Document:

ex10-1.htm

     

    EMPLOYMENT
AGREEMENT

     

    THIS
AGREEMENT is entered into as of the 11th of
June, 2008 (the "Effective Date") by and between COMMUNITY BANK (the
"Corporation"), a federally chartered savings bank, and NORMAN C. SMILEY, III
(the "Executive").

     

    WITNESSETH:

     

    WHEREAS,
the Corporation is a wholly-owned subsidiary of Community Financial Corporation,
a Virginia corporation ("CFC");

     

    WHEREAS,
the Corporation desires to retain the services of the Executive on the terms and
conditions set forth herein and, for the purpose of effecting the same, the
Board of Directors of the Corporation has approved this Agreement and authorized
its execution and delivery on the Corporation's behalf to the
Executive;

     

    WHEREAS,
the Executive is presently the duly elected President of the Corporation, and as
such is a key executive officer of the Corporation whose continued dedication,
availability, advice and counsel to the Corporation is deemed important to the
Board of Directors of the Corporation, as well as the Corporation, CFC and their
respective stockholder(s);

     

    WHEREAS,
the Corporation wishes to attract and retain such well-qualified executives, and
it is in the best interests of the Corporation and of the Executive to secure
the continued services of the Executive; and

     

    WHEREAS,
the Corporation considers the establishment and maintenance of a sound
management team to be part of its overall corporate strategy and to be essential
to protecting and enhancing the best interests of the Corporation, CFC and their
respective stockholder(s).

     

    NOW,
THEREFORE, to assure the Corporation of the Executive's continued dedication,
the availability of his advice and counsel to the Board of Directors of the
Corporation, and to induce the Executive to remain and continue in the employ of
the Corporation and for other good and valuable consideration, the receipt and
adequacy whereof each party hereby acknowledges, the Corporation and the
Executive hereby agree as follows:

     

    1.           EMPLOYMENT: The
Corporation agrees to, and does hereby, employ the Executive, and the Executive
agrees to, and, does hereby, accept such employment, for the period ending on
March 31, 2010, subject to earlier termination as provided herein. Beginning on
March 31, 2009, and on each anniversary thereafter, the term of employment under
this Agreement shall be extended for a period of one year in addition to the
then-remaining term of employment under this Agreement, unless either the
Corporation or the Executive gives contrary written notice to the other not less
than 90 days in advance of the date on which the term of employment under this
Agreement would otherwise be extended, provided that such term will not be
automatically extended unless, prior to each March 31 anniversary date, the
Board of Directors of the Corporation explicitly reviews the performance of the
Executive and approves the extension. Reference herein to the term of employment
under this Agreement shall refer to both such initial tern and such extended
terms.

     

    2.           EXECUTIVE DUTIES:
Executive agrees that, during the term of his employment under this Agreement
and in his capacity as President, he will devote his full business time and
energy to the business, affairs and interests of the Corporation and serve it
diligently and to the best of his ability. As such, the Executive shall render
administrative and management services 

     

     

    
      
         

      

      
         

        
        

      

      
         

      

    

     

     

    as are
customarily performed by persons situated in similar executive capacities, and
shall have such other powers and duties as the Board of Directors of the
Corporation may prescribe from time to time. The Executive shall also render
services to CFC and to any subsidiary or subsidiaries of CFC or the Corporation
as requested by the Board of Directors of the Corporation from time to time
consistent with his executive position. The Executive may (i) serve on corporate
or charitable boards or committees and (ii) manage personal investments, so long
as such activities do not interfere materially with the performance of his
responsibilities hereunder.

     

    3.           COMPENSATION;
VACATION:

     

    (a)           The
Corporation agrees to pay the Executive, and the Executive agrees to accept, as
compensation for all services rendered by him to the Corporation during the
period of his employment under this Agreement, base salary at an annual rate not
less than that in place on the prior March 31, which shall be payable in
monthly, semi-monthly or bi-weekly installments in conformity with the
Corporation's policy relating to salaried employees. The amount of the
Executive's salary shall be reviewed by the Board of Directors not less often
than annually. Any adjustments in salary or other compensation shall in no way
limit or reduce any other obligation of the Corporation hereunder. The Board of
Directors, in its discretion, may cause the Corporation to pay bonuses to the
Executive from time to time.

     

    (b)           The
Executive shall be entitled to annual paid vacation in accordance with the
policies established by the Board of Directors of the Corporation for executive
officers, which shall be in no event less than four (4) weeks per year, and to
voluntary leaves of absence, with or without pay, from time to time at such
times and upon such conditions as the Board of Directors may determine in its
discretion.

     

    
      	
               
      

            	
              4.

            	
              PARTICIPATION IN
      BENEFIT PLANS, REIMBURSEMENT OF BUSINESS EXPENSES AND OTHER
      BENEFITS:

            

    

     

    (a)           During
the term of the Executive's employment under this Agreement, the Executive shall
be eligible to participate in any pension, group insurance, hospitalization,
deferred compensation or other benefit, bonus or incentive plans of the
Corporation and CFC presently in effect (including, without limitation, CFC's
stock option plans) or hereafter adopted by the Corporation or CFC and generally
available to any employees of senior executive status, and, additionally, the
Executive shall be entitled to have the use of the Corporation's facilities and
executive benefits as are customarily made available by the Corporation and CFC
to its executive officers.

     

    (b)           During
the term of the Executive's employment under this Agreement, the Corporation
shall pay to the Country Club of Staunton all dues and assessments (monthly or
otherwise) associated with the Executive's membership in such country
club.

     

     (c)           During
the term of the Executive's employment under this Agreement, to the extent that
such expenditures are substantiated by the Executive as required by the Internal
Revenue Service and policies of the Corporation, the Corporation shall reimburse
the Executive promptly for all expenditures (including travel, entertainment,
parking, business meetings, and the costs, including monthly dues and
assessments, of maintaining memberships at appropriate clubs and organizations)
made in accordance with rules and policies established from time to time by the
Board of Directors of the Corporation in pursuance and furtherance of the
Corporation's business and good will.

     

     

    
      
         

      

      
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    5.           ILLNESS: In the event
the Executive is unable to perform his duties under this Agreement on a
full-time basis for a period of six (6) consecutive months by reason of illness
or other physical or mental disability, and at or before the end of such period
he does not return to work on a fall-time basis, the Corporation may terminate
this Agreement without further or additional compensation payment being due the
Executive from the Corporation pursuant to this Agreement, except benefits
accrued through the date of such termination under employee benefit plans of the
Corporation. These benefits shall include long-term disability and other
insurance or other benefits then regularly provided by the Corporation to
disabled employees, as well as any other insurance benefits so
provided.

     

    6.           DEATH: In the event
of the Executive's death during the term of this Agreement, this Agreement shall
terminate as of the end of the month in which the Executive dies. This Section 6
shall not affect the rights of any party under other contract between the
Executive and either the Corporation or CFC or under any life insurance
policy.

     

    7.           TERMINATION WITHOUT
CAUSE/RESIGNATION FOR GOOD REASON:

     

    (a)           Notwithstanding
the provisions of Section 1 of this Agreement, the Board of Directors of the
Corporation may, without Cause (as hereafter defined), terminate the Executive's
employment under this Agreement at any time in any lawful manner by giving not
less than thirty (30) days written notice to the Executive ("Notice of
Termination"), which notice shall indicate the specific provision(s) in this
Agreement relied upon for such termination. The Executive may resign for Good
Reason (as hereafter defined) at any time by giving not less than thirty (30)
days written notice to the Corporation ("Notice of Resignation"), which notice
shall indicate the specific provision(s) in this Agreement relied upon and shall
set forth in reasonable detail the facts and circumstances claimed to provide a
basis for a resignation for Good Reason. In the event the Corporation terminates
the Executive's employment without Cause or the Executive resigns for Good
Reason, and, in either such event, the Executive offers in writing to continue
to provide the services contemplated by and on the terms of this Agreement and
such offer is not accepted by the Corporation unconditionally in writing within
five (5) days thereafter, then the Executive shall be entitled to liquidated
damages, subject in the case of the Executive's resignation for Good Reason, to
the provisions of Section 7(d) of this Agreement, as follows:

     

    (i)           The
Executive shall be paid a lump sum cash payment by the Corporation, within
thirty-five (35) days after a Notice of Termination is given by the Corporation
to the Executive pursuant to this Section 7(a) of the Agreement, (unless such
payment is subject to the limitations set forth in Section 409A of the Internal
Revenue Code, in which case such payment shall be made 185 days after the date
of termination) in an amount equal to 1.0 times the total cash compensation
(including bonus) paid or payable to the Executive during the twelve (12) full
consecutive months immediately preceding the effective date of the Executive's
termination of employment; and

     

    (ii)           The
Corporation shall maintain in full force and effect for the continued benefit of
the Executive for twelve (12) months following the effective date of the
Executive's termination or resignation (the "Liquidated Damage Period"), as the
case may be, at no cost to the Executive, all employee benefit plans and
programs or arrangements in which the Executive 

     

     

    
      
         

      

      
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    was
entitled to participate immediately prior to such termination as described in
Section 4(a) of this Agreement (other than stock-based compensation plans of the
Corporation or CFC), provided that continued participation is possible under the
general terms and provisions of such plans and programs. In the event that the
Executive's participation in any such plan or program is barred, the Corporation
shall arrange to provide the Executive with benefits substantially similar to
those which the Executive was entitled to receive under such plans and
programs.

     

    (b)           (i)           In
the event that the Executive becomes entitled to liquidated damages pursuant to
Section 7(a) above, (A) the Corporation's obligations under Section 7(a)(i)
above with respect to cash damages shall be reduced by the amount of the
Executive's cash income, if any, earned from providing personal services during
the Liquidated Damage Period; and (B) the Corporation's obligation to maintain
the benefits described under Section 7(a)(ii) above shall be reduced to the
extent, if any, that the Executive receives such benefits, on no less favorable
terms, from another employer during the Liquidated Damage Period. For purposes
of this Section 7(b), the term "cash income" shall include amounts of salary,
wages, bonuses, incentive compensation and fees paid to the Executive in cash
but shall not include shares of stock, stock options, stock appreciation rights
or other earned income not paid to the Executive in cash. To the extent the
provisions of this Section 7(b) are applicable and an overpayment has been made
to the Executive as of the expiration of the Liquidated Damage Period, the
Executive shall reimburse the Corporation in an amount equal to the after tax
benefit realized by the Executive from such overpayment (i.e. amount realized
net of all federal, state, local, employment and medicare taxes). In making the
reimbursement calculation it shall be presumed that the Executive is subject to
the highest marginal federal and state income tax rates.

     

    (ii)           The
Executive agrees that in the event he becomes entitled to liquidated damages
pursuant to Section 7(a) above, throughout the Liquidated Damage Period, he
shall promptly inform the Corporation of the nature and amounts of cash income
and the type of health benefits and coverage which he earns or receives from
providing personal services, and shall provide such documentation of such cash
income and such health benefits and coverage as the Corporation may request. In
the event of changes to such cash income or such health benefits or coverage
from time to time, the Executive shall inform the Corporation of such changes,
in each case within five days after the change occurs, and shall provide such
documentation concerning the change as the Corporation may request.

     

    (c)           For
purposes of this Agreement, "Good Reason" shall mean:

     

    (i)           The
assignment of duties to the Executive by the Corporation which (A) are
materially different from the Executive's duties on the date he becomes
President of the Corporation, or (B) result in the Executive having
significantly less authority and/or responsibility than he had on the date he
became President of the Corporation, without his express written
consent;

     

    (ii)           The
removal of the Executive from or any failure to re-elect him to the position of
President, except in connection with a termination of his employment by the
Corporation for Cause or by reason of the Executive's disability;

     

    (iii)                      A
reduction by the Corporation, of the Executive's then current base
salary;

     

     

    
      
         

      

      
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    (iv)                      The
failure of the Corporation to provide the Executive with substantially the same
fringe benefits (including paid vacations) that were provided to him on the date
he became President of the Corporation; or

     

    (v)           The
failure of the Corporation to obtain the assumption of and agreement to perform
this Agreement by any successor as contemplated in Section 10(c) of this
Agreement;

     

    (d)           If
within thirty (30) days after any Notice of Resignation is given the Corporation
notifies the Executive that a dispute exists concerning the resignation for Good
Reason and that it is requesting arbitration pursuant to Section 17, the
Corporation shall continue to pay the Executive his full salary and benefits as
described in Sections 3 and 4, as and when due and payable, at least until such
time as a final decision is reached by the arbitrator(s). If Good Reason for
resignation by the Executive is ultimately determined not to exist, then all
sums paid by the Corporation to the Executive, including but not limited to the
cost to the Corporation of providing the Executive such fringe benefits, from
the date of such resignation and termination of service by the Executive to the
date of the resolution of such dispute shall be repaid within ten (10) days
after the ultimate resolution of such dispute by the Executive to the
Corporation with interest at the rate charged from time to time by the
Corporation to its most substantial customers for unsecured extensions of
credit. In the event it is ultimately determined that resignation by the
Executive for Good Reason pursuant Section 7(c) was justified, then the
Executive shall be entitled to receive as liquidated damages, within ten (10)
days of the ultimate resolution of such dispute, the payments and other benefits
provided for in Section 7(a) with interest from the date such payments and
benefits were first due to the Executive until paid by the Corporation at the
rate charged from time to time by the Corporation to its most substantial
customers for unsecured extensions of credit, subject to reduction for any
amounts paid to or on behalf of the Executive by the Corporation pursuant to the
first sentence of this Section 7(d).

     

    A failure
by the Corporation to notify the Executive that a dispute exists concerning the
resignation for Good Reason within thirty (30) days after any Notice of
Resignation is given shall constitute a final waiver by the Corporation of its
right to contest either that such resignation was for Good Reason or its
obligations to the Executive under Section 7(a) of this Agreement.

     

    
      	
               
      

            	
              8.

            	
              RESIGNATION -
      TERMINATION FOR CAUSE - REGULATORY
  TERMINATION:

            

    

     

    (a)           Notwithstanding
the provisions of Section 1 of this Agreement, the Board of Directors of the
Corporation may, in its sole discretion, terminate the Executive's employment
for Cause. For the purposes of this Agreement, "Cause" shall mean personal
dishonesty, 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.

     

    No act or
failure to act by the Executive shall be considered willful unless the Executive
acted or failed to act with an absence of good faith and without a reasonable
belief that his action or failure to act was in the best interest of the
Corporation. No act or omission to act by the Executive in reliance upon an
opinion of counsel to the Corporation shall be deemed to be
willful.

     

     

    
      
         

      

      
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    (b)           Termination
of the Executive's employment by the Corporation for Cause pursuant to Section
8(a) shall be communicated by written Notice of Termination to the Executive. A
Notice of Termination pursuant to this Section 8(a) shall indicate the specific
termination provision(s) in this Agreement relied upon and shall set forth with
particularity the facts and circumstances claimed to provide a basis for
termination of employment for Cause under the provision so
indicated.

     

    If within
ninety (90) days after any Notice of Termination is given the Executive notifies
the Corporation that a dispute exists concerning the termination for Cause and
that he is requesting arbitration pursuant to Section 17, the Corporation shall
continue to pay the Executive his full salary and benefits as described in
Sections 3 and 4, as and when due and payable, at least until such time as a
final decision is reached by the panel of arbitrators. If a termination for
Cause by the Corporation is challenged by the Executive and the termination is
ultimately determined to be justified, then all sums paid by the Corporation to
the Executive pursuant to this Section 8(b), plus the cost to the Corporation of
providing the Executive such fringe benefits from the date of such termination
to the date of the resolution of such dispute, shall be promptly repaid by the
Executive to the Corporation with interest at the rate charged from time to time
by the Corporation to its most substantial customers for unsecured lines of
credit. Should it ultimately be determined that a termination by the Corporation
pursuant to Section 8(a) was not justified, then the Executive shall be entitled
to retain all sums paid to him pending the resolution of such dispute and he
shall be entitled to receive the full payments and other benefits provided for
in Section 7(a) as liquidated damages, provided the Executive offers in writing
to continue to provide the services contemplated by and on the terms of this
Agreement and such offer is not accepted by the Corporation unconditionally in
writing within five (5) days thereafter.

     

    A failure
by the Executive to notify the Corporation that a dispute exists concerning a
termination for Cause within ninety (90) days after the Notice of Termination is
given shall constitute a final waiver by the Executive of his right to contest
that such termination was for Cause.

     

    (c)           In
the event that Executive resigns from or otherwise voluntarily terminates his
employment by the Corporation at any time (except a termination for Good Reason
pursuant to Section 7 of this Agreement), or if the Corporation rightfully
terminates the Executive's employment for Cause, this Agreement shall terminate
upon the date of such resignation or termination of employment for Cause, and
(subject to Section 8(b)) the Corporation thereafter shall have no obligation to
make any further payments under this Agreement, provided that the Executive
shall be entitled to receive any benefits, insured or otherwise, that he would
otherwise be eligible to receive under any benefit plans of the Corporation or
CFC or any affiliate of the Corporation or CFC.

     

    (d)           If
the Executive is suspended and/or temporarily prohibited from participating in
the conduct of the Corporation's affairs by a notice served under Sections
8(e)(3) or 8(g)(1) [12 U.S.C. §§ 1818(e)(3) and 1818(g)(1)] of the Federal
Deposit Insurance Act, 12 U.S.C. § 1811 et seq. (the "Federal Deposit Insurance
Act"), the Corporation'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 Corporation may in its discretion (i) pay the
Executive all or part of the compensation withheld while its contract
obligations were suspended, and (ii) reinstate (in whole or in part) any of its
obligations which were suspended.

     

     

    
      
         

      

      
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    If the
Executive is removed and/or permanently prohibited from participating in the
conduct of the Corporation's affairs by an order issued under Sections 8(e)(4)
or 8(g)(l) of the Federal Deposit Insurance Act [12 U.S.C. §§ 1818(e)(4) or
1818(g)(1)], all obligations of the Corporation under this Agreement shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.

     

    If the
Corporation is in default [as default is defined in Section 3(x)(1) of the
Federal Deposit Insurance Act], all obligations under this Agreement shall
terminate as of the date of default, but this paragraph shall not affect any
vested rights of the contracting parties.

     

    Except to
the extent it is determined that continuation of this Agreement is necessary for
the continued operation of the Corporation, all obligations under this Agreement
shall be terminated:

     

    (i)           by
the Director (as Director is defined in the Federal Deposit Insurance Act) or
his or her designee, at the time the Federal Deposit Insurance Corporation
enters into an agreement to provide assistance to or on behalf of the
Corporation under the authority contained in Section 13(c) of the Federal
Deposit Insurance Act; or

     

    (ii)           by
the Director or his or her designee, at the time the Director or his or her
designee approves a supervisory merger to resolve problems related to operation
of the Corporation or when the Corporation is determined by the Director 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.

     

    9.           CHANGE OF CONTROL: If
the Executive's employment terminates as a result of or in connection with a
Change of Control as described in any Change of Control Agreement between the
Executive and CFC, the payments to which the Executive is entitled pursuant to
any Change of Control Agreement shall be in lieu of any payments to which he
might otherwise be entitled under the terms of Section 7(a)(i).

     

    10.           LITIGATION - OBLIGATIONS -
SUCCESSORS:

     

    (a)           If
litigation shall be brought or arbitration commenced to challenge, enforce or
interpret any provision of this Agreement, and such litigation or arbitration
does not end with judgment in favor of the Corporation, the Corporation hereby
agrees to indemnify the Executive for his reasonable attorney's fees and
disbursements incurred in such litigation or arbitration.

     

    (b)           The
Corporation's obligation to pay the Executive the compensation and benefits and
to make the arrangements provided herein shall be absolute and unconditional and
shall not be affected by any circumstances, including, without limitation, any
set-off, counterclaim, recoupment, defense or other right which the Corporation
may have against him or anyone else. All amounts payable by the Corporation
hereunder shall be paid without notice or demand. Except as expressly provided
in Sections 7(b), 7(d) and 8(b), each and every payment made hereunder by the
Corporation shall be final and the Corporation will not seek to recover all or
any part of such payment from the Executive or from whosoever may be entitled
thereto, for any reason whatsoever. The Executive shall not be required to
mitigate the amount of any payment provided for in this Agreement by seeking
other employment or otherwise.

     

     

    
      
         

      

      
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    (c)           The
Corporation will require any successor (whether direct or indirect, by purchase,
merger, consolidation or otherwise) to all or substantially all of the business
and/or assets of the Corporation, or either one of them, by agreement in form
and substance satisfactory to the Executive, to expressly assume and agree to
perform this Agreement in its entirety. Failure of the Corporation to obtain
such agreement prior to the effectiveness of any such succession shall be a
breach of this Agreement and shall entitle the Executive to the compensation
described in Section 7(a). As used in this Agreement, "Corporation" shall mean
Community Bank and any successor to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Section 10(c) or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law.

     

    11.           LIMITATION OF
BENEFITS: It is the intention of the parties that no payment be made or
benefit provided to the Executive that would constitute an "excess parachute
payment" within the meaning of Section 280G of the Code and any regulations
thereunder, thereby resulting in a loss of an income tax deduction by the
Corporation or the imposition of an excise tax on the Executive under Section
4999 of the Code. If the independent accountants serving as auditors for the
Corporation immediately prior to the date of a Change of Control determine that
some or all of the payments or benefits scheduled under this Agreement, when
combined with any other payments or benefits provided to the Executive on a
Change of Control by CFC, the Corporation and any affiliate of CFC or the
Corporation required to be aggregated with CFC or the Corporation under Section
280G of the Code, would constitute nondeductible excess parachute payments by
the Corporation under Section 280G of the Code, then the payments or benefits
scheduled under this Agreement will be reduced to one dollar less than the
maximum amount which may be paid or provided without causing any such payments
or benefits scheduled under this Agreement or otherwise provided on a Change of
Control to be nondeductible. The determination made as to the reduction of
benefits or payments required hereunder by the independent accountants shall be
binding on the parties. The Executive shall have the right to designate within a
reasonable period which payments or benefits scheduled under this Agreement will
be reduced; provided, however, that if no direction is received from the
Executive, the Corporation shall implement the reductions under this Agreement
in its discretion.

     

    12.           NOTICES: For the
purposes of this Agreement, notices and all other communications provided for in
the Agreement shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:

     

    

     

    
      	
              If
      to the Executive:

               

               

               

              If
      to the Corporation:

            	
              Norman
      C. Smiley, III

              36
      Fallon Street

              Staunton,
      VA 24401

               

              Community
      Bank

              38
      N. Central Avenue

              P.O.
      Box 1209

              Staunton,
      VA 24402-1209

               

            

    

     

     

    
      
         

      

      
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    or at
such other address as any party may have furnished to the other in writing in
accordance herewith, except that notices of change of address shall be effective
only upon receipt.

     

    13.           MODIFICATION - WAIVERS -
APPLICABLE LAW: No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing, signed by the Executive and on behalf of the Corporation by such
officer as may be specifically designated by the Board of Directors of the
Corporation. No waiver by either party hereto at any time of any breach by the
other party hereto of, or in compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express or
implied, with respect to the subject matter hereof have been made by either
party which are not set forth expressly in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the Commonwealth of Virginia.

     

    14.           INVALIDITY -
ENFORCEABILITY: The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect. Any
provision in this Agreement which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
of such prohibition or unenforceability without invalidating or affecting the
remaining provisions of this Agreement, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

     

    15.           SUCCESSOR RIGHTS:
This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts would still be payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to his executor or, if there is no such executor, to his
estate.

     

    16.           HEADINGS: Descriptive
headings contained in this Agreement are for convenience only and shall not
control or affect the meaning or construction of any provision in this
Agreement.

     

    17.           ARBITRATION: Any
dispute, controversy or claim arising under or in connection with this Agreement
shall be settled exclusively by arbitration in Staunton, Virginia (or as close
thereto as feasible) in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect. The Corporation shall pay all
administrative fees associated with such arbitration. Judgment may be entered on
the arbitrator's award in any court having jurisdiction. Subject to Section
10(a), unless otherwise provided in the rules of the American Arbitration
Association, the arbitrators shall, in their award, allocate between the parties
the costs of arbitration, which shall include reasonable attorneys' fees and
expenses of the parties, as well as the arbitrator's fees and expenses, in such
proportions as the arbitrators deem just.

     

     

    
      
         

      

      
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    18.           CONFIDENTIALITY -
NONSOLICITATION:

     

    (a)           The
Executive acknowledges that the Corporation may disclose certain confidential
information to the Executive during the term of this Agreement to enable him to
perform his duties hereunder. The Executive hereby covenants and agrees that he
will not, without the prior written consent of the Corporation, during the term
of this Agreement or at any time thereafter, disclose or permit to be disclosed
to any third party by any method whatsoever any of the confidential information
of the Corporation. For purposes of this Agreement, "confidential information"
shall include, but not be limited to, any and all records, notes, memoranda,
data, ideas, processes, methods, techniques, systems, formulas, patents, models,
devices, programs, computer software, writings, research, personnel information,
customer information, the Corporation's financial information, plans, or any
other information of whatever nature in the possession or control of the
Corporation which has not been published or disclosed to the general public, or
which gives to the Corporation an opportunity to obtain an advantage over
competitors who do not know of or use it. The Executive further agrees that if
his employment hereunder is terminated for any reason, he will leave with the
Corporation and will not take originals or copies of any records, papers,
programs, computer software and documents and all matter of whatever nature
which bears secret or confidential information of the Corporation.

     

    The
foregoing paragraph shall not be applicable if and to the extent the Executive
is required to testify in a judicial or regulatory proceeding pursuant to an
order of a judge or administrative law judge issued after the Executive and his
legal counsel urge that the aforementioned confidentiality be
preserved.

     

    The
foregoing covenants will not prohibit the Executive from disclosing confidential
or other information to other employees of the Corporation or any third parties
to the extent that such disclosure is necessary to the performance of his duties
under this Agreement.

     

    (b)           Subject
to Section 18(c), during the term of this Agreement and throughout any further
period that he is an officer or employee of the Corporation, and for a period of
twelve (12) months from and after the termination of the last such position held
by the Executive, or for a period of twelve (12) months from the date of entry
by a court of competent jurisdiction of a final judgment enforcing this covenant
in the event of a breach by the Executive, whichever is later, the Executive
covenants and agrees that he will not, without the prior written consent of the
Corporation, solicit any existing or former customer or employee of the
Corporation for any competing business regardless of its location.

     

    (c)           If
the Corporation terminates the employment of the Executive without Cause or the
Executive resigns for Good Reason, the covenant set forth in Section 18(b) shall
not apply.

     

    

    
      
         

      

      
        10

        
        

      

      
         

      

    

     

     

     

    IN
WITNESS WHEREOF, the parties have executed this Agreement effective as of the
date first above written.

     

    
      
        	 	 	 	
                EXECUTIVE

                 

                 

              	 
	
                ATTEST:

              	/s/ 	
                     
      

              	
                /s/
      

              	 
	
                 

              	 	 	
                Norman
      C. Smiley, III 

              	 
	
                 

              	 	 	
                 

              	 

      

    

     

     

    
       

      
        
          	 	 	 	
                  COMMUNITY
      BANK

                   

                   

                	 
	
                  ATTEST:

                	/s/ 	
                  By:     
      

                	
                  /s/
      

                	 
	
                   

                	 	 	
                   

                	 
	
                   

                	 	 	
                   

                	 

        

      

       

    

     

    

     

    

    

    

    

    
      
         

      

      
        11ex10-2.htm

    CHANGE OF CONTROL
AGREEMENT

     

    THIS
AGREEMENT is entered into as of the 11th day of
June, 2008 (the "Effective Date") by and between Community Financial Corporation
("CFC"), a Virginia corporation, and NORMAN C. SMILEY, III (the
"Executive").

     

    WITNESSETH:

     

    WHEREAS,
CFC owns 100% of the outstanding stock of Community Bank (the "Bank"), a
federally chartered savings bank;

     

    WHEREAS,
Executive is the President of the Bank, and as such is a key executive officer
whose continued dedication, availability, advice and counsel to CFC and the Bank
is deemed important to the Boards of Directors of CFC and the Bank and to their
respective stockholders;

     

    WHEREAS,
CFC wishes to retain the services of Executive free from any distractions or
conflicts that could arise as a result of a change in control of CFC or the
Bank.

     

    NOW,
THEREFORE, to assure CFC of Executive's continued dedication, the availability
of his advice and counsel to the Board of Directors of CFC free of any
distractions resulting from a change of control, and for other good and valuable
consideration, the receipt and adequacy whereof each party hereby acknowledges,
CFC and Executive hereby agree as follows:

     

    1.           TERM OF AGREEMENT:
This Agreement shall remain in effect until cancelled by either party hereto,
upon not less than 24 months prior written notice to the other
party.

     

    2.           CHANGE IN CONTROL: If
the Executive's employment by the Bank or CFC shall be terminated by the Bank or
CFC, other than for Cause or as a result of the Executive's death, disability or
retirement, or terminated by the Executive for Good Reason, (all as defined in
the employment agreement ("Bank Employment Agreement") between Executive and the
Bank) in either case within six (6) months preceding or twenty-four (24) months
following a Change in Control of CFC or the Bank, then CFC, in lieu of the
Bank's obligations under Section 7(a)(i) of the Bank Employment Agreement,
shall:

     

    (a)           Pay
to the Executive in cash (less any amounts previously paid to the Executive
pursuant to Section 7(a) of the Bank Employment Agreement following the
Executive's termination or resignation of employment), upon the later of the
date of such Change of Control or the effective date of the Executive's
termination of employment with CFC or the Bank, an amount equal to 299% of the
Employee's "base amount" as determined under Section 280G of the Internal
Revenue Code of 1986, as amended (the "Code"); and

     

    (b)           Maintain
and provide for a period ending at the earlier of (i) one (1) year after the
effective date of the Executive's termination or (ii) the date of the
Executive's full time employment by another employer, at no cost to the
Executive, the Corporation's obligations under Section 7(a)(ii) of the Bank
Employment Agreement.

     

    (c)           For
purposes of this Agreement, a Change of Control of CFC occurs in any of the
following events: (i) the acquisition by any "person" or "group" (as defined in
Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 ("Exchange
Act")), other than CFC, any subsidiary of CFC or their employee benefit plans,
directly or indirectly, as "beneficial owner" (as defined in Rule 

     

     

    
      
        
        

      

      
        
        

        
        

      

      
        
        

      

    

     

     

    13d-3,
under the Exchange Act) of securities of CFC representing twenty percent (20%)
or more of either the then outstanding shares or the combined voting power of
the then outstanding securities of CFC; (ii) either a majority of the directors
of CFC elected at CFC's annual stockholders meeting shall have been nominated
for election other than by or at the direction of the "incumbent directors" of
CFC, or the "incumbent directors" shall cease to constitute a majority of the
directors of CFC. The term "incumbent director" shall mean any director who was
a director of CFC on the Effective Date and any individual who becomes a
director of CFC subsequent to the Effective Date and who is elected or nominated
by or at the direction of at least two-thirds of the then incumbent directors;
(iii) the shareholders of CFC approve (x) a merger, consolidation or other
business combination of CFC with any other "person" or "group" (as defined in
Sections 13(d) and 14(d) of the Exchange Act) or affiliate thereof, other than a
merger or consolidation that would result in the outstanding common stock of CFC
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into common stock of the surviving entity or a
parent or affiliate thereof) at least fifty percent (50%) of the outstanding
common stock of CFC or such surviving entity or a parent or affiliate thereof
outstanding immediately after such merger, consolidation or other business
combination, or (y) a plan of complete liquidation of CFC or an agreement for
the sale or disposition by CFC of all or substantially all of CFC's assets; or
(iv) any other event or circumstance which is not covered by the foregoing
subsections but which the Board of Directors of CFC determines to affect control
of CFC and with respect to which the Board of Directors adopts a resolution that
the event or circumstance constitutes a Change of Control for purposes of the
Agreement.

     

    The
Change of Control Date is the date on which an event described in (i), (ii),
(iii) or (iv) occurs.

     

    3.           LIMITATION OF
BENEFITS: It is the intention of the parties that no payment be made or
benefit provided to the Executive that would constitute an "excess parachute
payment" within the meaning of Section 280G of the Code and any regulations
thereunder, thereby resulting in a loss of an income tax deduction by CFC or the
imposition of an excise tax on the Executive under Section 4999 of the Code. If
the independent accountants serving as auditors for CFC immediately prior to the
date of a Change of Control determine that some or all of the payments or
benefits scheduled under this Agreement, when combined with any other payments
or benefits provided to the Executive on a Change of Control by CFC, the Bank
and any affiliate of CFC or the Bank required to be aggregated with CFC or the
Bank under Section 280G of the Code, would constitute nondeductible excess
parachute payments by CFC under Section 280G of the Code, then the payments or
benefits scheduled under this Agreement will be reduced to one dollar less than
the maximum amount which may be paid or provided without causing any such
payments or benefits scheduled under this Agreement or otherwise provided on a
Change of Control to be nondeductible. The determination made as to the
reduction of benefits or payments required hereunder by the independent
accountants shall be binding on the parties. The Executive shall have the right
to designate within a reasonable period which payments or benefits scheduled
under this Agreement will be reduced; provided, however, that if no direction is
received from the Executive, CFC shall implement the reductions under this
Agreement in its discretion.

     

    4.           LITIGATION - OBLIGATIONS -
SUCCESSORS:

     

    (a)           If
litigation shall be brought or arbitration commenced to challenge, enforce or
interpret any provision of this Agreement, and such litigation or arbitration
does not end with judgment in favor of CFC, CFC hereby agrees to indemnify the
Executive for his reasonable attorney's fees and disbursements incurred in such
litigation or arbitration.

     

     

    
      
        
        

      

      
        2

        
        

      

      
        
        

      

    

     

     

    (b)           CFC's
obligation to pay the Executive the compensation and benefits and to make the
arrangements provided herein shall be absolute and unconditional and shall not
be affected by any circumstances, including, without limitation, any set-off,
counterclaim, recoupment, defense or other right which CFC may have against him
or anyone else. All amounts payable by CFC hereunder shall be paid without
notice or demand. The Executive shall not be required to mitigate the amount of
any payment provided for in this Agreement by seeking other employment or
otherwise.

     

    (c)           CFC
will require any successor (whether direct or indirect, by purchase, merger,
consolidation or otherwise) to all or substantially all of the business and/or
assets of CFC, by agreement in form and substance satisfactory to the Executive,
to expressly assume and agree to perform this Agreement in its entirety. Failure
of CFC to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the Executive
to the compensation described in Section 2. As used in this Agreement, "CFC"
shall mean Community Financial Corporation and any successor to its business
and/or assets as aforesaid which executes and delivers the agreement provided
for in this Section 4 or which otherwise becomes bound by all the terms and
provisions of this Agreement by operation of law.

     

    5.           NOTICES: For the
purposes of this Agreement, notices and all other communications provided for in
the Agreement shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States registered or certified mail, return
receipt requested, postage prepaid, addressed as follows:

     

    
      	
              If
      to the Executive:

               

               

               

              If
      to CFC:

            	
              Norman
      C. Smiley, III

              36
      Fallon Street

              Staunton,
      VA 24401

               

              Community
      Financial Corporation

              38
      N. Central Avenue

              P.O.
      Box 1209

              Staunton,
      VA 24402-1209

            

    

    

    or at
such other address as any party may have furnished to the other in writing in
accordance herewith, except that notices of change of address shall be effective
only upon receipt.

     

    6.           MODIFICATION - WAIVERS -
APPLICABLE LAW: No provisions of this Agreement may be modified, waived
or discharged unless such waiver, modification or discharge is agreed to in
writing, signed by the Executive and on behalf of CFC by such officer as may be
specifically designated by the Board of Directors of CFC. No waiver by either
party hereto at any time of any breach by the other party hereto of, or in
compliance with, any condition or provision of this Agreement to be performed by
such other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise, express or implied, with respect to the
subject matter hereof have been made by either party which are not set forth
expressly in this Agreement. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the Commonwealth
of Virginia.

     

    7.           INVALIDITY -
ENFORCEABILITY: The invalidity or unenforceability of any provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect. Any
provision in this Agreement which 

     

     

    
      
        
        

      

      
        3

        
        

      

      
        
        

      

    

     

     

    is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective only to the extent of such prohibition or unenforceability
without invalidating or affecting the remaining provisions of this Agreement,
and any such prohibition or unenforceability in any jurisdiction shall not
invalidate or render unenforceable such provision in any other
jurisdiction.

     

    8.           SUCCESSOR RIGHTS:
This Agreement shall inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees and legatees. If the Executive should
die while any amounts would still be payable to him hereunder, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to his executor or, if there is no such executor, to his
estate.

     

    9.           HEADINGS: Descriptive
headings contained in this Agreement are for convenience only and shall not
control or affect the meaning or construction of any provision in this
Agreement.

     

    10.           ARBITRATION: Any
dispute, controversy or claim arising under or in connection with this Agreement
shall be settled exclusively by arbitration in Staunton, Virginia (or as close
thereto as feasible) in accordance with the Commercial Arbitration Rules of the
American Arbitration Association then in effect. CFC shall pay all
administrative fees associated with such arbitration. Judgment may be entered on
the arbitrator's award in any court having jurisdiction. Subject to Section
4(a), unless otherwise provided in the rules of the American Arbitration
Association, the arbitrators shall, in their award, allocate between the parties
the costs of arbitration, which shall include reasonable attorneys' fees and
expenses of the parties, as well as the arbitrator's fees and expenses, in such
proportions as the arbitrators deem just.

     

    11.           CONFIDENTIALITY -
NONSOLICITATION:

     

    (a)           The
Executive acknowledges that CFC may disclose certain confidential information to
the Executive during the term of this Agreement to enable him to perform his
duties hereunder. The Executive hereby covenants and agrees that he will not,
without the prior written consent of CFC, during the term of this Agreement or
at any time thereafter, disclose or permit to be disclosed to any third party by
any method whatsoever any of the confidential information of CFC. For purposes
of this Agreement, "confidential information" shall include, but not be limited
to, any and all records, notes, memoranda, data, ideas, processes, methods,
techniques, systems, formulas, patents, models, devices, programs, computer
software, writings, research, personnel information, customer information, CFC'
s financial information, plans, or any other information of whatever nature in
the possession or control of CFC which has not been published or disclosed to
the general public, or which gives to CFC an opportunity to obtain an advantage
over competitors who do not know of or use it. The Executive further agrees that
if his employment hereunder is terminated for any reason, he will leave with CFC
and will not take originals or copies of any records, papers, programs, computer
software and documents and all matter of whatever nature which bears secret or
confidential information of CFC.

     

    (b)           The
foregoing paragraph shall not be applicable if and to the extent the Executive
is required to testify in a judicial or regulatory proceeding pursuant to an
order of a judge or administrative law judge issued after the Executive and his
legal counsel urge that the aforementioned confidentiality be
preserved.

     

     

    
      
        
        

      

      
        4

        
        

      

      
        
        

      

    

     

     

    (c)           The
foregoing covenants will not prohibit the Executive from disclosing confidential
or other information to other employees of CFC or any third parties to the
extent that such disclosure is necessary to the performance of his duties under
this Agreement.

     

    12.           COMPLIANCE WITH SECTION 409A
OF THE CODE: Notwithstanding anything herein to the contrary, any
payments to be made in accordance with this Agreement shall not be made prior to
the date that is 185 calendar days from the date of termination of employment of
the Executive if it is determined by CFC in good faith that such payments are
subject to the limitations set forth at Section 409A of the Code and regulations
promulgated thereunder, and payments made in advance of such date would result
in the requirement that Executive pay additional interest and taxes in
accordance with Section 409A(a)(1)(B)of the Code.

     

    
      
         

      

      
        5

         

      

      
         

      

    

    IN
WITNESS WHEREOF, the parties have executed this Agreement as of the Effective
Date referred to above.

     

    
       

      
        
          	 	 	 	
                  EXECUTIVE

                   

                   

                	 
	
                  ATTEST:

                	/s/ 	
                       
      

                	
                  /s/
      

                	 
	
                   

                	 	 	
                  Norman
      C. Smiley, III 

                	 
	
                   

                	 	 	
                   

                	 

        

      

       

       

      
         

        
          
            	 	 	 	
                    COMMUNITY
      FINANCIAL CORPORATION

                     

                     

                  	 
	
                    ATTEST:

                  	/s/ 	
                    By:     
      

                  	
                    /s/
      

                  	 
	
                     

                  	 	 	
                     

                  	 
	
                     

                  	 	 	
                     

                  	 

          

        

         

      

       

      

    

    

    
      
         

      

      
        6

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