extent required under Code Section 409A.

IN WITNESS WHEREOF, the Executive and a representative of the Employer have executed this Agreement document as indicated below:

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| | | |
|:---|:---|:---|
| Executive: | Employer: | Employer: |
| /s/ Gary A. Harris | By: | /s/ James R. Bosley, Jr. |
|  | Its: | CEO |

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