10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2006

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 018279

Tri-County Financial Corporation

(Exact name of registrant as specified in its charter)

Maryland (State of other jurisdiction of incorporation or organization)	52-1652138 (I.R.S. Employer Identification No.)
3035 Leonardtown Road, Waldorf, Maryland (Address of principal executive offices)	20601 (Zip Code)

(301) 843–0854
(Registrant’s telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non – accelerated filer. (See definition of “accelerated filer and large accelerated filer” in rule 12b2 of the exchange act.)

Large accelerated filer o    Accelerated filer o    Non – accelerated filer þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b2 of the Exchange Act). Yes o No þ

As of July 29, 2006, the registrant had 1,766,840 shares of common stock outstanding.

TRI-COUNTY FINANCIAL CORPORATION

FORM 10-Q

INDEX

		Page
PART I FINANCIAL INFORMATION
Item 1 -	Financial Statements (Unaudited)
	Consolidated Balance Sheets — June 30, 2006 and December 31, 2005		3
	Consolidated Statements of Income and Comprehensive Income - Three and Six Months Ended June 30, 2006 and 2005		4
	Consolidated Statements of Cash Flows — Six Months Ended June 30, 2006 and 2005		6
	Notes to Consolidated Financial Statements		8
Item 2 -	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
Item 3 -	Quantitative and Qualitative Disclosures about Market Risk		20
Item 4 -	Controls and Procedures		20
PART II OTHER INFORMATION
Item 1 -	Legal Proceedings		21
Item 1.A -	Risk Factors		21
Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 3 -	Defaults Upon Senior Securities		21
Item 4 -	Submission of Matters to a Vote of Security Holders		21
Item 5 -	Other Information		22
Item 6 -	Exhibits		22
SIGNATURES			23
EX-3 AMENDED AND RESTATED BYLAWS
EX-31 SECTION 302 CERTIFICATION OF CEO/CFO
EX-32 SECTION 906 CERTIFICATION OF CEO/CFO

PART I FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

TRI-COUNTY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS JUNE 30, 2006 AND DECEMBER 31, 2005
(UNAUDITED)

	June 30, 2006			December 31, 2005
ASSETS
Cash and due from banks	$	2,869,183		$	7,262,547
Federal funds sold		675,129			640,818
Interest-bearing deposits with banks		12,454,378			14,671,875
Securities available for sale		9,538,720			7,178,894
Securities held to maturity — at amortized cost		106,205,210			116,486,685
Federal Home Loan Bank and Federal Reserve Bank stock — at cost		7,158,800			7,190,300
Loans receivable — net of allowance for loan losses of $3,549,270 and $3,383,334 respectively		404,506,928			369,592,253
Premises and equipment, net		6,546,664			6,460,545
Foreclosed real estate, net		460,884			475,561
Accrued interest receivable		2,549,593			2,406,542
Investment in bank owned life insurance		8,593,983			6,434,175
Other assets		3,020,764			2,487,280
TOTAL ASSETS	$	564,580,236		$	541,287,475
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES
Noninterest-bearing deposits	$	41,352,192		$	44,325,083
Interest-bearing deposits		346,735,839			319,048,657
Total deposits		388,088,031			363,373,740
Short-term borrowings		32,244,357			20,074,975
Long-term debt		93,065,552			107,823,759
Guaranteed preferred beneficial interest in junior subordinated debentures		12,000,000			12,000,000
Accrued expenses and other liabilities		3,868,623			3,436,845
Total liabilities		529,266,563			506,709,319
STOCKHOLDERS’ EQUITY:
Common stock – par value $.01; authorized - 15,000,000 shares; issued 1,761,499 and 1,760,991 shares, respectively		17,615			17,610
Additional paid in capital		9,182,554			9,057,805
Retained earnings		26,369,872			25,580,634
Accumulated other comprehensive (loss) income		(159,339	)		49,362
Unearned ESOP shares		(97,029	)		(127,255	)
Total stockholders’ equity		35,313,673			34,578,156
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	564,580,236		$	541,287,475

See notes to consolidated financial statements

3

TRI-COUNTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
INTEREST INCOME:
Interest and fees on loans	$	7,175,349	$	5,504,666	$	13,838,876	$	10,316,319
Taxable interest and dividends on investment securities		1,589,901		1,763,829		3,181,203		3,503,352
Interest on deposits with banks		62,660		15,544		107,790		29,236
Total interest income		8,827,910		7,284,039		17,127,869		13,848,907
INTEREST EXPENSE:
Interest on deposits		2,766,038		1,488,801		5,228,780		2,500,420
Interest on short-term borrowings		322,673		838,994		551,168		1,639,297
Interest on long-term debt		1,385,212		1,041,661		2,739,791		2,038,819
Total interest expenses		4,473,923		3,369,456		8,519,739		6,178,536
NET INTEREST INCOME		4,353,987		3,914,583		8,608,130		7,670,371
PROVISION FOR LOAN LOSSES		86,087		126,097		172,572		189,124
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		4,267,900		3,788,486		8,435,558		7,481,247

4

TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2006			2005		2006			2005
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges	$	135,172		$	61,973	$	233,789		$	124,880
Net gain on the sale of foreclosed property		—			3,756		—			39,756
Income from bank owned life insurance		89,036			62,201		159,808			123,330
Loss on sale of investment securities										(14,581	)
Service charges		281,404			305,876		589,733			561,750
Total noninterest income		505,612			433,806		983,330			835,135
NONINTEREST EXPENSE:
Salary and employee benefits		1,753,526			1,358,491		3,414,897			2,822,453
Occupancy		324,981			293,585		604,288			525,458
Advertising		100,983			118,158		246,191			205,570
Data processing		210,339			162,538		430,573			323,362
Legal and professional fees		309,153			129,723		548,167			249,168
Depreciation of furniture, fixtures, and equipment		128,931			109,250		241,427			196,350
Telephone communications		19,222			24,208		41,943			53,402
ATM expenses		58,855			80,087		116,177			149,881
Office supplies		33,239			37,587		68,950			67,951
Office equipment		11,458			19,974		24,251			29,676
Other		246,926			256,314		591,304			515,358
Total noninterest expenses		3,197,613			2,589,915		6,328,168			5,138,629
INCOME BEFORE INCOME TAXES		1,575,899			1,632,377		3,090,720			3,177,753
Income tax expense		516,964			553,288		1,058,648			1,074,303
NET INCOME		1,058,935			1,079,089		2,032,072			2,103,450
OTHER COMPREHENSIVE INCOME NET OF TAX
Net unrealized holding (losses) gains arising during period		(46,914	)		216,596		(208,701	)		(83,070	)
COMPREHENSIVE INCOME	$	1,012,021		$	1,295,685	$	1,823,371		$	2,020,380
EARNINGS PER COMMON SHARE
Basic	$	0.60		$	0.62	$	1.15		$	1.21
Diluted		0.56			0.59		1.08			1.14

Share and per share data have been adjusted to reflect the three for two common stock split effected on December 12, 2005 as if it had occurred on January 1, 2005.

See notes to consolidated financial statements

5

TRI-COUNTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2006 AND 2005

	Six Months Ended
	June 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	2,032,072		$	2,103,450
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		172,572			189,124
Loss on sales of investment securities		—			14,581
Depreciation and amortization		455,017			373,650
Net amortization of premium/discount on investment securities		13,095			180,582
Increase in cash surrender value of bank owned life insurance		(159,808	)		(123,330	)
Deferred income tax provision (benefit)		166,844			(100,498	)
Increase in accrued interest receivable		(143,051	)		(398,750	)
Decrease in deferred loan fees		(92,284	)		(160,602	)
Increase in accounts payable, accrued expenses, other liabilities		431,778			373,807
Increase in other assets		(592,814	)		(111,572	)
Net cash provided by operating activities		2,283,421			2,340,442
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale		(3,056,127	)		(7,316	)
Proceeds from sale, redemption or principal payments of investment securities available for sale		369,077			3,171,871
Purchase of investment securities held to maturity		(4,300,000	)		(25,249,248	)
Proceeds from maturities or principal payments of investment securities held to maturity		14,579,389			37,290,218
Net sale of FHLB and Federal Reserve Bank stock		31,500			33,200
Loans originated or acquired		(93,286,715	)		(131,435,265	)
Principal collected on loans		58,291,752			81,490,185
Purchase of bank owned life insurance		(2,000,000	)		—
Purchase of premises and equipment		(541,136	)		(1,203,473	)
Proceeds from sale of foreclosed real estate		14,677			39,756
Net cash used in investing activities		(29,897,583	)		(35,870,072	)

6

TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2006 AND 2005

	Six Months Ended
	June 30,
	2006			2005
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	24,714,291		$	51,639,659
Proceeds from long-term borrowings		260,000			20,000,000
Payments of long-term borrowings		(15,018,207	)		(5,090,513	)
Trust preferred debentures		—			5,000,000
Net increase (decrease) in short term borrowings		12,169,382			(35,419,900	)
Exercise of stock options		81,505			166,815
Net change in unearned ESOP shares		73,554			60,395
Dividends paid		(972,966	)		(930,669	)
Redemption of common stock		(269,947	)		(232,185	)
Net cash provided by financing activities		21,037,612			35,193,602
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(6,576,550	)		1,663,972
CASH AND CASH EQUIVALENTS JANUARY 1		22,575,240			17,715,779
CASH AND CASH EQUIVALENTS JUNE 30	$	15,998,690		$	19,379,751
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the six months for:
Interest	$	8,516,751		$	6,105,531
Income taxes	$	1,251,000		$	1,002,500

See notes to consolidated financial statements

7

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.	BASIS OF PRESENTATION
	General The consolidated financial statements of Tri — County Financial Corporation (the “Company”) and its wholly owned subsidiary, Community Bank of Tri — County (the “Bank”) included herein are unaudited; however, they reflect all adjustments consisting only of normal recurring accruals that, in the opinion of management, are necessary to present fairly the Company’s financial condition, results of operations, and cash flows for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the information presented not misleading. The balances as of December 31, 2005 have been derived from audited financial statements. There have been no significant changes to the Company’s accounting policies as disclosed in the 2005 Annual Report. The results of operations for the six months ended June 30, 2006 are not necessarily indicative of the results of operations to be expected for the remainder of the year or any other period. Certain previously reported amounts have been restated to conform to the 2006 presentation.
	It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report for the year ended December 31, 2005.
2.	NATURE OF BUSINESS
	The Company, through its bank subsidiary, provides domestic financial services primarily in southern Maryland. The primary financial services include real estate, commercial and consumer lending, as well as traditional demand deposits and savings products.
3.	INCOME TAXES
	The Company uses the liability method of accounting for income taxes as required by SFAS No. 109, “Accounting for Income Taxes.” Under the liability method, deferred — tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences reverse.
4.	EARNINGS PER SHARE
	Earnings per common share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period, including any potential dilutive common shares outstanding, such as options and warrants. As of June 30, 2006, there were no shares excluded from the diluted earnings per share computation. Basic and diluted earnings per share, have been computed based on weighted — average common and common equivalent shares outstanding as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Basic		1,761,069		1,734,383		1,760,525		1,731,356
Diluted		1,890,232		1,847,276		1,876,258		1,845,375

Share and per share data have been adjusted to reflect the three for two common stock split effected on December 12, 2005 as if it had occurred on January 1, 2005.

8

5.	STOCK-BASED COMPENSATION
	The Company has stock option and incentive plans to attract and retain key personnel in order to promote the success of the business. These plans are described in note 12 to the financial statements included in our Annual Report to Stockholders for the year ended December 31, 2005. Prior to 2006, the Company applied the intrinsic value method as outlined in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and related interpretations in accounting for stock options granted. Under the intrinsic value method, no compensation expense was recognized if the exercise price of the Company’s employee stock options equaled the market price of the underlying stock on the date of the grant. Accordingly, no compensation cost was recognized in the accompanying consolidated statements of earnings prior to 2006 on stock options granted to employees or directors, since all options granted under the Company’s incentive programs had an exercise price equal to the market value of the underlying common stock on the date of grant.
	Effective January 1, 2006, the Company adopted SFAS No. 123(R), “Share — Based Payment” (“SFAS No. 123(R)”). This statement replaced SFAS No. 123, “Accounting for Stock — based Compensation” and superseded APB No. 25. SFAS No. 123(R) requires that all stock–based compensation be recognized as an expense in the financial statements and that such cost be measured at the fair value of the award. This statement was adopted using the modified prospective method of application, which requires the Company to recognize compensation expense on a prospective basis. Therefore, prior period financial statements have not been restated. Under this method, in addition to reflecting compensation expense for new share-based awards, expense is also recognized to reflect the remaining service period of outstanding awards that had been included in pro forma disclosures in prior periods. As of December 31, 2005, all outstanding options were fully vested, so no expense will be recognized for options outstanding as of that date; however, the Company has accrued for outstanding options relating to the current year. SFAS No. 123(R) also requires that excess tax benefits related to stock option exercises be reflected as financing cash flows instead of operating cash flows.
	The Company and the Bank currently maintain incentive plans which provide for payments to be made in either cash or stock options. The Company has accrued the full amounts due under these plans, but currently it is not possible to identify the portion that will be paid out in the form of stock options.
	The following table illustrates the effect on the net earnings per common share if the fair value method had been applied to all outstanding awards for the three and six months ended June 30, 2005:

	Three Months Ended			Six Months Ended
	June 30, 2005			June 30, 2005
Net income as reported	$	1,079,089		$	2,103,450
Less pro forma stock-based compensation:
Expense determined under fair value method, net tax effects		(193,614	)		(193,614	)
	$	885,475		$	1,909,836
Earnings per common share
Basic as reported	$	0.62		$	1.21
Basic pro forma	$	0.51		$	1.10
Diluted as reported	$	0.59		$	1.14
Diluted pro forma	$	0.48		$	1.03

9

A summary of the Company’s stock option plans as of June 30, 2006 and changes during the six — month period then ended is presented below:

				Weighted				Weighted – Average
				Average		Aggregate		Contractual Life
				Exercise		Intrinsic		Remaining In
	Shares			Price		Value (1)		Years
Outstanding at December 31, 2005		296,502		$	20.38
Granted
Exercised		(6,279	)		12.98
Expired
Forfeited		(5,156	)		19.27
Outstanding at June 30, 2006		285,068		$	20.57	$	4,328,091		5.8
Exercisable at June 30, 2006		285,068		$	20.57	$	4,328,091		5.8

	Share and per share data have been adjusted to reflect the three for two common stock split effected on December 12, 2005 as if it had occurred on January 1, 2005.
6.	GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES
	On June 15, 2005, Tri County Capital Trust II (“Capital Trust II”), a Delaware business trust formed, funded and wholly owned by the Company, issued $5,000,000 of variable – rate capital securities with an interest rate of 5.07% in a private pooled transaction. The variable rate is based on the 90day LIBOR rate plus 1.70% and adjusts quarterly. The Trust used the proceeds from this issuance to purchase $5.2 million of the Company’s junior subordinated debentures. The interest rate on the debentures is identical to the interest rate on the trust preferred securities. The Company has, through various contractual arrangements, fully and unconditionally guaranteed all of Capital Trust II’s obligations with respect to the capital securities. These capital securities qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust II and the junior subordinated debentures are scheduled to mature on June 15, 2035, unless called by the Company not earlier than June 15, 2010.
	On July 22, 2004, Tri County Capital Trust I (“Capital Trust I”), a Delaware business trust formed, funded and wholly owned by the Company, issued $7,000,000 of variable — rate capital securities with an interest rate of 4.22% in a private pooled transaction. The variable rate is based on the 90day LIBOR rate plus 2.60% and adjusts quarterly. The Trust used the proceeds from this issuance to purchase $7.2 million of the Company’s junior subordinated debentures. The interest rate on the debentures is identical to the interest rate on the trust preferred securities. The Company has, through various contractual arrangements, fully and unconditionally guaranteed all of Capital Trust I’s obligations with respect to the capital securities. These capital securities qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust I and the junior subordinated debentures are scheduled to mature on July 22, 2034, unless called by the Company not earlier than July 22, 2009.
	Costs associated with the issuance of the trust-preferred securities were less than $10,000 and were expensed as period costs.
7.	NEW ACCOUNTING STANDARDS
	In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” which amends SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140,

10

“Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS 155 simplifies the accounting for certain derivative embedded in other financial instruments by allowing them to be accounted for as a whole if the holder elects to account for the whole instrument on a fair value basis. SFAS 155 also clarifies and amends certain other provisions of SFAS 133 and SFAS 140. SFAS 155 is effective for all financial instruments acquired, issued or subject to a re-measurement event occurring in fiscal years beginning after September 15, 2006. Earlier adoption is permitted, provided the Company has not yet issued financial statements, including for interim periods, for that fiscal year. Management does not expect the adoption of SFAS 155 to have a material impact on the consolidated financial statements.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets” which amends SFAS No. 140 and SFAS 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS 156 is effective for fiscal years beginning after September 15, 2006. Management does not expect the adoption of SFAS 155 to have a material impact on the consolidated financial statements.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expects to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. Management does not expect the adoption of SFAS 155 to have a material impact on the consolidated financial statements.

In June 2006, the FASB ratified Emerging Issues Task Force (“EITF) No. 06-2, “Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43, Accounting for Compensated Absences (‘SAFS 43’) (“EITF 06–2”). EITF 06-2 provides guidelines under which sabbatical leave or other similar benefits provided to an employee are considered to accumulate, as defined in SFAS 43. If such benefits are deemed to accumulate, then the compensation cost associated with a sabbatical or other similar benefit arrangement should be accrued over the requisite service period. The provisions of the EITF are effective for fiscal years beginning after December 15, 2006 and allow for either retrospective application or a cumulative effect adjustment approach upon adoption. Management does not expect the adoption of SFAS 155 to have a material impact on the consolidated financial statements.

11

ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This document contains forward — looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including discussions of Tri — County Financial Corporation’s (the “Company”) goals, strategies and expected outcomes; estimates of risks and future costs; and reports of the Company’s ability to achieve its financial and other goals. Forward – looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. These forward — looking statements are subject to significant known and unknown risks and uncertainties because they are based upon future economic conditions, particularly interest rates, competition within and without the banking industry, changes in laws and regulations applicable to the Company and various other matters. Additional factors that may affect our results are discussed in the Company’s Annual Report on Form 10-K (the “Form 10-K”) under Part I, “Item 1.A. Risk Factors” and this Quarterly Report on Form 10-Q under Part II, “Item 1.A. Risk Factors.” Because of these uncertainties, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by these forward — looking statements. The Company does not undertake — and specifically disclaims any obligation — to publicly release the result of any revisions that may be made to any forward — looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

GENERAL

The Company is a bank holding company organized in 1989 under the laws of the State of Maryland. It owns all the outstanding shares of capital stock of Community Bank of Tri — County (the “Bank”), a Maryland — chartered commercial bank. The Company engages in no significant activity other than holding the stock of the Bank, the payment of its subordinated debt, and operating the business of the Bank. Accordingly, the information set forth in this report, including financial statements and related data, relates primarily to the Bank and its subsidiaries.

The Bank serves the Southern Maryland area through its main office and eight branches located in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, Prince Frederick and California, Maryland. The Bank is engaged in the commercial and retail banking business as authorized by the banking statutes of the State of Maryland and applicable Federal regulations. The Bank accepts demand and time deposits and uses these funds along with borrowings from the Federal Home Loan Bank (“FHLB”), to fund loan originations to individuals, associations, partnerships and corporations. The Bank makes real estate loans including residential first and second mortgage loans, home equity lines of credit and commercial mortgage loans. The Bank also makes secured and unsecured commercial and consumer loans. The Bank is a member of the Federal Reserve and FHLB Systems. The Federal Deposit Insurance Corporation (“FDIC”) provides deposit insurance coverage up to applicable limits.

Since its conversion to a state chartered commercial bank in 1997, the Bank has sought to increase its commercial, commercial real estate, construction, second mortgage, home equity, and consumer lending business as well as the level of transactional deposits to levels consistent with similarly sized commercial banks. As a result of this emphasis, the Bank’s percentage of assets invested in residential first mortgage lending has declined since 1997. Conversely, targeted loan types have increased. The Bank has also seen an increase in transactional deposit accounts while the percentage of total liabilities represented by certificates of deposits has declined. Management believes that these changes will enhance the Bank’s overall long — term financial performance.

Management recognizes that the shift in composition of the Bank’s loan portfolio will tend to increase its exposure to credit losses. The Bank continues to evaluate its allowance for loan losses and the associated provision to compensate for the increased risk. Any evaluation of the allowance for loan losses is inherently inexact and reflects management’s expectations as to future economic conditions in the Southern Maryland area as well as individual borrower’s circumstances. Management believes that its allowance for loan losses is adequate. For further information on the Bank’s allowance for loan losses see the discussion in the sections captioned “Financial Condition” and “Critical Accounting Policies” as well as the relevant discussions in the Form 10-K and Annual Report to Stockholders for the fiscal year ended December 31, 2005.

For the last several quarters, the Federal Reserve has signaled a resolve to control inflation through successive increases in the targeted Federal Funds rate. These increases have pushed the Federal Funds rate from 1.0% in June 2004 to 5.25% currently. These increases have had the effect of “flattening” the yield curve as long — term rates have generally not increased

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the same amount as short — term rates. While we believe that we are positioned to perform well in a moderate rate increase environment, substantially higher or substantially lower interest rates could affect our future financial performance. This would be true if key interest rates increased funding costs faster than they increased yields on interest — earning assets. Our ability to increase asset yields in a rising interest rate environment is limited by periodic and lifetime caps on interest rates embedded in many of our loans and investments. In addition, certain of our loans and investments are for fixed rates. Moreover, substantially higher interest rates would tend to increase borrowing costs for our customers with adjustable-rate borrowings and might lead to an increase in loan delinquency caused by borrowers’ inability to pay these higher costs. Substantially lower interest rates might lead to accelerated prepayment of our interest — earning assets while many of our liabilities would remain at today’s higher rates.

SELECTED FINANCIAL DATA

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2005		2006		2005
Condensed Income Statement
Interest Income	$	8,827,910	$	7,284,039	$	17,127,869	$	13,848,907
Interest Expense		4,473,923		3,369,456		8,519,739		6,178,536
Net Interest Income		4,353,987		3,914,583		8,608,130		7,670,371
Provision for Loan Loss		86,087		126,097		172,572		189,124
Noninterest Income		505,612		433,806		983,330		835,135
Noninterest Expense		3,197,613		2,589,915		6,328,168		5,138,629
Income Before Income Taxes		1,575,899		1,632,377		3,090,720		3,177,753
Income Taxes		516,964		553,288		1,058,648		1,074,303
Net Income		1,058,935		1,079,089		2,032,072		2,103,450
Per Common Share
Basic Earnings	$	0.60	$	0.62	$	1.15	$	1.21
Diluted Earnings	$	0.56	$	0.59	$	1.08	$	1.14
Book Value	$	20.05	$	18.57	$	20.05	$	18.57

Share and per share data have been adjusted to reflect the three for two common stock split effected on December 12, 2005 as if it had occurred on January 1, 2005.

RESULTS OF OPERATIONS – SIX MONTHS ENDED JUNE 30, 2006

Net income for the six — month period ended June 30, 2006 totaled $2,032,072 ($1.15 basic and $1.08 diluted earnings per share) compared to $2,103,450 ($1.21 basic and $1.14 diluted earnings per share) for the same period in the prior year. This decrease of $71,378, or 3.39%, was caused by an increase in noninterest expense offset by increases in net interest income and noninterest income and a decrease in provision for loan losses.

For the six — month period ended June 30, 2006, interest income increased by $3,278,962, or 23.68%, to $17,127,869. The increase was due to higher average balances of interest — earning assets and higher rates earned on these assets. Higher interest rates on assets were partly the result of a higher rate environment reflecting consistent increases in the federal funds rate. In addition, the Bank continued to increase balances of commercial real estate loans and commercial lines of credit, which tend to have higher yields and decrease balances of cash and investment securities which tend to have lower yields. Interest expense increased to $8,519,739 in the six — month period ended June 30, 2006 as compared to $6,178,536 in the same period in the prior year, an increase of $2,341,203 or 37.89%. The increase was the result of higher average balances and higher rates. Although overall rates paid on interest-earning liabilities increased, the Bank’s continued shifting from wholesale liabilities to retail deposits helped to control the overall amount of interest expense.

The provision for loan losses decreased to $172,572 for the six months ended June 30, 2006 from $189,124 for the six — month

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period ended June 30, 2005. The decrease in the provision was caused by continued drops in delinquencies, payoffs of certain loans and continued low level of charge — offs. These positive factors were partially offset by increases in the Bank’s loan portfolio, especially in commercial loans, which tend to have a higher risk of default than one — to four — family residential real estate loans. Management will continue to periodically review its allowance for loan losses and the related provision and adjust as deemed necessary. This review will include a review of economic conditions nationally and locally, as well as a review of the performance of significant major loans and the overall portfolio.

	Six Months Ended June 30,
	2006		2005			$ Change			% Change
NONINTEREST INCOME
Loan appraisal, credit, and miscellaneous charges	$	233,789	$	124,880		$	108,909			87.21	%
Net gain on the sale of foreclosed property				39,756			(39,756	)		(100.00	%)
Income from bank owned life insurance		159,808		123,330			36,478			29.58	%
Loss on sale of investment securities				(14,581	)		14,581			(100.00	%)
Service charges		589,733		561,750			27,983			4.98	%
Total noninterest income	$	983,330	$	835,135		$	148,195			17.75	%

Loan appraisal, credit, and miscellaneous charges increased due to higher loan volumes. The decrease in gain on the sale of foreclosed property reflects that a smaller amount of foreclosed property was sold ($14,677) in the current year compared to $39,756 in 2005. The current year property sold was sold at its current book value while the property sold in 2005 had a valuation allowance which effectively had reduced its book value to zero. Income from bank owned life insurance reflects $2,000,000 in additional policy purchases in the current year. The absence of a loss on the sale of investment securities reflects that there were much smaller investment sales in 2006, $369,077, compared to $3,171,871 in 2005. The increase in service charges reflects higher transaction account balances as well as increased fees.

	Six Months Ended June 30,
	2006		2005		$ Change			% Change
NONINTEREST EXPENSE
Salary and employee benefits	$	3,414,897	$	2,822,453	$	592,444			20.99	%
Occupancy		604,288		525,458		78,830			15.00	%
Advertising		246,191		205,570		40,621			19.76	%
Data processing		430,573		323,362		107,211			33.16	%
Legal and professional fees		548,167		249,168		298,999			120.00	%
Depreciation of furniture, fixtures, and equipment		241,427		196,350		45,077			22.96	%
Telephone communications		41,943		53,402		(11,459	)		(21.46	%)
ATM expenses		116,177		149,881		(33,704	)		(22.49	%)
Office supplies		68,950		67,951		999			1.47	%
Office equipment		24,251		29,676		(5,425	)		(18.28	%)
Other		591,304		515,358		75,946			14.74	%
Total noninterest expenses	$	6,328,168	$	5,138,629	$	1,189,539			23.15	%

Salary and employee benefits costs increased because of increases in the number of personnel employed by the Bank, including several senior level employees, and increased benefits costs. Employees were added to staff an additional branch and to staff some administrative and accounting positions. In addition, the Bank’s average cost per employee has increased in the last year due to tight labor markets and the need to add highly skilled employees as the Bank grows in size and complexity. Occupancy expense increased as the Bank opened an additional branch. Advertising expenses increased as the Bank has continued to focus on increasing market presence in southern Maryland. Data processing reflects increases in the size of the Bank and the number of accounts. It also reflects the addition of several new systems to support customer growth. Legal and professional fees reflect the additional costs of preparing the Company for Sarbanes — Oxley compliance. Depreciation expense includes increases due to a remodeled home office and additional branch equipment. ATM expenses have declined due to changes in the rates paid based on the ATM provider contract. Other expenses reflect increases due to the added size of the Bank.

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Income tax expense decreased to $1,058,648, or 34.25% of pretax income, in the current year, from $1,074,303, or 33.81% of pretax income, in the prior year. The prior year’s lower income tax rate was attributable to a higher proportion of interest income receiving preferential state or federal income tax treatment and an increase in the current year state income tax rate.

RESULTS OF OPERATIONS – THREE MONTHS ENDED JUNE 30, 2006

Net income for the three — month period ended June 30, 2006 totaled $1,058,935 ($0.60 basic and $0.56 diluted earnings per share) compared to $1,079,089 ($0.62 basic and $0.59 diluted earnings per share) for the same period in the prior year. This decrease of $20,154 or 1.9%, was caused by an increase in noninterest expense offset by increases in net interest income and noninterest income and a decrease in the provision for loan losses.

Interest income increased in 2006 due to higher average balances of assets, a higher interest rate environment and a continued shift from investments which tend to have relatively lower rates to loans such as commercial real estate loans and commercial lines of credit, which have higher interest rates. Interest expense increased due to higher average balances and the higher overall interest rate environment during 2006. These effects were partially offset by a decline in the use of wholesale funding sources during the current year. The provision for loan losses declined as the Bank’s overall loan quality improved.

	Three Months Ended June 30,
	2006		2005		$ Change			% Change
Loan appraisal, credit, and miscellaneous charges	$	135,172	$	61,973	$	73,199			118.11	%
Net gain on the sale of foreclosed property				3,756		(3,756	)		(100.00	%)
Income from bank owned life insurance		89,036		62,201		26,835			43.14	%
Service charges		281,404		305,876		(24,472	)		(8.00	%)
Total noninterest income		505,612		433,806		71,806			16.55	%

Loan appraisal, credit and miscellaneous charges increased as the Bank increased loan types which allow for these charges. Income from bank owned life insurance increased due to higher balances in bank owned life insurance due to $2,000,000 in additional policy purchases in 2006.

	Three Months Ended June 30,
	2006		2005		$ Change			% Change
Salary and employee benefits		1,753,526		1,358,491		395,035			29.08	%
Occupancy		324,981		293,585		31,396			10.69	%
Advertising		100,983		118,158		(17,175	)		(14.54	%)
Data processing		210,339		162,538		47,801			29.41	%
Legal and professional fees		309,153		129,723		179,430			138.32	%
Depreciation of furniture, fixtures, and equipment		128,931		109,250		19,681			18.01	%
Telephone communications		19,222		24,208		(4,986	)		(20.60	%)
ATM expenses		58,855		80,087		(21,232	)		(26.51	%)
Office supplies		33,239		37,587		(4,348	)		(11.57	%)
Office equipment		11,458		19,974		(8,516	)		(42.64	%)
Other		246,926		256,314		(9,388	)		(3.66	%)
Total noninterest expenses		3,197,613		2,589,915		607,698			23.46	%

Salary and employee benefits costs increased due to additional employees and higher average employee salaries. These additional employees were needed to help manage the Bank’s increased size and complexity. Occupancy costs increased as the Bank opened an additional branch. Data processing expenses reflect the growth in the Bank as well as the addition of new products. Legal and professional fees reflect the additional costs of preparing the Company for Sarbanes — Oxley compliance. Depreciation expense includes increases due to a remodeled home office and additional branch equipment. The decrease in ATM expenses is the result of renegotiating the ATM services contract with an outside vendor.

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FINANCIAL CONDITION

Assets	June 30, 2006		December 31, 2005		$ Change			% Change
Cash and due from banks	$	2,869,183	$	7,262,547	$	(4,393,364	)		(60.49	%)
Federal funds sold		675,129		640,818		34,311			5.35	%
Interest — bearing deposits with banks		12,454,378		14,671,875		(2,217,497	)		(15.11	%)
Securities available for sale		9,538,720		7,178,894		2,359,826			32.87	%
Securities held to maturity at amortized cost		106,205,210		116,486,685		(10,281,475	)		(8.83	%)
Federal Home Loan Bank and Federal Reserve Bank stock at cost		7,158,800		7,190,300		(31,500	)		(0.44	%)
Loans receivable net of allowance for loan losses of $3,549,270 and $3,383,334 respectively		404,506,928		369,592,253		34,914,675			9.45	%
Premises and equipment, net		6,546,664		6,460,545		86,119			1.33	%
Foreclosed real estate		460,884		475,561		(14,677	)		(3.09	%)
Accrued interest receivable		2,549,593		2,406,542		143,051			5.94	%
Investment in bank owned life insurance		8,593,983		6,434,175		2,159,808			33.57	%
Other assets		3,020,764		2,487,280		533,484			21.45	%
Total Assets	$	564,580,236	$	541,287,475	$	23,292,761			4.30	%

Cash and due from banks, Federal Funds sold and interest – bearing deposits with banks decreased as the funds were used to fund growth in loans. Investment securities held to maturity decreased because the Bank has continued to use the proceeds from investment repayments and maturities as a source of funds to build its loan portfolio. The small increase in investments available for sale is the result of the Bank’s investment in a mutual fund designed to provided credit the Community Reinvestment Act. The effect of this additional investment was partially offset by continued repayments from the available-for-sale portfolio which were used to fund loan growth. The loan portfolio increased as a result of increases in the Bank’s portfolio of commercial real estate loans and commercial lines of credit due to continued marketing emphasis on these loan types. Foreclosed real estate decreased due to the sale of a portion of the foreclosed property. The Bank has received indications that a substantial portion of the remaining real estate will be sold in the third quarter. Investment in bank owned life insurance increased due to purchases of additional policies.

Details of the Bank’s loan portfolio are presented below:

	June 30, 2006					December 31, 2005
	Amount		%			Amount		%
Real estate loans
Commercial	$	175,021,917		42.84	%	$	166,850,838		44.66	%
Residential first mortgages		76,902,713		18.82	%		73,627,717		19.71	%
Residential construction		34,678,763		8.49	%		32,608,002		8.73	%
Second mortgage loans		26,636,264		6.52	%		25,884,406		6.93	%
Commercial lines of credit		74,216,583		18.17	%		54,737,693		14.65	%
Consumer loans		3,217,163		0.79	%		3,128,425		0.84	%
Commercial equipment		17,894,225		4.38	%		16,742,220		4.48	%
Total Loans		408,567,628		100.00	%		373,579,301		100.00	%
Less:
Deferred loan fees		511,430		0.13	%		603,714		0.16	%
Allowance for loan loss		3,549,270		0.87	%		3,383,334		0.91	%
	$	404,506,928				$	369,592,253

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At June 30, 2006, the Bank’s allowance for loan losses totaled $3,549,270 or 0.87% of loan balances, as compared to $3,383,334 or 0.91% of loan balances at December 31, 2005. Management’s determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio with consideration given to the overall loss experience; current economic conditions; volume, growth and composition of the loan portfolio; financial condition of the borrowers; and other relevant factors that, in management’s judgment, warrant recognition in providing an adequate allowance. Management believes that the allowance is adequate. Additional loan information for prior years is presented in the Company’s Form 10-K for the year ended December 31, 2005.

The following table summarizes changes in the allowance for loan losses for the periods indicated.

	6 Months Ended		6 Months Ended
	June 30, 2006		June 30, 2005
Beginning Balance	$	3,383,334	$	3,057,558
Charge Offs		6,636		3,201
Recoveries
Net Charge Offs		6,636		3,201
Additions Charged to Operations		172,572		189,124
Balance at the end of the Period	$	3,549,270	$	3,243,481

The following table provides information with respect to our nonperforming assets at the dates indicated.

	Balances as of			Balances as of
	June 30, 2006			December 31, 2005
Restructured Loans	$	—		$	—
Accruing loans which are contractually past due 90 days or more:	$	—		$	—
Loans accounted for on a non–accrual basis	$	518,673		$	590,498
Total nonperforming loans	$	518,673		$	590,498
Nonperforming loans to total loans		0.13	%		0.16	%
Allowance for loan losses to non– performing loans		684.30	%		572.96	%

Liabilities

	June 30, 2006		December 31, 2005		$ Change			% Change
Noninterest — bearing deposits	$	41,352,192	$	44,325,083		(2,972,891	)		(6.71	%)
Interest — bearing deposits		346,735,839		319,048,657		27,687,182			8.68	%
Total deposits		388,088,031		363,373,740		24,714,291			6.80	%
Short — term borrowings		32,244,357		20,074,975		12,169,382			60.62	%
Long — term debt		93,065,552		107,823,759		(14,758,207	)		(13.69	%)
Guaranteed preferred beneficial interest in junior subordinated debentures		12,000,000		12,000,000					0.00	%
Accrued expenses and other liabilities		3,868,623		3,436,845		431,778			12.56	%
Total Liabilities	$	529,266,563	$	506,709,319		22,557,244			4.45	%

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Interest-bearing deposit balances increased due to the Bank’s continuing efforts to increase its market share through advertising, branch improvements, and other marketing efforts. Noninterest — bearing deposits are harder to market in a rising rate environment, and they have declined in the current period. We will continue to make marketing efforts on all deposit types in the future. Short — term borrowings increased as certain long-term borrowings matured or were converted into short- term debt. These maturities led to the decline in the long-term debt. The Bank will continue to attempt to replace borrowings with deposits in the future.

Stockholders’ Equity

	June 30, 2006			December 31, 2005			$ Change			% Change
Common stock	$	17,615		$	17,610			5			0.03	%
Additional paid in capital		9,182,554			9,057,805			124,749			1.38	%
Retained earnings		26,369,872			25,580,634			789,238			3.09	%
Accumulated other comprehensive income (loss)		(159,339	)		49,362			(208,701	)		(422.80	%)
Unearned ESOP shares		(97,029	)		(127,255	)		30,226			(23.75	%)
	$	35,313,673		$	34,578,156			735,517			2.13	%

Common stock and additional paid in capital increased due to exercise of options. Retained earnings increased because of earnings, offset by the repurchase of 7,949 shares at a cost of $269,947, and cash dividends of $0.55 per share for a total cost of $972,966. Accumulated other comprehensive income declined due to a drop in the fair value of the available for sale investment portfolio. Book value per share increased from $19.64 per share to $20.05 reflecting the total change in equity.

LIQUIDITY AND CAPITAL RESOURCES

The Company currently has no business other than holding the stock of the Bank and payment on its subordinated debentures. Its primary uses of funds are the payment of dividends, the payment of interest and principal on debentures, and the repurchase of common shares. The Company’s principal sources of liquidity are cash on hand and dividends received from the Bank. The Bank is subject to various regulatory restrictions on the payment of dividends.

The Bank’s principal sources of funds for investments and operations are net income, deposits from its primary market area, wholesale funding sources including brokered deposits and Federal Home Loan Bank advances, principal and interest payments on loans, interest received on investment securities and proceeds from sale and maturity of investment securities. Its principal funding commitments are for the origination or purchase of loans, the purchase of investment securities and the payment of maturing deposits. Deposits are considered a primary source of funds supporting the Bank’s lending and investment activities. The Bank also uses various wholesale funding instruments including FHLB advances and reverse repurchase agreements. The Bank may borrow up to 40% of consolidated Bank assets on a line of credit available from the FHLB. As of June 30, 2006, the maximum available under this line would be $218 million, while outstanding advances totaled $125 million. In order to draw on this line the Bank must have sufficient collateral. Qualifying collateral includes residential one- to four-family first mortgage loans, certain second mortgage loans, certain commercial real estate loans, and various investment securities. At June 30, 2006, the Bank had pledged collateral sufficient to draw $212 million under the line.

The Bank’s most liquid assets are cash and cash equivalents, which are cash on hand, amounts due from financial institutions, Federal Funds sold, and money market mutual funds. The levels of such assets are dependent on the Bank’s operating, financing and investment activities at any given time. The variations in levels of cash and cash equivalents are influenced by deposit flows and anticipated flows.

Cash and cash equivalents as of June 30, 2006 totaled $15,998,690, a decrease of $6,576,550, or 29.13%, from the December 31, 2005 total of $22,575,240. This decrease was due to the use of such funds to support the increase in loans and pay down short-term borrowings.

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The Bank’s principal sources of cash flows from financing activities including deposits and borrowings. During the first six months of 2006, all financing activities provided $21,037,612 in cash compared to $35,193,602 for the first six months of 2005. The decrease in cash flows from financing activities during the most recent period was principally due to a decline in the rate of deposit growth. In the first six months of 2006, the net increase in deposits declined to $24,714,291 from $51,639,659 for the same period in 2005. In addition, the Bank also had declining cash flows from long-term borrowings in the first six months of 2006 compared to the same period in 2005 as proceeds from long-term borrowings declined to $260,000 from $20,000,000 in the same period of 2005. At the same time, the Bank used substantially more cash, $15,018,207 in the first six months of 2006 compared to $5,090,513 in the same period in 2005 to pay maturing or converted long-term borrowings. Finally in the first six months of 2005, the Bank realized $5,000,000 from the sale of trust preferred debentures with no corresponding sale of these debentures in 2006. These declines in financing cash flows were partially offset by a net increase in short-term borrowings of $12,169,382 in the first six months of 2006 compared to a net decline of $35,419,900 in the same period in 2005.

The Bank’s principal use of cash has been in investments in loans, investment securities and other assets. During the six months ended June 30, 2006, the Bank invested a total of $29,897,583 compared to $35,870,072 in 2005. The principal reasons for the decrease in cash used in investing activities were a decline in the purchases of investment securities from $25,256,564 in 2005 to $7,356,127 in 2006 and a decline in loan originations.

REGULATORY MATTERS

The Bank is subject to Federal Reserve System capital requirements as well as statutory capital requirements imposed under Maryland law. At June 30, 2006, the Bank’s tangible, leverage and risk – based capital ratios were 8.22%, 10.61% and 11.44%, respectively. These levels are in excess of the required 4.0%, 4.0% and 8.0% ratios required by the Federal Reserve System as well as the 5.0%, 5.0%, and 10% ratios required to be considered well capitalized. At June 30, 2006, the Company’s tangible, leverage and risk — based capital ratios were 8.45%, 11.03% and 11.86%, respectively. These levels are also in excess of the 4.0%, 4.0% and 8.0% ratios required by the Federal Reserve System as well as the 5.0%, 5.0%, and 10% ratios required to be considered well capitalized.

CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and the general practices of the United States banking industry. Application of these principles requires management to make estimates, assumptions, and judgments that affect the amounts reported in the financial statements and accompanying notes. These estimates assumptions and judgments are based on information available as of the date of the financial statements; accordingly, as this information changes, the financial statements could reflect different estimates, assumptions, and judgments. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and as such have a greater possibility of producing results that could be materially different than originally reported. The Company considers its determination of the allowance for loan losses and the valuation allowance on its foreclosed real estate to be critical accounting policies. Estimates, assumptions, and judgments are necessary when assets and liabilities are required to be recorded at fair value, when a decline in the value of an asset not carried on the financial statements at fair value warrants an impairment write — down or valuation reserve to be established, or when an asset or liability needs to be recorded contingent upon a future event. Carrying assets and liabilities at fair value inherently results in more financial statement volatility. The fair values and the information used to record valuation adjustments for certain assets and liabilities are based either on quoted market prices or are provided by other third — party sources, when available. When these sources are not available, management makes estimates based upon what it considers to be the best available information.

The allowance for loan losses is an estimate of the losses that may be sustained in the loan portfolio. The allowance is based on two principles of accounting: (a) Statement on Financial Accounting Standards (“SFAS”) No. 5, “Accounting for Contingencies”, which requires that losses be accrued when they are probable of occurring and are estimable and (b) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan”, which requires that losses be accrued when it is probable that the Company will not collect all principal and interest payments according to the contractual terms of the loan. The loss, if any, is determined by the difference between the loan balance and the value of collateral, the present value of expected future cash flows, or values observable in the secondary markets.

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The loan loss allowance balance is an estimate based upon management’s evaluation of the loan portfolio. Generally the allowance is comprised of a specific and a general component. The specific component consists of management’s evaluation of certain loans and their underlying collateral. Loans are examined to determine the specific allowance based upon the borrower’s payment history, economic conditions specific to the loan or borrower, or other factors that would impact the borrower’s ability to repay the loan on its contractual basis. Management assesses the ability of the borrower to repay the loan based upon any information available. Depending on the assessment of the borrower’s ability to pay the loan as well as the type, condition, and amount of collateral, management will establish an allowance amount specific to the loan.

In establishing the general component of the allowance, management analyzes non — classified and non — impaired loans in the portfolio including changes in the amount and type of loans. Management also examines the Bank’s history of write — offs and recoveries within each loan category. The state of the local and national economy is also considered. Based upon these factors the Bank’s loan portfolio is categorized and a loss factor is applied to each category. These loss factors may be higher or lower than the Bank’s actual recent average losses in any particular loan category, particularly in loan categories where the Bank is rapidly increasing the size of its portfolio. Based upon these factors, the Bank will adjust the loan loss allowance by increasing or decreasing the provision for loan losses.

Management has significant discretion in making the judgments inherent in the determination of the provision and allowance for loan losses, including in connection with the valuation of collateral, a borrower’s prospects of repayment, and in establishing allowance factors on the general component of the allowance. Changes in allowance factors will have a direct impact on the amount of the provision, and a corresponding effect on net income. Errors in management’s perception and assessment of the global factors and their impact on the portfolio could result in the allowance not being adequate to cover losses in the portfolio, and may result in additional provisions or charge — offs. For additional information regarding the allowance for loan losses, refer to Notes 1 and 4 to the Consolidated Financial Statements as presented in the Company’s Form 10-K.

In addition to the loan loss allowance, the Company also maintains a valuation allowance on its foreclosed real estate. As with the allowance for loan losses the valuation allowance on foreclosed real estate is based on SFAS No. 5, “Accounting for Contingencies,” as well as SFAS No. 144 “Accounting for the Impairment or Disposal of Long — Lived Assets.” These statements require that the Company establish a valuation allowance when it has determined that the carrying amount of a foreclosed asset exceeds its fair value. Fair value of a foreclosed asset is measured by the cash flows expected to be realized from its subsequent disposition. These cash flows should be reduced for the costs of selling or otherwise disposing of the asset.

In estimating the cash flow from the sale of foreclosed real estate, management must make significant assumptions regarding the timing and amount of cash flows. In cases where the real estate acquired is undeveloped land, management must gather the best available evidence regarding the market value of the property, including appraisals, cost estimates of development, and broker opinions. Due to the highly subjective nature of this evidence, as well as the limited market, long time periods involved, and substantial risks, cash flow estimates are highly subjective and subject to change. Errors regarding any aspect of the costs or proceeds of developing, selling, or otherwise disposing of foreclosed real estate could result in the allowance being inadequate to reduce carrying costs to fair value and may require an additional provision for valuation allowances.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not applicable as the registrant has not been subject to the requirements of Item 305 of Regulation SK at a fiscal year end.

ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, management of the Company carried out an evaluation, under the supervision and with the participation of the Company’s principal executive officer and principal financial officer, of the effectiveness of the Company’s disclosure controls and procedures. Based on this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective in ensuring that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, (1) is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms and (2) is accumulated and communicated to the Company’s management, including its principal and executive and financial officers as appropriate to allow timely

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decisions regarding required disclosure. It should be noted that the design of the Company’s disclosure controls and procedures is based in part upon certain reasonable assumptions about the likelihood of future events, and there can be no reasonable assurance that any design of disclosure controls and procedures will succeed in achieving its stated goals under all potential future conditions, regardless of how remote, but the Company’s principal executive and financial officers have concluded that the Company’s disclosure controls and procedures are, in fact, effective at a reasonable assurance level.

In addition, there have been no changes in the Company’s internal control over financial reporting (to the extent that elements of internal control over financial reporting are subsumed within disclosure controls and procedures) identified in connection with the evaluation described in the above paragraph that occurred during the Company’s last fiscal quarter, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II OTHER INFORMATION

Item 1— Legal Proceedings — The Company is not involved in any pending legal proceedings. The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. Such routine legal proceedings, in the aggregate, are believed by management to be immaterial to the financial condition and results of operations of the company.

Item 1.A — In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part 1, “Item 1A — Risk Factors” in the Company’s Form 10-K, which could materially affect our business, financial condition or future results. The risks described in our Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently know to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

Item 2 — Unregistered sales of equity securities and use of proceeds

(a)	Not applicable
(b)	Not applicable
(c)	The following table sets forth information regarding the Company’s repurchases of its Common Stock during the quarter ended June 30, 2006.

					(c)
					Total Number
					of Shares		(d)
					Purchased		Maximum
	(a)				as Part of		Number of Shares
	Total		(b)		Publicly		that May Yet Be
	Number of		Average		Announced Plans		Purchased Under
	Shares		Price Paid		or		the Plans or
Period	Purchased (I)		per Share		Programs		Programs
April 2006		2,514		34.46		2,514		55,241
May 2006		1,103		35.00		1,103		54,138
June 2006		–		–		–		54,138
Total		3,617	$	34.62		3,617

(I) On October 25, 2004, Tri – County Financial Corporation announced a repurchase program under which it would repurchase 85,000 shares of its common stock (as adjusted for the three for two stock splits declared in October 2004 and December 2005). The program will continue until it is completed or terminated by the Board of Directors.

Item 3 — Default Upon Senior Securities None

Item 4 — Submission of Matters to a Vote of Security Holders — At the annual meeting of shareholders on May 3, 2006, two matters were put to a vote of security holders. Nominees Herbert N. Redmond, Jr. and A. Joseph Slater, Jr. were elected as directors. For Mr. Redmond, 1,179,233 votes were recorded for, and 58,162 votes were withheld. For Mr. Slater, 1,226,492 votes were recorded for, and 10,903 votes were withheld. The second matter put to a vote of security holders was the ratification of the appointment of Stegman & Company as the independent auditors of the Company for the fiscal year ending December 31, 2007. The appointment of Stegman & Company as the independent auditors for the Company for the fiscal year ending December 31, 2007 was ratified by the following vote: 1,227,241 votes in favor; 0 votes against; and 10,154 abstentions.

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Item 5 — Other Information None

Item 6 — Exhibits

Exhibit 3 Amended and Restated Bylaws

Exhibit 31 Rule 13a14(a) Certifications

Exhibit 32 Section 1350 Certifications

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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 thereunto duly authorized.

	TRI-COUNTY FINANCIAL CORPORATION:
Date: August 11, 2006	By:	/s/ Michael L. Middleton
		Michael L. Middleton, President, Chief
		Executive Officer and Chairman of the Board
Date: August 11, 2006	By:	/s/ William J. Pasenelli
		William J. Pasenelli, Executive Vice
		President and Chief Financial Officer (Principal Financial and Accounting Officer)

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EX-3

Exhibit 3

AMENDED AND RESTATED BYLAWS

OF

TRI-COUNTY FINANCIAL CORPORATION

ARTICLE I

Home Office

The home office of Tri-County Financial Corporation (herein the “Corporation”) shall be at Route 5 in Waldorf.

ARTICLE II

Stockholders

          SECTION 1. Place of Meetings. All annual and special meetings of stockholders shall be held at the home office of the Corporation or at such other place within or without the State in which the home office of the Corporation is located as the board of directors may determine and as designated in the notice of such meeting.

          SECTION 2. Annual Meeting. A meeting of the stockholders of the Corporation for the election of directors and for the transaction of any other business of the Corporation shall be held annually at such date and time as the board of directors may determine.

          SECTION 3. Special Meetings. Special meetings of the stockholders for any purpose or purposes may be called at any time by the majority of the board of directors or by a committee of the board of directors in accordance with the provisions of the Corporation’s Articles of Incorporation or a special meeting may be called by the Secretary of the Corporation upon the written request of the holders of not less than 25% of all votes entitled to be cast at the meeting. Such written request shall state the purpose or purposes of the meeting and the matters proposed to be acted on at the meeting and shall be delivered at the home office of the Corporation addressed to the chairman of the board, the president or the secretary. The secretary shall inform the stockholders who make the request of the reasonably estimated cost of preparing and mailing a notice of the meeting and upon payment of these costs to the Corporation, the secretary shall then notify each stockholder entitled to notice of the meeting.

          SECTION 4. Conduct of Meetings. Annual and special meetings shall be conducted in accordance with the rules and procedures established by the board of directors. The board of directors shall designate, when present, either the chairman of the board or president to preside at such meetings.

          SECTION 5. Notice of Meeting. Written notice stating the place, day and hour of the meeting and the purpose or purposes for which the meeting is called shall be mailed by the secretary or the officer performing his duties, not less than ten days nor more than ninety days before the meeting to each stockholder of record entitled to vote at such meeting and to each other stockholder entitled to notice of the meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the stockholder at his address as it appears on the stock transfer books or records of the Corporation as of the record date prescribed in Section 6 of this Article II, with postage thereon prepaid. If a stockholder be present at a meeting, or in writing waives notice thereof before or after the meeting and such waiver is filed with the records of the stockholders meeting, notice of the meeting to such stockholder shall be unnecessary. When any stockholders’ meeting, either annual or special, is adjourned for thirty days, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the time and place of any meeting adjourned for less than thirty days or of the business to be transacted at such adjourned meeting, other than an announcement at the meeting at which such adjournment is taken.

          SECTION 6. Fixing of Record Date. For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or stockholders entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the board of

directors shall fix in advance a date as the record date for any such determination of stockholders. Such date in any case shall be not more than ninety days, and in case of a meeting of stockholders, not less than ten days prior to the date on which the particular action, requiring such determination of stockholders is to be taken. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof.

          SECTION 7. Voting Lists. The officer or agent having charge of the stock transfer books for shares of the Corporation shall make, at least ten days before each meeting of stockholders, a complete record of the stockholders entitled to vote at such meeting or any adjournment thereof, arranged in alphabetical order, with the address of and the number of shares held by each. The record, for a period of ten days before such meeting, shall be kept on file at the principal office of the Corporation.

          SECTION 8. Quorum. A majority of the outstanding shares of the Corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.

          SECTION 9. Proxies. At all meetings of stockholders, a stockholder may vote by proxy executed in writing by the stockholder or by his duly authorized attorney in fact. Proxies solicited on behalf of the management shall be voted as directed by the stockholder or, in the absence of such direction, as determined by a majority of the board of directors. No proxy shall be valid after eleven months from the date of its execution unless otherwise provided in the proxy.

          SECTION 10. Voting. At each election for directors every stockholder entitled to vote at such election shall be entitled to one vote for each share of stock held by him. Unless otherwise provided in the Articles of Incorporation, by statute, or by these Bylaws, a majority of those votes cast by stockholders at a lawful meeting shall be sufficient to pass on a transaction or matter.

          SECTION 11. Voting of Shares in the Name of Two or More Persons. When ownership of stock stands in the name of two or more persons, in the absence of written directions to the Corporation to the contrary, at any meeting of the stockholders of the Corporation any one or more of such stockholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in whose name shares of stock stand, the vote or votes to which these persons are entitled shall be cast as directed by a majority of those holding such stock and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree.

          SECTION 12. Voting of Shares by Certain Holders. Shares standing in the name of another corporation may be voted by any officer, agent or proxy as the bylaws of such corporation may provide, or, in the absence of such provision, as the board of directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him, either in person or by proxy, without a transfer of such shares into his name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed.

          A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee and thereafter the pledgee shall be entitled to vote the shares so transferred.

          Neither treasury shares of its own stock held by the Corporation, nor shares held by another corporation, if a majority of the shares entitled to vote for the election of directors of such other corporation are held by the Corporation, shall be voted at any meeting or counted in determining the total number of outstanding shares at any given time for purposes of any meeting.

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          SECTION 13. Inspectors of Election. In advance of any meeting of stockholders, the board of directors may appoint any persons, other than nominees for office, as inspectors of election to act at such meeting or any adjournment thereof. The number of inspectors shall be either one or three. If the board of directors so appoints either one or three inspectors, that appointment shall not be altered at the meeting. If inspectors of election are not so appointed, the chairman of the board or the president may make such appointment at the meeting. In case any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the board of directors in advance of the meeting or at the meeting by the chairman of the board or the president.

          Unless otherwise prescribed by applicable law, the duties of such inspectors shall include: determining the number of shares of stock and the voting power of each share, the shares of stock represented at the meeting, the existence of a quorum, the authenticity, validity and effect of proxies; receiving votes, ballots or consents; hearing and determining all challenges and questions in any way arising in connection with the right to vote; counting and tabulating all votes or consents; determining the result; and such acts as may be proper to conduct the election or vote with fairness to all stockholders.

          SECTION 14. Nominating Committee. The board of directors shall act as a nominating committee for selecting the management nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of a management nominee, the nominating committee shall deliver written nominations to the secretary at least twenty days prior to the date of the annual meeting. Provided such committee makes such nominations, no nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by stockholders are made in writing and delivered to the secretary of the Corporation in accordance with the provisions of the Corporation’s Articles of Incorporation.

          SECTION 15. New Business. Any new business to be taken up at the annual meeting shall be stated in writing and filed with the secretary of the Corporation in accordance with the provisions of the Corporation’s Articles of Incorporation. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees, but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as provided in the Corporation’s Articles of Incorporation.

ARTICLE III

Board of Directors

          SECTION 1. General Powers. The business and affairs of the Corporation shall be under the direction of its board of directors. The board of directors shall annually elect a chairman of the board and a president from among its members and shall designate, when present, either the chairman of the board or the president to preside at its meetings.

          SECTION 2. Number, Term and Election. The board of directors shall consist of nine (9) members and shall be divided into three classes as nearly equal in number as possible. The members of each class shall be elected for a term of three years and until their successors are elected or qualified. The board of directors shall be classified in accordance with the provisions of the Corporation’s Articles of Incorporation.

          SECTION 3. Regular Meetings. A regular meeting of the board of directors shall be held without other notice than this Bylaw within two weeks after the annual meeting of stockholders. The board of directors may provide, by resolution, the time and place for the holding of additional regular meetings without other notice than such resolution.

          SECTION 4. Special Meetings. Special meetings of the board of directors may be called by or at the request of the chairman of the board or the president, or a majority of the directors. The persons authorized to call special meetings of the board of directors may fix any place as the place for holding any special meeting of the board of directors called by such persons.

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          Members of the board of directors may participate in special meetings by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person.

          SECTION 5. Notice. Written notice of any special meeting shall be given to each director at least two days previous thereto delivered personally or by telegram or at least seven days previous thereto delivered by mail at the address at which the director is most likely to be reached. Such notice shall be deemed to be delivered when deposited in the United States mail so addressed, with postage thereon prepaid if mailed or when delivered to the telegraph company if sent by telegram. Any director may waive notice of any meeting by a writing filed with the secretary. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting.

          SECTION 6. Quorum. A majority of the number of directors fixed by Section 2 of this Article III shall constitute a quorum for the transaction of business at any meeting of the board of directors, but if less than such majority is present at a meeting, a majority of the directors present may adjourn the meeting from time to time. Notice of any adjourned meeting shall be given in the same manner as prescribed by Section 5 of this Article III.

          SECTION 7. Manner of Acting. The act of the majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors, unless a greater number is prescribed by these Bylaws, the Articles of Incorporation, or the General Laws of the State of Maryland.

          SECTION 8. Action Without a Meeting. Any action required or permitted to be taken by the board of directors at a meeting may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all of the directors and filed with the minutes of the proceedings of the board.

          SECTION 9. Resignation. Any director may resign at any time by sending a written notice of such resignation to the home office of the Corporation addressed to the chairman of the board or the president. Unless otherwise specified herein such resignation shall take effect upon receipt thereof by the chairman of the board or the president.

          SECTION 10. Vacancies. Any vacancy occurring in the board of directors shall be filled in accordance with the provisions of the Corporation’s Articles of Incorporation. Any directorship to be filled by reason of an increase in the number of directors may be filled by the affirmative vote of two-thirds of the directors then in office. The term of such director shall be in accordance with the provisions of the Corporation’s Articles of Incorporation.

          SECTION 11. Removal of Directors. Any director or the entire board of directors may be removed only in accordance with the provisions of the Corporation’s Articles of Incorporation.

          SECTION 12. Compensation. Directors, as such, may receive a stated salary for their services. By resolution of the board of directors, a reasonable fixed sum, and reasonable expenses of attendance, if any, may be allowed for actual attendance at each regular or special meeting of the board of directors. Members of either standing or special committees may be allowed such compensation for actual attendance at committee meetings as the board of directors may determine. Nothing herein shall be construed to preclude any director from serving the Corporation in any other capacity and receiving remuneration therefor.

          SECTION 13. Presumption of Assent. A director of the Corporation who is present at a meeting of the board of directors at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who votes in favor of such action.

          SECTION 14. Advisory Directors. The board of directors may by resolution appoint advisory directors to the board, who may also serve as directors emeriti, and shall have such authority and receive such compensation and

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reimbursement as the board of directors shall provide. Advisory directors or directors emeriti shall not have the authority to participate by vote in the transaction of business.

          SECTION 15. Age Limitation. No person (other than a director who was seventy-two (72) or more years of age on the effective date of this Article III, Section 15) shall be eligible for election, reelection, appointment, or reappointment to the board of directors if such person is seventy-two (72) or more years of age. No director (other than a director who was seventy-two (72) or more years of age on the effective date of this Article III, Section 15) shall serve beyond the annual meeting of the Corporation immediately following his attainment of age seventy-two (72). No person shall serve as a director immediately following the attainment of age seventy-five (75). The foregoing limitations shall not apply to a person serving as an advisory director of the Corporation.

          SECTION 16. Qualifications. A person is not qualified to serve as a director if he or she: (1) is under indictment for, or has ever been convicted of, a criminal offense involving dishonesty or breach of trust and the penalty for such offense could be imprisonment for more than one year, (2) is a person against who a banking agency has issued a cease and desist order for conduct involving dishonesty or breach of trust and that order is final and not subject to appeal, (3) has been found either by a regulatory agency whose decision is final and not subject to appeal or by a court to have (i) breached a fiduciary duty involving personal profit or (ii) committed a willful violation of any law, rule or regulation governing banking, securities, commodities or insurance, or any final cease and desist order issued by a banking, securities, commodities or insurance regulatory agency or (4) unless such person has been, for a period of at least one year immediately before his or her nomination or appointment, a legal resident of the State of Maryland.

ARTICLE IV

Committees of the Board of Directors

          The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, as they may determine to be necessary or appropriate for the conduct of the business of the Corporation, and may prescribe the duties, constitution and procedures thereof. Each committee shall consist of one or more directors of the Corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee.

          The board of directors shall have power, by the affirmative vote of a majority of the authorized number of directors, at any time to change the members of, to fill vacancies in, and to discharge any committee of the board. Any member of any such committee may resign at any time by giving notice to the Corporation; provided, however, that notice to the board, the chairman of the board, the chief executive officer, the chairman of such committee, or the secretary shall be deemed to constitute notice to the Corporation. Such resignation shall take effect upon receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, acceptance of such resignation shall not be necessary to make it effective. Any member of any such committee may be removed at any time, either with or without cause, by the affirmative vote of a majority of the authorized number of directors at any meeting of the board called for that purpose.

ARTICLE V

Officers

          SECTION 1. Positions. The officers of the Corporation shall be a chairman, a president, one or more vice presidents, a secretary and a treasurer, each of whom shall be elected by the board of directors. The chairman shall be the chief executive officer, unless the board of directors designates another person as the chief executive officer. The offices of the secretary and treasurer may be held by the same person and a vice president may also be either the secretary or the treasurer. The board of directors may designate one or more vice presidents as executive vice president or senior vice president. The board of directors may also elect or authorize the appointment of such other officers as the business of the Corporation may require. The officers shall have such authority and perform such duties as the board of directors may from time to time authorize or determine. In the absence of action by the board of directors, the officers shall have such powers and duties as generally pertain to their respective offices.

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          SECTION 2. Election and Term of Office. The officers of the Corporation shall be elected annually by the board of directors at the first meeting of the board of directors held after each annual meeting of the shareholders. If the election of officers is not held at such meeting, such election shall be held as soon thereafter as possible. Each officer shall hold office until his successor shall have been duly elected and qualified or until his death or until he shall resign or shall have been removed in the manner hereinafter provided. Election or appointment of an officer, employee or agent shall not of itself create contract rights. The board of directors may authorize the Corporation to enter into an employment contract with any officer in accordance with state law; but no such contract shall impair the right of the board of directors to remove any officer at any time in accordance with Section 3 of this Article V.

          SECTION 3. Removal. Any officer may be removed by vote of two-thirds of the board of directors whenever, in its judgment, the best interests of the Corporation will be served thereby, but such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the person so removed.

          SECTION 4. Vacancies. A vacancy in any office because of death, resignation, removal, disqualification or otherwise, may be filled by the board of directors for the unexpired portion of the term.

          SECTION 5. Remuneration. The remuneration of the officers shall be fixed from time to time by the board of directors and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of the Corporation.

ARTICLE VI

Contracts, Loans, Checks and Deposits

          SECTION 1. Contracts. To the extent permitted by applicable law, and except as otherwise prescribed by the Corporation’s Articles of Incorporation or these Bylaws with respect to certificates for shares, the board of directors may authorize any officer, employee, or agent of the Corporation to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation. Such authority may be general or confined to specific instances.

          SECTION 2. Loans. No loans shall be contracted on behalf of the Corporation and no evidence of indebtedness shall be issued in its name unless authorized by the board of directors. Such authority may be general or confined to specific instances.

          SECTION 3. Checks, Drafts, Etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by one or more officers, employees or agents of the Corporation in such manner as shall from time to time be determined by resolution of the board of directors.

          SECTION 4. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in any of its duly authorized depositories as the board of directors may select.

ARTICLE VII

Certificates for Shares and Their Transfer

          SECTION 1. Certificates for Shares. The shares of the Corporation shall be represented by certificates signed by the chairman or vice chairman of the board of directors or by the president or a vice president and by the treasurer or an assistant treasurer or by the secretary or an assistant secretary of the Corporation, and may be sealed with the seal of the Corporation or a facsimile thereof. Any or all of the signatures upon a certificate may be facsimiles if the certificate is countersigned by a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. If any officer who has signed or whose facsimile signature has been placed upon such certificate shall have ceased to be such officer before the certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the date of its issue.

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          SECTION 2. Form of Share Certificates. All certificates representing shares issued by the Corporation shall set forth upon the face or back that the Corporation will furnish to any stockholder upon request and without charge a full statement of the designations, preferences, limitations, and relative rights of the shares of each class authorized to be issued, the variations in the relative rights and preferences between the shares of each such series so far as the same have been fixed and determined, and the authority of the board of directors to fix and determine the relative rights and preferences of subsequent series.

          Each certificate representing shares shall state upon the face thereof: that the Corporation is organized under the laws of the State of Maryland; the name of the person to whom issued; the number and class of shares; the date of issue; the designation of the series, if any, which such certificate represents; the par value of each share represented by such certificate, or a statement that the shares are without par value. Other matters in regard to the form of the certificates shall be determined by the board of directors.

          SECTION 3. Payment for Shares. No certificate shall be issued for any shares until such share is fully paid.

          SECTION 4. Form of Payment for Shares. The consideration for the issuance of shares shall be paid in accordance with the provisions of the Corporation’s Articles of Incorporation.

          SECTION 5. Transfer of Shares. Transfer of shares of capital stock of the Corporation shall be made only on its stock transfer books. Authority for such transfer shall be given only by the holder of record thereof or by his legal representative, who shall furnish proper evidence of such authority, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Corporation. Such transfer shall be made only on surrender for cancellation of the certificate for such shares. The person in whose name shares of capital stock stand on the books of the Corporation shall be deemed by the Corporation to be the owner thereof for all purposes.

          SECTION 6. Stock Ledger. The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 7 of Article II or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders.

          SECTION 7. Lost Certificates. The board of directors may direct a new certificate to be issued in place of any certificate theretofore issued by the Corporation alleged to have been lost, stolen, or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen, or destroyed. When authorizing such issue of a new certificate, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen, or destroyed certificate, or his legal representative, to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen, or destroyed.

          SECTION 8. Beneficial Owners. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof, except as otherwise provided by law.

ARTICLE VIII

Fiscal Year; Annual Audit

          The fiscal year of the Corporation shall end on the 31st day of December of each year. The Corporation shall be subject to an annual audit as of the end of its fiscal year by independent public accountants appointed by and responsible to the board of directors.

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ARTICLE IX

Dividends

          Subject to the provisions of the Articles of Incorporation and applicable law, the board of directors may, at any regular or special meeting, declare dividends on the Corporation’s outstanding capital stock. Dividends may be paid in cash, in property or in the Corporation’s own stock.

ARTICLE X

Corporate Seal

          The corporate seal of the Corporation shall be in such form as the board of directors shall prescribe.

ARTICLE XI

Amendments

          In accordance with the Corporation’s Articles of Incorporation, these Bylaws may be repealed, altered, amended or rescinded by the stockholders of the Corporation only by vote of not less than 80% of the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors (considered for this purpose as one class) cast at a meeting of the stockholders called for that purpose (provided that notice of such proposed repeal, alteration, amendment or rescission is included in the notice of such meeting). In addition, the board of directors may repeal, alter, amend or rescind these Bylaws by vote of two-thirds of the board of directors at a legal meeting held in accordance with the provisions of these Bylaws.

As amended and restated on July 21, 2006.

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EX-31

Exhibit 31

Certification

I, Michael L. Middleton, President and Chief Executive Officer of Tri – County Financial Corporation, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Tri – County Financial Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board or directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2006

/s/ Michael L. Middleton
	Michael L. Middleton
	President and Chief Executive Officer

Certification

I, William J. Pasenelli, Executive Vice President, Treasurer and Chief Financial Officer of Tri – County Financial Corporation, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of Tri – County Financial Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and
(c)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board or directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2006

/s/ William J. Pasenelli
	William J. Pasenelli
	Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION

          This Report on Form 10-Q of Tri – County Financial Corporation (the “Company”) for the quarter ended June 30, 2006 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: August 11, 2006	By:	/s/ Michael L. Middleton
		Michael L. Middleton President and Chief Executive Officer
Date: August 11, 2006	By:	/s/ William J. Pasenelli
		William J. Pasenelli
		Executive Vice President and Chief Financial Officer