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 September 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 0-18279

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 October 23, 2006, the registrant had 1,767,936 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 - September 30, 2006 and December 31, 2005		3
Consolidated Statements of Income and Comprehensive Income - Three and Nine Months Ended September 30, 2006 and 2005		4
Consolidated Statements of Cash Flows - Nine Months Ended September 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		21
Item 4 - Controls and Procedures		21
PART II OTHER INFORMATION
Item 1 - Legal Proceedings		21
Item 1A. - Risk Factors		21
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds		21
Item 3 - Defaults Upon Senior Securities		22
Item 4 - Submission of Matters to a Vote of Security Holders		22
Item 5 - Other Information		22
Item 6 - Exhibits		22
SIGNATURES		23
EX-10.1 SALARY CONTINUATION AGREEMENT/ GREGORY COCKERHAM
EX-10.2 SALARY CONTINUATION AGREEMENT/ WILLIAM PASENELLI
EX-10.3 EMPLOYMENT AGREEMENT / MICHAEL MIDDLETON
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32 SECTION 906 CERTIFICATIONS OF CEO AND CFO

PART I FINANCIAL STATEMENTS

ITEM I. FINANCIAL STATEMENTS

TRI-COUNTY FINANCIAL CORPORATION

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

	September 30, 2006			December 31, 2005
ASSETS
Cash and due from banks	$	3,474,835		$	7,262,547
Federal funds sold		567,212			640,818
Interest-bearing deposits with banks		11,926,575			14,671,875
Securities available for sale		9,702,681			7,178,894
Securities held to maturity - at amortized cost		101,382,853			116,486,685
Federal Home Loan Bank and Federal Reserve Bank stock - at cost		6,573,400			7,190,300
Loans receivable - net of allowance for loan losses of $3,667,047 and $3,383,334, respectively		411,870,980			369,592,253
Premises and equipment, net		6,467,448			6,460,545
Foreclosed real estate		460,884			475,561
Accrued interest receivable		2,780,633			2,406,542
Investment in bank owned life insurance		8,678,020			6,434,175
Other assets		2,415,676			2,487,280
TOTAL ASSETS	$	566,301,197		$	541,287,475
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits	$	43,047,897		$	44,325,083
Interest-bearing deposits		357,327,992			319,048,657
Total deposits		400,375,889			363,373,740
Short-term borrowings		14,928,715			20,074,975
Long-term debt		98,055,793			107,823,759
Guaranteed preferred beneficial interest in junior subordinated debentures		12,000,000			12,000,000
Accrued expenses and other liabilities		4,426,258			3,436,845
Total liabilities		529,786,655			506,709,319
STOCKHOLDERS’ EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares; issued 1,759,687 and 1,760,991 shares, respectively		17,597			17,610
Additional paid in capital		9,259,317			9,057,805
Retained earnings		27,323,557			25,580,634
Accumulated other comprehensive income		11,100			49,362
Unearned ESOP shares		(97,029	)		(127,255	)
Total stockholders’ equity		36,514,542			34,578,156
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	566,301,197		$	541,287,475

See notes to consolidated financial statements

3

TRI-COUNTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
INTEREST INCOME:
Interest and fees on loans	$	7,620,780	$	5,765,253	$	21,459,656	$	16,081,572
Taxable interest and dividends on investment securities		1,529,140		1,644,284		4,710,343		5,147,636
Interest on deposits with banks		36,882		24,165		144,672		53,401
Total interest income		9,186,802		7,433,702		26,314,671		21,282,609
INTEREST EXPENSE:
Interest on deposits		3,273,112		1,767,789		8,501,892		4,268,209
Interest on short-term borrowings		276,858		553,415		828,026		2,192,712
Interest on long-term debt		1,294,107		1,245,426		4,033,898		3,284,245
Total interest expenses		4,844,077		3,566,630		13,363,816		9,745,166
NET INTEREST INCOME		4,342,725		3,867,072		12,950,855		11,537,443
PROVISION FOR LOAN LOSSES		116,563		11,183		289,135		200,307
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		4,226,162		3,855,889		12,661,720		11,337,136

4

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges	$	72,850		$	68,666		$	306,639		$	193,546
Net gain on the sale of foreclosed property		—			—			—			39,756
Income from bank owned life insurance		84,037			63,624			243,845			186,954
Loss on sale of investment securities		—			—			—			(14,581	)
Service charges		362,565			334,360			952,298			896,110
Total noninterest income		519,452			466,650			1,502,782			1,301,785
NONINTEREST EXPENSE:
Salary and employee benefits		1,764,419			1,547,190			5,179,316			4,369,643
Occupancy		329,805			309,796			934,093			835,254
Advertising		170,553			112,982			416,744			318,552
Data processing		202,546			152,285			633,119			475,647
Legal and professional fees		(50,041	)		201,260			498,126			450,428
Depreciation of furniture, fixtures, and equipment		141,931			118,161			383,358			314,511
Telephone communications		25,049			12,381			66,992			65,783
ATM expenses		64,413			61,346			180,590			211,227
Office supplies		32,671			33,567			101,621			101,518
Office equipment		10,786			10,010			35,037			39,686
Other		379,534			210,586			970,838			725,944
Total noninterest expenses		3,071,666			2,769,564			9,399,834			7,908,193
INCOME BEFORE INCOME TAXES		1,673,948			1,552,975			4,764,668			4,730,728
Income tax expense		570,895			562,908			1,629,543			1,637,211
NET INCOME		1,103,053			990,067			3,135,125			3,093,517
OTHER COMPREHENSIVE INCOME NET OF TAX
Net unrealized holding gains (losses) arising during period		170,439			(33,443	)		(38,262	)		(116,512	)
COMPREHENSIVE INCOME	$	1,273,492		$	956,624		$	3,096,863		$	2,977,005
INCOME PER COMMON SHARE
Basic	$	0.42		$	0.38		$	1.19		$	1.19
Diluted		0.39			0.35			1.11			1.12
Dividends Paid Per Share		0.36			0.53			0.36			0.53

See notes to consolidated financial statements

Share and per share data have been adjusted to reflect the three for two common stock splits effected on December 12, 2005 and announced on October 25, 2006 as if they had occurred on January 1, 2005.

See notes to consolidated financial statements

5

TRI-COUNTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005

	Nine Months Ended
	September 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,135,125		$	3,093,517
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses		289,135			200,307
Loss on sales of investment securities		—			14,581
Depreciation and amortization		741,179			594,906
Net amortization of premium/discount on investment securities		16,587			288,210
Increase in cash surrender of bank owned life insurance		(243,845	)		(186,954	)
Deferred income tax benefit		(270,486	)		(111,680	)
Increase in accrued interest receivable		(374,091	)		(321,837	)
Decrease in deferred loan fees		(146,349	)		(210,792	)
Increase in accounts payable, accrued expenses, other liabilities		989,413			381,764
Decrease in other assets		361,802			152,255
Gain on sale of foreclosed property		—			(39,756	)
Net cash provided by operating activities		4,498,470			3,854,521
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale		(3,092,176	)		(8,439	)
Proceeds from sale, redemption or principal payments of investment securities available for sale		498,736			4,754,373
Purchase of investment securities held to maturity		(4,300,000	)		(25,749,248	)
Proceeds from maturities or principal payments of investment securities held to maturity		19,398,924			60,124,155
Net sale (purchase) of FHLB and federal Reserve stock		616,900			(393,900	)
Loans originated or acquired		(129,829,352	)		(157,502,581	)
Principal collected on loans		87,407,839			98,185,118
Purchase of bank owned life insurance		(2,000,000	)		—
Purchase of premises and equipment		(748,082	)		(1,258,360	)
Proceeds from foreclosed real estate		14,677			39,756
Net cash used in investing activities		(32,032,534	)		(21,809,126	)

6

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

	Nine Months Ended
	September 30,
	2006			2005
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	37,002,149		$	65,439,233
Proceeds from long-term borrowings		10,260,000			20,000,000
Payments of long-term borrowings		(20,027,966	)		(5,098,892	)
Trust Preferred Debentures		—			5,000,000
Net decrease in short term borrowings		(5,146,260	)		(64,808,090	)
Proceeds of private placement		74,550
Exercise of stock options		83,741			166,815
Net change in unearned ESOP shares		73,554			60,395
Dividends Paid		(972,966	)		(930,669	)
Redemption of common stock		(419,356	)		(232,185	)
Net cash provided by financing activities		20,927,446			19,596,607
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(6,606,618	)		1,642,002
CASH AND CASH EQUIVALENTS - JANUARY 1		22,575,240			17,715,779
CASH AND CASH EQUIVALENTS - SEPT 30	$	15,968,622		$	19,357,781
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the nine months for:
Interest	$	13,101,351		$	9,693,637
Income taxes	$	1,272,400		$	1,447,500

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 nine months ended September 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.
	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 September 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				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Basic		2,639,868		2,600,834		2,640,477		2,598,314
Diluted		2,824,308		2,701,296		2,819,123		2,769,467

Share and per share data have been adjusted to reflect the three for two common stock splits effected on December 12, 2005 and announced on October 25, 2006 as if they 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. 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 nine months ended September 30, 2005:

	Three Months Ended			Nine Months Ended
	September 30, 2005			September 30, 2005
Net Income as reported	$	990,067		$	3,093,517
Less pro forma stock based compensation:
Expense determined under fair value method, net of tax effects.		(45,979	)		(239,592	)
Pro forma net income	$	944,088		$	2,853,925
Net income per share
Basic - as reported	$	0.38		$	1.19
Basic - pro forma	$	0.36		$	1.10
Diluted - as reported	$	0.35		$	1.12
Diluted - pro forma	$	0.34		$	1.03

9

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

				Weighted				Weighted-Average
				Average		Aggregate		Contractual Life
				Exercise		Intrinsic		Remaining In
	Shares			Price		Value		Years
Outstanding at December 31, 2005		444,753		$	13.59
Granted at fair value		—			—
Exercised		(9,770	)		8.57
Expired		—			—
Forfeited		(7,734	)		12.85
Outstanding at September 30, 2006		427,250		$	13.72	$	4,250,754		5.5
Exercisable at September 30, 2006		427,250		$	13.72	$	4,250,754		5.5

Share and per share data have been adjusted to reflect the three for two common stock splits effected on December 12, 2005 and announced on October 25, 2006 as if they 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 90 day 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.

10

	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 90 day 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, “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. 14 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 (“FIN”) No. 48 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 (“EITF 06-2”) 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 may contain 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 1A. Risk Factors” and this Quarterly Report on Form 10-Q under Part II, “Item 1A. 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 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 several quarters, the Federal Reserve signaled a resolve to control inflation through successive increases in the targeted Federal Funds rate. These increases pushed the Federal Funds rate from 1.0% in June 2004 to 5.25%. After an increase in June 2006, the Federal Reserve has not increased rates at the August or September 2006 meetings. The

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Federal Reserve has declared that future changes in the funds rate will be “data dependent.” These increases had the effect of “flattening” the yield curve as long-term rates have generally not increased the same amount as short-term rates. We believe that we are positioned to perform well in a moderate rate increase or decrease environment; however, substantially higher or substantially lower interest rates could negatively 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				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006		2005
Condensed Income Statement:
Interest Income	$	9,186,802	$	7,433,702	$	26,314,671	$	21,282,609
Interest Expense		4,844,077		3,566,630		13,363,816		9,745,166
Net Interest Income		4,342,725		3,867,072		12,950,855		11,537,443
Provision for Loan Loss		116,563		11,183		289,135		200,307
Noninterest Income		519,452		466,650		1,502,782		1,301,785
Noninterest Expense		3,071,666		2,769,564		9,399,834		7,908,193
Income Before Income Taxes		1,673,948		1,552,975		4,764,668		4,730,728
Income Taxes		570,895		562,908		1,629,543		1,637,211
Net Income		1,103,053		990,067		3,135,125		3,093,517
Per Common Share: (I)
Basic Earnings	$	0.42	$	0.38	$	1.19	$	1.19
Diluted Earnings	$	0.39	$	0.35	$	1.11	$	1.12
Book Value	$	13.83	$	12.75	$	13.83	$	12.75

(I) Share and per share data have been adjusted to reflect the three for two common stock splits effected on December 12, 2005 and announced on October 25, 2006 as if they had occurred on January 1, 2005.

RESULTS OF OPERATIONS — NINE MONTHS ENDED SEPTEMBER 30, 2006

Net income for the nine-month period ended September 30, 2006 totaled $3,135,125 ($1.19 basic and $1.11 diluted earnings per share) compared to $3,093,517 ($1.19 basic and $1.12 diluted earnings per share) for the same period in the prior year. This increase of $41,608, or 1.35%, was caused by increases in net interest income and noninterest income partially offset by increases in noninterest expense and the provision for loan losses.

For the nine-month period ended September 30, 2006, interest income increased by $5,032,962, or 23.64%, to $26,314,671. 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 $13,363,816 in the nine-month period ended September 30, 2006 as compared to $9,745,166 in the same period in the prior year, an increase of $3,618,650, or 37.13%. 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.

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The provision for loan losses increased to $289,135 for the nine months ended September 30, 2006 from $200,307 for the nine — month period ended September 30, 2005. The increase in the provision was caused by continued 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. The increase also reflected higher charge-offs and non-accrual loans in the nine months ended September 30, 2006 compared to the same period in 2005. Management will continue to periodically review its allowance for loan losses and the related provision and make adjustments 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.

	Nine Months Ended September 30,
	2006		2005			$ Change			% Change
NONINTEREST INCOME
Loan appraisal, credit, and miscellaneous charges	$	306,639	$	193,546		$	113,093			58.43	%
Net gain on the sale of foreclosed property		—		39,756			(39,756	)		(100.00	%)
Income from bank owned life insurance		243,845		186,954			56,891			30.43	%
Loss on sale of investment securities		—		(14,581	)		14,581			(100.00	%)
Service charges		952,298		896,110			56,188			6.27	%
Total noninterest income	$	1,502,782	$	1,301,785		$	200,997			15.44	%

Loan appraisal, credit, and miscellaneous charges increased due to higher loan volumes. The decrease in gain on the sale of foreclosed property reflects that $14,677 of foreclosed property was sold in the current year compared to $39,756 in 2005, and that the property sold in the current year 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 gain or loss on the sale of investment securities reflects that there were $0 in investment sales in 2006, compared to $1.3 million in 2005. The increase in service charges reflects higher transaction account balances as well as increased fees.

	Nine Months Ended September 30,
	2006		2005		$ Change			% Change
NONINTEREST EXPENSE
Salary and employee benefits	$	5,179,316	$	4,369,643	$	809,673			18.53	%
Occupancy		934,093		835,254		98,839			11.83	%
Advertising		416,744		318,552		98,192			30.82	%
Data processing		633,119		475,647		157,472			33.11	%
Legal and professional fees		498,126		450,428		47,698			10.59	%
Depreciation of furniture, fixtures, and equipment		383,358		314,511		68,847			21.89	%
Telephone communications		66,992		65,783		1,209			1.84	%
ATM expenses		180,590		211,227		(30,637	)		(14.50	%)
Office supplies		101,621		101,518		103			0.10	%
Office equipment		35,037		39,686		(4,649	)		(11.71	%)
Other		970,838		725,944		244,894			33.73	%
Total noninterest expenses	$	9,399,834	$	7,908,193	$	1,491,641			18.86	%

Salary and employee benefits costs increased because of increases in the number of Bank employees 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 and regulatory requirements. The income shown for legal and professional fees reflect the additional

14

costs of preparing the Company for Sarbanes — Oxley compliance. The current quarter reflects an offset credit for Sarbanes Oxley which was previously accrued but was negotiated to settle at a lower amount. Depreciation expense includes increases due to a remodeled home office, additional branch equipment, and preparing for the replacement of our Leonardtown branch. 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.

Income tax expense decreased to $1,629,543, or 34.20% of pretax income, in the current year, from $1,637,211, or 34.61% of pretax income, in the prior year.

RESULTS OF OPERATIONS — THREE MONTHS ENDED SEPTEMBER 30, 2006

Net income for the three-month period ended September 30, 2006 totaled $1,103,053 ($0.42 basic and $0.39 diluted earnings per share) compared to $990,067 ($0.38 basic and $0.35 diluted earnings per share) for the same period in the prior year. This increase of $112,986, or 11.41%, was caused by an increase in net interest and noninterest income partially offset by increases in the provision for loan loss and noninterest expense.

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 interest 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, particularly in commercial loans which tend to have a higher risk of default. The increase in the provision also reflects an increase in charge offs and non-performing loans for the three months ended September 30, 2006 compared to the three months ended September 30, 2005.

The provision for loan losses increased as the Bank’s loan portfolio continued to grow.

	Three Months Ended September 30,
	2006		2005		$ Change		% Change
NONINTEREST INCOME
Loan appraisal, credit, and miscellaneous charges	$	72,850	$	68,666	$	4,184		6.09	%
Income from bank owned life insurance		84,037		63,624		20,413		32.08	%
Service charges		362,565		334,360		28,205		8.44	%
Total noninterest income	$	519,452	$	466,650	$	52,802		11.32	%

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. Service charges increased as the Bank grew in deposit and loan balances and adjusted certain fees upward.

	Three Months Ended September 30,
	2006			2005		$ Change			% Change
NONINTEREST EXPENSE
Salary and employee benefits	$	1,764,419		$	1,547,190	$	217,229			14.04	%
Occupancy		329,805			309,796		20,009			6.46	%
Advertising		170,553			112,982		57,571			50.96	%
Data processing		202,546			152,285		50,261			33.00	%
Legal and professional fees		(50,041	)		201,260		(251,301	)		(124.86	%)
Depreciation of furniture, fixtures, and equipment		141,931			118,161		23,770			20.12	%
Telephone communications		25,049			12,381		12,668			102.32	%
ATM expenses		64,413			61,346		3,067			5.00	%
Office supplies		32,671			33,567		(896	)		(2.67	%)
Office equipment		10,786			10,010		776			7.75	%
Other		379,534			210,586		168,948			80.23	%
Total noninterest expenses	$	3,071,666		$	2,769,564	$	302,102			10.91	%

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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. Advertising expenses increased due to the Bank’s increased efforts to attain greater market share. Data processing expenses reflect the growth in the Bank as well as the addition of new products. The income shown for legal and professional fees reflects the settlement of certain outstanding amounts and the subsequent adjustment of related accruals. Depreciation expense includes increases due to a remodeled home office and additional branch equipment. The increase in other expenses is reflective of the Bank’s increased size and complexity.

FINANCIAL CONDITION

	September 30, 2006		December 31, 2005		$ Change			% Change
Assets
Cash and due from banks	$	3,474,835	$	7,262,547	$	(3,787,712	)		(52.15	%)
Federal Funds sold		567,212		640,818		(73,606	)		(11.49	%)
Interest-bearing deposits with banks		11,926,575		14,671,875		(2,745,300	)		(18.71	%)
Securities available for sale		9,702,681		7,178,894		2,523,787			35.16	%
Securities held to maturity — at amortized cost		101,382,853		116,486,685		(15,103,832	)		(12.97	%)
Federal Home Loan Bank and Federal Reserve Bank stock		6,573,400		7,190,300		(616,900	)		(8.58	%)
Loans receivable — net of allowance for loan losses of $3,667,047 and $3,383,334, respectively		411,870,980		369,592,253		42,278,727			11.44	%
Premises and equipment, net		6,467,448		6,460,545		6,903			0.11	%
Foreclosed real estate		460,884		475,561		(14,677	)		(3.09	%)
Accrued interest receivable		2,780,633		2,406,542		374,091			15.54	%
Investment in bank owned life insurance		8,678,020		6,434,175		2,243,845			34.87	%
Other assets		2,415,676		2,487,280		(71,604	)		(2.88	%)
Total Assets	$	566,301,197	$	541,287,475	$	25,013,722			4.62	%

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. Securities available for sale increased due to the purchase of certain mutual fund shares designed to provide credit under 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. 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 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. Investment in bank owned life insurance increased due to purchases of additional policies and the retention of income earned.

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

	September 30, 2006					December 31, 2005
	Amount		%			Amount		%
Real Estate Loans
Commercial	$	173,024,531		41.59	%	$	166,850,838		44.66	%
Residential first mortgages		78,573,247		18.89	%		73,627,717		19.71	%
Residential construction		39,044,884		9.39	%		32,608,002		8.73	%
Second mortgage loans		26,866,914		6.46	%		25,884,406		6.93	%
Commercial lines of credit		77,255,675		18.57	%		54,737,693		14.65	%
Consumer loans		3,155,803		0.76	%		3,128,425		0.84	%
Commercial equipment		18,074,337		4.34	%		16,742,220		4.48	%
		415,995,391		100.00	%		373,579,301		100.00	%
Less:
Deferred loan fees		457,365		0.11	%		603,714		0.16	%
Allowance for loan loss		3,667,047		0.88	%		3,383,334		0.91	%
	$	411,870,979				$	369,592,253

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At September 30, 2006, the Bank’s allowance for loan losses totaled $3,667,047 or 0.88% 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 Form 10-K.

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

	Nine Months Ended		Nine Months Ended
	September 30, 2006		September 30, 2005
Beginning balance	$	3,383,334	$	3,057,558
Charge-offs		8,181		4,468
Recoveries		2,759		5,185
Net charge-offs		5,422		(717	)
Provision for loan losses		289,135		200,307
Balance at the end of the Period	$	3,667,047	$	3,258,582

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

	Balances as of			Balances as of
	September 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	$	1,072,943		$	590,498
Total non-performing loans	$	1,072,943		$	590,498
Non-performing loans to total loans		0.26	%		0.16	%
Allowance for loan losses to non- performing loans		341.77	%		572.96	%

Although overall delinquency remains low, the amount and percentage of the loan portfolio that is in non-accrual status has increased over the last several months. Management has individually reviewed the major non-accrual loans and we are satisfied that the allowance for loan losses is adequate.

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	September 30, 2006		December 31, 2005		$ Change			% Change
Liabilities:
Noninterest-bearing deposits	$	43,047,897	$	44,325,083	$	(1,277,186	)		(2.88	%)
Interest-bearing deposits		357,327,992		319,048,657		38,279,335			12.00	%
Total deposits		400,375,889		363,373,740		37,002,149			10.18	%
Short-term borrowings		14,928,715		20,074,975		(5,146,260	)		(25.64	%)
Long-term debt		98,055,793		107,823,759		(9,767,966	)		(9.06	%)
Guaranteed preferred beneficial interest in junior subordinated debentures		12,000,000		12,000,000		—			0.00	%
Accrued expenses and other liabilities		4,426,258		3,436,845		989,413			28.79	%
Total liabilities	$	529,786,655	$	506,709,319	$	23,077,336			4.55	%

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 decreased as deposits increased providing the funds to retire short-term borrowings. The Bank will continue to attempt to replace borrowings with deposits in the future. Long-term borrowings were also reduced as they matured using funds provided by new deposits.

	September 30, 2006			December 31, 2005			$ Change			% Change
Stockholders’ Equity:
Common stock	$	17,597		$	17,610		$	(13	)		(0.07	%)
Additional paid in capital		9,259,317			9,057,805			201,512			2.22	%
Retained earnings		27,323,557			25,580,634			1,742,923			6.81	%
Accumulated other comprehensive income		11,100			49,362			(38,262	)		(77.51	%)
Unearned ESOP shares		(97,029	)		(127,255	)		30,226			(23.75	%)
	$	36,514,542		$	34,578,156		$	1,936,386			5.60	%

Additional paid in capital increased due to the exercise of options and the proceeds of a private placement of common stock. Retained earnings increased because of net income of $3,135,125, offset by the repurchase of 12,095 shares at a cost of $419,236, and cash dividends of $0.37 per share for a total cost of $972,966. Accumulated other comprehensive income increased due to an increase in the fair value of the available-for-sale investment portfolio. Book value per share increased from $13.09 per share to $13.83 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 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

18

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 September 30, 2006, the maximum available under this line would be $226 million, while outstanding advances totaled $113 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 September 30, 2006, the Bank had pledged collateral sufficient to draw $203 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 September 30, 2006 totaled $15,968,622, a decrease of $6,606,618, or 29.26%, 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.

The Bank’s principal sources of cash are its financing activities including deposits and borrowings. During the first nine months of 2006, all financing activities provided $20,927,446 in cash compared to $19,596,607 for the first nine months of 2005. The increase in cash flows from financing activities during the most recent period was principally due to a decrease in the use of cash to reduce short and long term borrowings from $69,906,982 in the first nine months of 2005 to $25,174,226 in the same period in 2006. This increase was offset by a decline in the amount of funds provided by the growth in deposits from $65,439,233 in the first nine months of 2005 to 37,002,149 in the same period in 2006. The Bank also had declining cash flows from long-term borrowings in the first nine months of 2006 compared to the same period in 2005 as proceeds from long-term borrowings declined to $10,260,000 from $20,000,000 in the same period of 2005. Finally in the first nine 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.

The Bank’s principal use of cash has been in investments in loans, investment securities and other assets. During the nine months ended September 30, 2006, the Bank invested a total of $32,032,534 compared to $21,809,126 in 2005. The principal reasons for the decrease in cash used in investing activities were a decline in the purchases of investment securities from $25,757,687 in 2005 to $7,392,176 in 2006 and a decline in loan originations to $157,502,581 in 2006 from $129,829,322 in 2005.

REGULATORY MATTERS

The Bank is subject to Federal Reserve System capital requirements as well as statutory capital requirements imposed under Maryland law. At September 30, 2006, the Bank’s tangible, leverage and risk-based capital ratios were 8.38%, 11.04% and 11.92%, respectively. These levels are 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. At September 30, 2006, the Company’s tangible, leverage and risk-based capital ratios were 8.60%, 11.32% and 12.20%, 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

19

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.

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.

20

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 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 1A. Risk Factors. 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 Form 10-K, which could materially affect our business, financial condition or future results. The risks described in the 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

On August 22, 2006 and September 13, 2006, the Company issued 3,000 and 150 shares, respectively, of its common stock, par value $0.01, in a private placement exempt from registration under Section 4(2) of the Securities Act of 1933, as amended thereunder. An underwriter was not utilized in the transaction. Shares were sold to 2 persons newly appointed directors of the Company and Community Bank of Tri-County who are required by Maryland law to own company stock. Both directors are accredited investors. The Company received an aggregate of $74,550 in cash for the shares that were issued. There were no underwriting discounts or commissions. The net proceeds from the offering were used for general corporate purposes.

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The following table sets forth information regarding the Company’s repurchases of its Common Stock during the quarter ended September 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
July 2006		2,630	$	24.26		2,630		78,578
August 2006		2,370		24.11		2,370		76,208
September 2006		1,220		23.33		1,220		74,988
		6,219	$	24.10		6,219

Share and per share data have been adjusted to reflect the three for two common stock splits effected on December 12, 2005 and announced on October 25, 2006 as if they had occurred on January 1, 2005.

(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. None.

Item 5. Other Information. None.

Item 6. Exhibits

Exhibit 10.1	Salary Continuation Agreement between Community Bank of Tri-County and Gregory C. Cockerham
Exhibit 10.2	Salary Continuation Agreement between Community Bank of Tri-County and William J. Pasenelli
Exhibit 10.3	Salary Continuation Agreement between Community Bank of Tri-County and Michael L. Middleton
Exhibit 31.1	Rule 13a14(a) Certification of CEO
Exhibit 31.2	Rule 13a14(a) Certification of CFO
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: November 13, 2006	By :	/s/ Michael L. Middleton
		Michael L. Middleton, President, Chief
		Executive Officer and Chairman of the Board
Date: November 13, 2006	By:	/s/ William J. Paseneelli
		William J. Pasenelli, Executive Vice
		President and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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EX-10.1

Exhibit 10.1

COMMUNITY BANK OF TRI-COUNTY
SALARY CONTINUATION AGREEMENT

     THIS SALARY CONTINUATION AGREEMENT (the “Agreement”) is adopted this 21st day of August, 2006, by and between COMMUNITY BANK OF TRI-COUNTY, a state-chartered commercial, bank located in Waldorf, Maryland (the “Company”) and GREGORY C. COCKERHAM (the “Executive”).

     The purpose of this Agreement is to provide specified benefits to the Executive, a member of a select group of management or highly compensated employees who contribute materially to the continued growth, development, and future business success of the Company. This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended from time to time.

Article 1
Definitions

     Whenever used in this Agreement, the following words and phrases shall have the meanings specified:

1.1 “Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive determined pursuant to Article 4.

1.2 “Beneficiary Designation Form” means the form established from time to time by the Plan Administrator that the Executive completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries.

1.3 “Board” means the Board of Directors of the Company as from time to time constituted.

1.4 “Change in Control” shall mean the occurrence of any of the following events:

(a) individuals who, on the date of this Agreement, constitute the Board of Directors of the Company (the “Incumbent Directors”) cease for any reason to constitute at least half of the Board of Directors of the Company, provided that any person becoming a director subsequent to such time, whose election or nomination for election was approved by a vote of at least two-thirds (2/3) of the Incumbent Directors then on the Board of Directors of the Company (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board of Directors of the Company shall be deemed to be an Incumbent Director;

(b)

any “person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”) and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board of Directors of the Company (the “Company Voting Securities”); provided, however, that the event described in this paragraph (b) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (1) by the Company or any subsidiary, (2) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary, (3) by any underwriter temporarily holding securities pursuant to an offering of such securities or (4) a transaction (other than one described in (c) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approve a resolution providing expressly that the acquisition pursuant to this clause (4) does not constitute a Change in Control under this paragraph (b);

(c)

the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (1) at least 50% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by the Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among (and only among) the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (2) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation) is or becomes the beneficial owner, directly or indirectly, of 25% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (3) ,at least 50% of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Company Board’s approval of the execution of the initial agreement providing for such Business Combination; or

(d) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company’s assets.

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 25% of Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.

1.5	“Code” means the Internal .Revenue Code of 1986, as amended.
1.6	“Corporation” means the Tri-County Financial Corporation.
1.7	“Disability” means the Executive’s (i) inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (ii) receipt of disability benefits for a period of 3 months under an accident and health plan of the employer by reason of the participant’s medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.
1.8	“Early Termination” means Separation from Service before Normal Retirement Age except when such Separation from Service occurs: (i) within twelve (12) months following a Change in Control; or (ii) due to death, Disability, or Termination for Cause.
1.9	“Effective Date” means January 1, 2006.
1.10	“Normal Retirement Age” means the Executive attaining age sixty-five (65).
1.11	“Normal Retirement Date” means the date of the Executive’s Separation from Service on or after attaining Normal Retirement Age.
1.12	“Plan Administrator” means the plan administrator described in Article 6.
1.13	“Plan Year” means each twelve-month period commencing on January 1st and ending on December 31st of each year. The initial Plan Year shall commence on the Effective Date of this Agreement and end on the following December 31st.
1.14	“Schedule A” means the schedule attached to this Agreement and made a part hereof. Schedule A shall be updated upon a change in any of the benefits under Articles 2 or 3.

1.15 “Separation from Service” means the termination of the Executive’s employment with the Company for reasons other than death (except as provided in Section 1.8). Whether a Separation from Service takes place is determined based on the facts and circumstances surrounding the termination of the Executive’s employment and whether the Company and the Executive intended for the Executive to provide significant services for the Company following such termination. A termination of employment will not be considered a Separation from Service if:

(a)

the Executive continues to provide services as employee of the Company at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or, if employed less than three years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three full calendar years of employment (or, if less, such lesser period), or

(b)

the Executive continues to provide services to the Company in a capacity other than as an employee of the Company at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or if employed less than three years, such lesser period) and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final three full calendar years of employment (or if less, such lesser period).

1.16	“Specified Employee” means a key employee (as defined in Section 416(i) of the Code without regard to paragraph 5 thereof) of the Company if any stock of the Company is publicly traded on an established securities market or otherwise.
1.17	“Termination for Cause” shall have the meaning set forth in Article 5.

Article 2
Distributions During Lifetime

2.1 Normal Retirement Benefit. Upon Separation from Service on or after the Normal Retirement Date, the Company shall distribute to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Article.

2.1.1

Amount of Benefit. The annual benefit under this Section 2.1 is Four Thousand Eight Hundred Dollars ($4,800), payable for a period of fifteen (15) years and resulting in a total benefit of Seventy-Two Thousand Dollars ($72,000). The Company’s Board of Directors, in its sole discretion, through a duly adopted resolution, may increase the annual benefit under this Section prior to the Executive’s Separation from Service.

2.1.2

Distribution of Benefit. The Company shall distribute the benefit to the Executive in one hundred eighty (180) consecutive equal monthly installments, commencing

on the first day of the month following Separation from Service.

2.2 Early Termination Benefit. Upon Early Termination, the Company shall distribute to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Article.

2.2.1	Amount of Benefit. The benefit under this Section 2.2 is the Early Termination Benefit set forth on Schedule A for the Plan Year ending prior to Separation from Service.
2.2.2	Distribution of Benefit. The Company shall distribute the benefit to the Executive in one hundred eighty (180) consecutive equal monthly installments commencing the first day of the month following the Executive attaining Normal Retirement Age.

2.3 Disability Benefit. If the Executive experiences a Disability which results in a Separation from Service prior to Normal Retirement Age, the Company shall distribute to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Article.

2.3.1	Amount of Benefit. The benefit under this Section 2.3 is the Normal Retirement Benefit amount described in Section 2.1.1.
2.3.2	Distribution of Benefit. The Company shall distribute the benefit to the Executive in one hundred eighty (180) consecutive equal monthly installments commencing the first day of the month following the Executive attaining Normal Retirement Age.

2.4 Change in Control Benefit. Upon a Change in Control, followed within twelve (12) months by a Separation from Service, the Company shall distribute to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Article.

2.4.1	Amount of Benefit. The benefit under this Section 2.4 is the Normal Retirement Benefit amount described in Section 2.1.1.
2.4.2	Distribution of Benefit. The Company shall distribute the benefit to the Executive in one hundred eighty (180) consecutive equal monthly installments commencing the first day of the month following the Executive attaining Normal Retirement Age.

2.5 Restriction on Timing of Distribution. Notwithstanding any provision of this Agreement to the contrary, if the Executive is considered a Specified Employee at Separation from Service under such procedures as established by the Company in accordance with Section 409A of the Code, benefit distributions that are made upon Separation from Service may not commence earlier than six (6) months after the date of such Separation from Service. Therefore, in the event this Section 2.5 is applicable to the Executive, any distribution which would otherwise be paid to the Executive within the first six months following the

Separation from Service shall be accumulated and paid to the Executive in a lump sum on the first day of the seventh month following the Separation from Service. All subsequent distributions shall be paid in the manner specified under this Article II of the Plan with respect to the applicable benefit.

2.6 Distributions Upon Income Inclusion Under Section 409A of the Code. Upon the inclusion of any amount into the Executive’s income as a result of the failure of this non- qualified deferred compensation plan to comply with the requirements of Section 409A of the Code, to the extent such tax liability can be covered by the amount which the Company has accrued with respect to the obligations described in this Article 2, a distribution shall be made as soon as is administratively practicable following the discovery of the plan failure.

2.7 Change in Form or Timing of Distributions. For distribution of benefits under this Article 2, the Executive and the Company may, subject to the terms of Section 8.1, amend the Agreement to delay the timing or change the form of distributions. Any such amendment:

(a)	may not accelerate the time or schedule of any distribution, except as provided in Section 409A of the Code and the regulations thereunder;
(b)	must, for benefits distributable under Section 2.2, 2.3 and 2.4, be made at least twelve (12) months prior to the first scheduled distribution;
(c)	must, for benefits distributable under Sections 2.1, 2.2, 2.3 and 2.4, delay the commencement of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made; and
(d)	must take effect not less than twelve (12) months after the amendment is made.

Article 3
Distribution at Death

3.1 Death During Active Service. If the Executive dies before Separation from Service and prior to Normal Retirement Age, the Company shall distribute to the Beneficiary the benefit described in this Section 3.1. This benefit shall be distributed in lieu of the benefits under Article 2.

3.1.1	Amount of Benefit. The benefit under this Section 3.1 is the Normal Retirement Benefit amount described in Section 2.1.1.
3.1.2	Distribution of Benefit. The Company shall distribute the benefit to the Beneficiary in one hundred eighty (180) consecutive equal monthly installments for commencing the first day of the month following receipt by the Company of the Executive’s death certificate.

3.2 Death During Distribution of a Benefit. If the Executive dies after any benefit distributions have commenced under this Agreement before receiving all such distributions, the Company shall distribute to the Beneficiary the remaining benefits at the same time and in the same amounts that would have been distributed to the Executive had the Executive survived.

3.3 Death After Separation from Service But Before Benefit Distributions Commence. If the Executive is entitled to benefit distributions under this Agreement, but dies prior to the commencement of said benefit distributions, the Company shall distribute to the Beneficiary the same benefits that the Executive was entitled to prior to death except that the benefit distributions shall commence within thirty (30) days following receipt by the Company of the Executive’s death certificate.

Article 4
Beneficiaries

4.1	Beneficiary. The Executive shall have the right, at any time, to designate a Beneficiary to receive any benefit distributions under this Agreement upon the death of the Executive. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other plan of the Company in which the Executive participates.
4.2	Beneficiary Designation: Change. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent. The Executive’s beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator prior to the Executive’s death.
4.3	Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent.
4.4	No Beneficiary Designation. If the Executive dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive’s spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, the benefits shall be made to the personal representative of the Executive’s estate.

4.5 Facility of Distribution. If the Plan Administrator determines in its discretion that a benefit is to be distributed to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Executive and the Executive’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such distribution amount.

Article 5
General Limitations

5.1 Termination for Cause, Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company terminates the Executive’s employment for Cause. Cause shall mean a good faith determination of the Company’s Board of Directors that the Executive has: (a) engaged in acts of personal dishonesty which have resulted in loss to the Company, or one of its affiliates, (b) intentionally failed to perform stated duties, (c) committed a willful violation of any law, rule, regulation (other than traffic violations or similar offenses), (d) become subject to the entry of a final cease and desist order which results in substantial loss to the Company or one of its affiliates, (e) been convicted of a crime or act involving moral turpitude, (f) willfully breached the Company’s code of conduct and business ethics, (g) been disqualified or barred by any governmental or self-regulatory authority from serving in the Executive’s then-current employment capacity or (h) willfully attempted to obstruct or failed to cooperate with any investigation authorized by the Board of Directors or any governmental or self regulatory entity. No act or failure to act on the part of the Executive shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted ,by the Board of Directors, or upon the advice of legal counsel for the Company, shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company.

5.2 Suicide or Misstatement. No benefits shall be distributed if the Executive commits suicide within three years after the Effective Date of this Agreement, or if an insurance company which issued a life insurance policy covering the Executive and owned by the Company denies coverage (i) for material misstatements of fact made by the Executive on an application for such life insurance, or (ii) for any other reason.

5.3 Required Regulatory Provision. No payments will be made under this Agreement that would violate of 12 U.S.C. Sec. 1828(k) or 12 U.S.C. Sec. 1818(e) or any regulation promulgated thereunder.

Article 6
Administration of Agreement

6.1	Plan Administrator Duties. This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint. The Plan Administrator shall administer this Agreement according to its express terms and shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Agreement and (ii) decide or resolve any and all questions including interpretations of this Agreement, as may arise in connection with the Agreement to the extent the exercise of such discretion and authority does not conflict with Section 409A of the Code and regulations thereunder.
6.2	Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Company.
6.3	Binding Effect of Decisions. The decision or action of the Plan Administrator with respect to any question arising out of or in connection with the administration, interpretation and application of the Agreement and the rules and regulations promulgated hereunder shall be final and conclusive and binding upon all persons having any interest in the Agreement.
6.4	Indemnity of Plan Administrator. The Company shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.
6.5	Company Information. To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the date and circumstances of the Disability, death, or, Separation from Service of the Executive and such other pertinent information as the Plan Administrator may reasonably require.
6.6	Annual Statement. The Plan Administrator shall provide to the Executive, within one hundred twenty (120) days after the end of each Plan Year, a statement setting forth the benefits to be distributed under this Agreement.

Article 7
Claims And Review Procedures

7.1 For all claims, the following procedures will apply:

7.1.1 Claims Procedure. Any individual (“Claimant”) who has not received benefits under this Agreement that he or she believes should be paid shall make a claim for such benefits as follows:

7.1.1.1	Initiation — Written Claim. The Claimant initiates a claim by submitting to the Company a written claim for the benefits.
7.1.1.2	Timing of Company Response. The Company shall respond to such
	Claimant within ninety (90) days after receiving the claim. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional ninety (90) days by notifying the Claimant in writing, prior to the end of the initial ninety (90) day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
7.1.1.3	Notice of Decision. If the Company denies part or all of the claim the Company shall notify the Claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth:

(a)	The specific reasons for the denial,
(b)	A reference to the specific provisions of this Agreement on which the denial is based,
(c)	A description of any additional information or material necessary for the Claimant to perfect the claim and an explanation of why it is needed,
(d)	An explanation of this Agreement’s review procedures and the time limits applicable to such procedures, and
(e)	A statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

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

7.1.2.1	Initiation — Written Request. To initiate the review, the Claimant, within 60 days after receiving the Company’s notice of denial must file with the Company a written request for review.
7.1.2.2	Additional Submissions — Information Access. The Claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Company shall also provide the Claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and

	other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits.
7.1.2.3	Considerations on Review. In considering the review, the Company shall take into account all materials and information the Claimant submits relating to the claim, without regard to whether such information was submitted or considered in the initial benefit determination.
7.1.2.4	Timing of Company Response. The Company shall respond in writing to such Claimant within 60 days after receiving the request for review. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the Claimant in writing, prior to the end of the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
7.1.2.5	Notice of Decision. The Company shall notify the Claimant in writing of its decision on review. The Company shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth:

(a)	The specific reasons for the denial,
(b)	A reference to the specific provisions of this Agreement on which the denial is based,
(c)	A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits, and
(d)	A statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).

Article 8
Amendments and Termination

8.1 Amendments. This Agreement may be amended only by a written agreement signed by the Company and the Executive. However, the Company may unilaterally amend this Agreement to conform with written directives to the Company from its auditors or banking regulators or to comply with legislative or tax law, including without limitation Section 409A of the Code and any and all regulations and guidance promulgated thereunder.

8.2 Plan Termination Generally. This Agreement may be terminated only by a written agreement signed by the Company and the Executive. However, the Company may unilaterally amend this Agreement to conform with written directives to the Company

from its auditors or banking regulators or to comply with legislative or tax law, including without limitation Section 409A of the Code and any and all regulations and guidance promulgated thereunder. The benefit shall be frozen as of the date the Agreement is terminated. Except as provided in Section 8.3, the termination of this Agreement shall not cause a distribution of benefits under this Agreement. Rather, upon such termination benefit distributions will be made at the earliest distribution event permitted under Article or Article 3.

8.3 Plan Terminations Under Section 409A. Notwithstanding anything to the contrary in Section 8.2, if the Company terminates this Agreement in the following circumstances:

(a)	Within thirty (30) days before, or twelve (12) months after a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company as described in Section 409A(2)(A)(v) of the Code, provided that all distributions are made no later than twelve (12) months following such termination of the Agreement and further provided that all the Company’s arrangements which are substantially similar to the Agreement are terminated so the Executive and all participants in the similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (12) months of the termination of the arrangements;
(b)	Upon the Company’s dissolution or with the approval of a bankruptcy court provided that the amounts deferred under the Agreement are included in the Executive’s gross income in the latest of (i) the calendar year in which the Agreement terminates; (ii) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the distribution is administratively practical; or
(c)	Upon the Company’s termination of this and all other non-account balance plans (as referenced in Section 409A of the Code or the regulations thereunder), provided that all distributions are made no earlier than twelve (12) months and no later than twenty-four (24) months following such termination, and the Company does not adopt any new non-account balance plans for a minimum of five (5) years following the date of such termination;

the Company may distribute the amount which the Company has accrued with respect to the Company’s obligations under Article 2 hereof, determined as of the date of the termination of the Agreement, to the Executive in a lump sum subject to the above terms.

Article 9
Miscellaneous

9.1 Binding Effect. This Agreement shall bind the Executive and the Company, and their beneficiaries, survivors, executors, administrators and transferees.

9.2	No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain as an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive. It also does not require the Executive to remain .an employee nor interfere with the Executive’s right to terminate employment at any time.
9.3	Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
9.4	Tax Withholding and Reporting. The Company shall withhold any taxes that are required to be withheld, including, but not limited to, taxes owed under Section 409A of the Code and regulations thereunder, from the benefits provided under this Agreement. The Executive acknowledges that the Company’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies). Further, the Company shall satisfy all applicable reporting requirements, including those under Section 409A of the Code and regulations thereunder.
9.5	Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Maryland, except to the extent preempted by the laws of the United States of America.
9.6	Unfunded Arrangement. The Executive and the Beneficiary are general unsecured creditors of the Company for the distribution of benefits under this Agreement. The benefits represent the mere promise by the Company to distribute such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive’s life or other informal funding asset is a general asset of the Company to which the Executive and Beneficiary have no preferred or secured claim.
9.7	Reorganization. The Company shall not merge or consolidate into or with another bank, or reorganize, or sell substantially all of its assets to another bank, firm, or person unless such succeeding or continuing bank, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement. Upon the occurrence of such event, the term “Company” as used in this Agreement shall be deemed to refer to the successor or survivor bank.
9.8	Entire Agreement. This Agreement constitutes the .entire agreement between the Company and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.
9.9	Interpretation. Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural.
9.10	Alternative Action. In the event it shall become impossible for the Company or the Plan Administrator to perform any act required by this Agreement, the Company or Plan

	Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Company, provided that such alternative acts do not violate Section 409A of the Code.
9.11	Headings. Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.
9.12	Validity. In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal And invalid provision has never been inserted herein.
9.13	Notice. Any notice or filing required or permitted to be given to the Company or Plan Administrator under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

Community Bank of Tri-County
P.O. Box 38
Waldorf, MD 20601

Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.

Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered, or sent by mail, to the last known address of the Executive.

9.14 Compliance with Section 409A. This Agreement shall at all times be administered and the provisions of this Agreement shall be interpreted consistent with the requirements of Section 409A of the Code and any and all regulations thereunder, including such regulations as may be promulgated after the Effective Date, of this Agreement.

     IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Company have signed this Agreement.

EXECUTIVE:	COMPANY:
	COMMUNITY BANK OF TRI-COUNTY
/s/ Gregory C. Cockerham	By: /s/ Michael Middleton
Gregory C. Cockerham	Title: President

þ New Designation

o Change in Designation

I, GREGORY C. COCKERHAM, designate the following as Beneficiary under this Agreement.

Primary:
	%
	%
Contingent:
	%
	%

Notes:

§	Please PRINT CLEARLY or TYPE the names of the beneficiaries
§	To name a trust as Beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.
§	To name your estate as Beneficiary, please write “Estate of [your name]”.
§	Be aware that none of the contingent beneficiaries will receive anything unless ALL of the primary beneficiaries predecease you.

I understand that I may change these beneficiary designations by delivering a new written designation to the Plan Administrator, which shall be effective only upon receipt and acknowledgment by the Plan Administrator prior to my death. I further understand that the designations will be automatically revoked if the Beneficiary predeceases me, or, if I have name my spouse as Beneficiary and our marriage is subsequently dissolved.

Name:
Signature:	Date:

Received by the Plan Administrator this                      day of                                         , 2006

By:

Title:

SCHEDULE A
COMMUNITY BANK OF TRI-COUNTY
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT

Gregory C. Cockerham

							Change in
			Early				Control
			Termination		Disability		Annual		Preretirement
			Annual Benefit		Annual		Benefit		Annual Death
Date	Age		(1)		Benefit (1)		(1)		Benefit (2)
12/31/2006		52	$	501	$	501	$	2,562	$	4,800
12/31/2007		53	$	973	$	973	$	2,693	$	4,800
12/31/2008		54	$	1,418	$	1,418	$	2,831	$	4,800
12/31/2009		55	$	1,836	$	1,836	$	2,976	$	4,800
12/31/2010		56	$	2,231	$	2,231	$	3,128	$	4,800
12/31/2011		57	$	2,602	$	2,602	$	3,288	$	4,800
12/31/2012		58	$	2,952	$	2,952	$	3,456	$	4,800
12/31/2013		59	$	3,282	$	3,282	$	3,633	$	4,800
12/31/2014		60	$	3,592	$	3,592	$	3,819	$	4,800
12/31/2015		61	$	3,885	$	3,885	$	4,014	$	4,800
12/31/2016		62	$	4,160	$	4,160	$	4,220	$	4,800
12/31/2017		63	$	4,420	$	4,420	$	4,435	$	4,800
12/31/2018		64	$	4,664	$	4,664	$	4,662	$	4,800
7/24/2019(3)		65	$	4,800	$	4,800	$	4,800	$	4,800

(1)	Payments are made in 180 equal monthly installments commencing with later of (a) the seventh month after the Executive’s Separation from Service, or (b) the month immediately after the month in which the Executive attains the Normal Retirement Age. Refer to Section 2.2 for Early Termination, 2.3 for Disability, and 2.4 for Change in Control.
(2)	Payments are made in 180 equal monthly installments commencing the first day of the month following receipt by the Company of the Executive’s death certificate. Refer to Section 3.1 for Death.
(3)	This is the day the Executive reaches his Normal Retirement Age.

EX-10.2

Exhibit 10.2

COMMUNITY BANK OF TRI-COUNTY
SALARY CONTINUATION AGREEMENT

     THIS SALARY CONTINUATION AGREEMENT (the “Agreement”) is adopted this 21^st day of August, 2006, by and between COMMUNITY BANK OF TRI-COUNTY, a state-chartered commercial bank located in Waldorf, Maryland (the “Company”) and WILLIAM J. PASENELLI (the “Executive”).

     The purpose, of this Agreement is to provide specified benefits to the Executive, a member of a select group of management or highly compensated employees who contribute materially to the continued growth, development, and future business success of the Company. This Agreement shall be unfunded for tax purposes and for purposes of Title I of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended from time to time.

Article 1
Definitions

     Whenever used in this Agreement, the following words and phrases shall have the meanings specified:

1.1 “Beneficiary” means each designated person, or the estate of the deceased Executive, entitled to benefits, if any, upon the death of the Executive determined pursuant to Article 4.

1.2 “Beneficiary Designation Form” means the form established from time to time by the Plan Administrator that the Executive completes, signs, and returns to the Plan Administrator to designate one or more Beneficiaries.

1.3 “Board” means the Board of Directors of the Company as from time to time constituted.

1.4 “Change in Control” shall mean the occurrence of any of the following events:

(a) Individuals who, on the date of this Agreement, constitute the Board of Directors of the Company (the “Incumbent Directors”) cease for any reason to constitute at least half of the Board of Directors of the Company, provided that any person becoming a director subsequent to such time, whose election or nomination for election was approved by a vote of at least two-thirds (2/3) of the Incumbent Directors then on the Board of Directors of the Company (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board of Directors of the Company shall be deemed to be an Incumbent Director;

(b) any “person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”) and as used in Sections 13(d)(3) and 14(d)(2 ) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board of Directors of the Company (the “Company Voting Securities”); provided, however, that the event described in this paragraph (b) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (1) by the Company or any subsidiary, (2) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary, (3) by any underwriter temporarily holding securities pursuant to an offering of such securities or (4) a transaction (other than one described in (c) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approve a resolution providing expressly that the acquisition pursuant to this clause (4) does not constitute a Change in Control under this paragraph (b);

(c) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (1) at least 50% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by the Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among (and only among) the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (2) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation) is or becomes the beneficial owner, directly or indirectly, of 25% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (3) at least 50% of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Company Board’s approval of the execution of the initial agreement providing for such Business Combination; or

(d) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company’s assets.

Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 25% of Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.

1.5	“Code” means the Internal Revenue Code of 1986, as amended.
1.6	“Corporation” means the Tri-County Financial Corporation.
1.7	“Disability” means the Executive’s (i) inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months; or (ii) receipt of disability benefits for a period of 3 months under an accident and health plan of the employer by reason of the participant’s medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months.
1.8	“Early Termination” means Separation from Service before Normal Retirement Age except when such Separation from Service occurs: (i) within twelve (12) months following a Change in Control; or (ii) due to death, Disability, or Termination for Cause.
1.9	“Effective Date” means January 1, 2006.
1.10	“Normal Retirement Age” means the Executive attaining age sixty-five (65).
1.11	“Normal Retirement Date” means the date of the Executive’s Separation from Service on or after attaining Normal Retirement Age.
1.12	“Plan Administrator” means the plan administrator described in Article 6.
1.13	“Plan Year” means each twelve-month period commencing on January 1st and ending on December 31st of each year. The initial Plan Year shall commence on the Effective Date of this Agreement and end on the following December 31st.
1.14	“Schedule A” means the schedule attached to this Agreement and made a part hereof. Schedule A shall be updated upon a change in any of the benefits under Articles 2 or 3.

1.15 “Separation from Service” means the termination of the Executive’s employment with the Company for reasons other than death (except as provided in Section 1.8). Whether a Separation from Service takes place is determined based on the facts and circumstances surrounding the termination of the Executive’s employment and whether the Company and the Executive intended for the Executive to provide significant services for the Company, following such termination. A termination of employment will not be considered a Separation from Service if:

(a)

the Executive continues to provide services as an employee of the Company at an annual rate that is twenty percent (20%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or, if employed less than three years, such lesser period) and the annual remuneration for such services is twenty percent (20%) or more of the average annual remuneration earned during the final three full calendar years of employment (or, if less, such lesser period), or

(b)

the Executive continues to provide services to the Company in a capacity other than as an employee of the Company at an annual rate that is fifty percent (50%) or more of the services rendered, on average, during the immediately preceding three full calendar years of employment (or if employed less than three years, such lesser period) and the annual remuneration for such services is fifty percent (50%) or more of the average annual remuneration earned during the final three full calendar years of employment (or if less, such lesser period).

1.16 “Specified Employee” means a key employee (as defined in Section 416(i) of the Code without regard to paragraph 5 thereof) of the Company if any stock of the Company is publicly traded on an established securities market or otherwise.

1.17 “Termination for Cause” shall have the meaning set forth in Article 5.

Article 2
Distributions During Lifetime

2.1 Normal Retirement Benefit. Upon Separation from Service on or after the Normal Retirement Date, the Company shall distribute to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Article.

2.1.1 Amount of Benefit. The annual benefit under this Section 2.1 is Eighteen Thousand One Hundred Dollars ($18,100), payable for a period of fifteen (15) years and resulting in a total benefit of Two Hundred Seventy-One Thousand Five Hundred Dollars ($271,500). The Company’s Board of Directors, in its sole discretion, through a duly adopted resolution, may increase the annual benefit under this Section prior to the Executive’s Separation from Service.

2.1.2 Distribution of Benefit. The Company shall distribute the benefit to the Executive in one hundred eighty (180) consecutive equal monthly installments, commencing on the first day of the month following Separation from Service.

2.2 Early Termination Benefit. Upon Early Termination, the Company shall distribute to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Article.

2.2.1	Amount of Benefit. The benefit under this Section 2.2 is the Early Termination Benefit set forth on Schedule A for the Plan Year ending prior to Separation from Service.
2.2.2	Distribution of Benefit. The Company shall distribute the benefit to the Executive in one hundred eighty (180) consecutive equal monthly installments commencing the first day of the month following the Executive attaining Normal Retirement Age.

2.3 Disability Benefit. If the Executive experiences a Disability which results in a Separation from Service prior to Normal Retirement Age, the Company shall distribute to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Article.

2.3.1	Amount of Benefit. The benefit under this Section 2.3 is the Normal Retirement Benefit amount described in Section 2.1.1.
2.3.2	Distribution of Benefit. The Company shall distribute the benefit to the Executive in one hundred eighty (180) consecutive equal monthly installments commencing the first day of the month following the Executive attaining Normal Retirement Age.

2.4 Change in Control Benefit. Upon a Change in Control, followed within twelve (12) months by a Separation from Service, the Company shall distribute to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Article.

2.4.1	Amount of Benefit. The benefit under this Section 2.4 is the Normal Retirement Benefit amount described in Section 2.1.1.
2.4.2	Distribution of Benefit. The Company shall distribute the benefit to the Executive in one hundred eighty (180) consecutive equal monthly installments commencing the first day of the month following the Executive attaining Normal Retirement Age.

2.5 Restriction on Timing of Distribution. Notwithstanding any provision of this: Agreement to the contrary, if the Executive is considered a Specified Employee at Separation from Service under such procedures as established by the Company in accordance with Section 409A of the Code, benefit distributions that are made upon Separation from Service may not commence earlier than six (6) months after the date of such Separation from Service. Therefore, in the event this Section 2.5 is applicable to the Executive, any distribution which would otherwise be paid to the Executive within the first six months following the Separation from Service shall be accumulated and paid to the Executive in a lump sum on the first day of the seventh month following the Separation from Service. All subsequent distributions shall be paid in the manner specified under this Article II of the Plan with respect to the applicable benefit.

2.6 Distributions Upon Income Inclusion Under Section 409A of the Code. Upon the inclusion of any amount into the Executive’s income as a result of the failure of this non-qualified deferred compensation plan to comply with the requirements of Section 409A of the Code, to the extent such tax liability can be covered by the amount which the Company has accrued with respect to the obligations described in this Article 2, a distribution shall be made as soon as is administratively practicable following the discovery of the plan failure.

2.7 Change in Form or Timing of Distributions. For -distribution of benefits under this Article 2, the Executive and the Company may, subject to the terms of Section 8.1, amend the Agreement to delay the timing or change the form of distributions. Any such amendment:

(a)	may not accelerate the time or schedule of any distribution, except as provided in Section 409A of the Code and the Regulations thereunder;
(b)	must, for benefits distributable under Section 2.2, 2.3 and 2.4, be made at least twelve (12) months prior to the first scheduled distribution;
(c)	must, for benefits distributable under Sections 2.1, 2.2, 2.3 and 2.4, delay the commencement of distributions for a minimum of five (5) years from the date the first distribution was originally scheduled to be made; and
(d)	must take effect not less than twelve (12) months after the amendment is made.

Article 3
Distribution at Death

3.1 Death During Active Service. If the Executive dies before Separation from Service and prior to Normal Retirement Age, the Company shall distribute to the Beneficiary the benefit described in this Section 3.1. This benefit shall be distributed in lieu of the benefits under Article 2.

3.11 Amount of Benefit. The benefit under this Section 3.1 is the Normal Retirement Benefit amount described in Section 2.1.1.

3.1.2 Distribution of Benefit. The Company shall distribute the benefit to the Beneficiary in one hundred eighty (180) consecutive equal monthly installments for commencing the first day of the month following receipt by the Company of the Executive’s death certificate.

3.2 Death During Distribution of a Benefit. If the Executive dies after any benefit distributions have commenced under this Agreement but before receiving all such distributions, the Company shall distribute to the Beneficiary the remaining benefits at the same time and in the same amounts that would have been distributed to the Executive had the Executive survived.

3.3 Death After Separation from Service But Before Benefit Distributions Commence. If the Executive is entitled to benefit distributions under this Agreement, but dies prior to the commencement of said benefit distributions, the Company shall distribute to the Beneficiary the same benefits that the Executive was entitled to prior to death except that the benefit distributions shall commence within thirty (30) days following receipt by the Company of the Executive’s death certificate.

Article 4
Beneficiaries

4.1 Beneficiary. The Executive shall have the right, at any time, to designate a Beneficiary to receive any benefit distributions under this Agreement upon the death of the Executive. The Beneficiary designated under this Agreement may be the same as or different from the beneficiary designation under any other plan of the Company in which the Executive participates.

4.2 Beneficiary Designation: Change. The Executive shall designate a Beneficiary by completing and signing the Beneficiary Designation Form, and delivering it to the Plan Administrator or its designated agent. The Executive’s beneficiary designation shall be deemed automatically revoked if the Beneficiary predeceases the Executive or if the Executive names a spouse as Beneficiary and the marriage is subsequently dissolved. The Executive shall have the right to change a Beneficiary by completing, signing and otherwise complying with the terms of the Beneficiary Designation Form and the Plan Administrator’s rules and procedures, as in effect from time to time. Upon the acceptance by the Plan Administrator of a new Beneficiary Designation Form, all Beneficiary designations previously filed shall be cancelled. The Plan Administrator shall be entitled to rely on the last Beneficiary Designation Form filed by the Executive and accepted by the Plan Administrator prior to the Executive’s death.

4.3 Acknowledgment. No designation or change in designation of a Beneficiary shall be effective until received, accepted and acknowledged in writing by the Plan Administrator or its designated agent.

4.4 No Beneficiary Designation. If the Executive dies without a valid beneficiary designation, or if all designated Beneficiaries predecease the Executive, then the Executive’s spouse shall be the designated Beneficiary. If the Executive has no surviving spouse, the benefits shall be made to the personal representative of the Executive’s estate.

4.5 Facility of Distribution. If the Plan Administrator determines in its discretion that a benefit is to be distributed to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Executive and the Executive’s Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such distribution amount.

Article 5
General Limitations

5.1 Termination for Cause. Notwithstanding any provision of this Agreement to the contrary, the Company shall not pay any benefit under this Agreement if the Company terminates the Executive’s employment for Cause. Cause shall mean a good faith determination of the Company’s Board of Directors that the Executive has: (a) engaged in acts of personal dishonesty which have resulted in loss to the Company, or one of its affiliates, (b) intentionally failed to perform stated duties, (c) committed a willful violation of any law, rule, regulation (other than traffic violations or similar offenses), (d) become subject to the entry of a final cease and desist order which results in substantial loss to the Company or one of its affiliates, (e) been convicted of a crime or act involving moral turpitude, (f) willfully breached the Company’s code of conduct and business ethics, (g) been disqualified or barred by any governmental or self regulatory authority from serving in the Executive’s then-current employment capacity or (h) willfully attempted to obstruct or failed to cooperate with any investigation authorized by the Board of Directors or any governmental or self regulatory entity. No act or failure to act on the part of the Executive shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board of Directors, or upon the advice of legal counsel for the Company, shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company.

5.2 Suicide or Misstatement. No benefits shall be distributed if the Executive commits suicide within three years after the Effective Date of this Agreement, or if an insurance company which issued a life insurance policy covering the Executive and owned by the

	Company denies coverage (i) for material misstatements of fact made by the Executive on an application for such life insurance, or (ii) for any other reason.
5.3	Required Regulatory Provision. No payments will be made under this Agreement that would violate of 12 U.S.C. Sec. 1828(k) or 12 U.S.C. Sec. 1818(e) or any regulation promulgated thereunder.

Article 6
Administration of Agreement

6.1 Plan Administrator Duties. This Agreement shall be administered by a Plan Administrator which shall consist of the Board, or such committee or person(s) as the Board shall appoint. The Plan Administrator shall administer this Agreement according to its express terms and shall also have the discretion and authority to (i) make, amend, interpret and enforce all appropriate rules and regulations for the administration of this Agreement and (ii) decide or resolve any and all questions including interpretations of this Agreement, as may arise in connection with the Agreement to the extent the exercise of such discretion and authority does not conflict with Section 409A of the Code and regulations thereunder.

6.2 Agents. In the administration of this Agreement, the Plan Administrator may employ agents and delegate to them such administrative duties as it sees fit, (including acting through a duly appointed representative), and may from time to time consult with counsel who may be counsel to the Company.

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

6.4 Indemnity of Plan Administrator. The Company shall indemnify and hold harmless the members of the Plan Administrator against any and all claims, losses, damages, expenses or liabilities arising from any action or failure to act with respect to this Agreement, except in the case of willful misconduct by the Plan Administrator or any of its members.

6.5 Company Information. To enable the Plan Administrator to perform its functions, the Company shall supply full and timely information to the Plan Administrator on all matters relating to the date and circumstances of the Disability, death, or Separation from Service of the Executive and such other pertinent information as the Plan Administrator may reasonably require.

6.6 Annual Statement. The Plan Administrator shall provide to the Executive, within one hundred twenty (120) days after the end of each Plan Year, a statement setting forth the benefits to be distributed under this Agreement.

Article 7
Claims And Review Procedures

7.1.1 Claims Procedure. Any individual (“Claimant”) who has not received benefits under this Agreement that he or she believes should be paid shall make a claim for such benefits as follows:

7.1.1.1	Initiation — Written Claim. The Claimant initiates a claim by submitting to the Company a written claim for the benefits.
7.1.1.2	Timing of Company Response. The Company shall respond to such Claimant within ninety (90) days after receiving the claim. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional ninety (90) days by notifying the Claimant in writing, prior to the end of the initial ninety (90) day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
7.1.1.3	Notice of Decision. If the Company denies part or all of the claim, the Company shall notify the Claimant in writing of such denial. The Company shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth:

(a)	The specific reasons for the denial,
(b)	A reference to the specific provisions of this Agreement on which the denial is based,
(c)	A description of any additional information or material necessary for the Claimant to perfect the claim and an explanation of why it is needed,
(d)	An explanation of this Agreement’s review procedures and the time limits applicable to such procedures, and
(e)	A statement of the Claimant’s right to bring a civil action under ERISA Section 502(a) following an adverse benefit determination on review.

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

7.1.2.1 Initiation — Written Request. To initiate the review, the Claimant, within 60 days after receiving the Company’s notice of denial, must file with the Company a written request for review.

7.1.2.2	Additional Submissions — Information Access, The Claimant shall then have the opportunity to submit written comments, documents, records and other information relating to the claim. The Company shall also provide the Claimant, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits.
7.1.2.3	Considerations on Review. In considering the review, the Company shall take into account all materials and information the Claimant submits relating to the claim, without regard to whether such information was submitted or considered the initial benefit determination:
7.1.2.4	Timing of Company Response. The Company shall respond in writing to such Claimant within 60 days after receiving the request for review. If the Company determines that special circumstances require additional time for processing the claim, the Company can extend the response period by an additional 60 days by notifying the Claimant in writing, prior to the end the initial 60-day period, that an additional period is required. The notice of extension must set forth the special circumstances and the date by which the Company expects to render its decision.
7.1.2.5	Notice of Decision. The Company shall notify the Claimant in writing of its decision on review. The Company shall write the notification in a manner calculated to be understood by the Claimant. The notification shall set forth:

(a)	The specific reasons for the denial,
(b)	A reference to the specific provisions of this Agreement on which the denial is based,
(c)	A statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant (as defined in applicable ERISA regulations) to the Claimant’s claim for benefits, and
(d)	A statement of the Claimant’s right to bring a civil action under ERISA Section 502(a).

Article 8
1 Amendments and Termination

8.1 Amendments. This Agreement may be amended only by a written agreement signed by the Company and the Executive. However, the Company may unilaterally amend this Agreement to conform with written directives to the Company from its auditors or banking regulators or to comply with legislative or tax law, including without limitation Section 409A of the Code and any and all regulations and -guidance promulgated thereunder.

8.2 Plan Termination Generally. This Agreement may be terminated only by a written agreement signed by the Company and the Executive. However, the Company may unilaterally amend this Agreement to conform with written directives to the Company from its auditors or banking regulators or to comply with legislative or tax law, including without limitation Section 409A of the Code and any and all regulations and guidance promulgated thereunder. The benefit shall be frozen as of the date the Agreement is terminated. Except as provided in Section 8.3, the termination of this Agreement shall not cause a distribution of benefits under this Agreement. Rather, upon such termination benefit distributions will be made at the earliest distribution event permitted under Article 2 or Article 3.

8.3 Plan Terminations Under Section 409A. Notwithstanding anything to the contrary in Section 8.2, if the Company terminates this Agreement in the following circumstances:

(a)	Within thirty (30) days before, or twelve (12) months after a change in the ownership or effective control of the Company, or in the ownership of a substantial portion of the assets of the Company as described in Section 409A(2)(A)(v) of the Code, provided that all distributions are made no later than twelve (12) months following such termination of the Agreement and further provided that all the Company’s arrangements which are substantially similar to the Agreement are terminated so the Executive and all participants in the similar arrangements are required to receive all amounts of compensation deferred under the terminated arrangements within twelve (l 2) months of the termination of the arrangements;
(b)	Upon the Company’s dissolution or with the approval of a bankruptcy court provided that the amounts deferred under the Agreement are included in the Executive’s gross income in the latest of (i) the calendar year in which the Agreement terminates; (ii) the calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (iii) the first calendar year in which the distribution is administratively practical; or
(c)	Upon the Company’s termination of this and all other non-account balance plans (as referenced in Section 409A of the Code or the regulations thereunder), provided that all distributions are made no earlier than twelve (12) months and no later than twenty-four (24) months following such termination, and the Company does not adopt any new non-account balance plans for a minimum of five (5) years following the date of such termination;

the Company may distribute the amount which the company has accrued with respect to the Company’s obligations under Article 2 hereof, determined as of the date of the termination of the Agreement, to the Executive in a lump sum subject to the above terms.

Article 9
Miscellaneous

9.1	Binding Effect. This Agreement shall bind the Executive and the Company, and their
	beneficiaries, survivors, executors, administrators and transferees.
9.2	No Guarantee of Employment. This Agreement is not a contract for employment. It does not give the Executive the right to remain as an employee of the Company, nor does it interfere with the Company’s right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the Executive’s right to terminate employment at any time.
9.3	Non-Transferability. Benefits under this Agreement cannot be sold, transferred, assigned, pledged, attached or encumbered in any manner.
9.4	Tax Withholding and Reporting. The Company shall withhold any taxes that are required to be withheld, including, but not limited to, taxes owed under Section 409A of the Code and regulations thereunder, from the benefits provided under this Agreement. The Executive acknowledges that the Company’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies). Further, the Company shall satisfy all applicable reporting requirements, including those under Section 409A of the Code and regulations thereunder.
9.5	Applicable Law. The Agreement and all rights hereunder shall be governed by the laws of the State of Maryland, except to the extent preempted by the laws of the United States of America.
9.6	Unfunded Arrangement. The Executive and the Beneficiary are general unsecured creditors of the Company for the distribution of benefits under this Agreement. The benefits represent the mere promise by the Company to distribute such benefits. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors. Any insurance on the Executive’s life or other informal funding asset is a general asset of the Company to which the Executive and Beneficiary have no preferred or secured claim.
9.7	Reorganization. The Company shall not merge or consolidate into or with another bank, or reorganize, or sell substantially all of its assets to another bank, firm, or person unless such succeeding or continuing bank, firm, or person agrees to assume and discharge the obligations of the Company under this Agreement. Upon the occurrence of such event, the term “Company” as used in this Agreement shall be deemed to refer to the successor or survivor bank.
9.8	Entire Agreement. This Agreement constitutes the entire agreement between the Company, and the Executive as to the subject matter hereof. No rights are granted to the Executive by virtue of this Agreement other than those specifically set forth herein.

9.9	Interpretation. Wherever the fulfillment of the intent and purpose of this Agreement requires, and the context will permit, the use of the masculine gender includes the feminine and use of the singular includes the plural.
9.10	Alternative Action. In the event it shall become impossible for the Company or the Plan Administrator to perform any act required by this Agreement, the Company or Plan Administrator may in its discretion perform such alternative act as most nearly carries out the intent and purpose of this Agreement and is in the best interests of the Company, provided that such alternative acts do not violate Section 409A of the Code.
9.11	Heading. Article and section headings are for convenient reference only and shall not control or affect the meaning or construction of any of its provisions.
9.12	Validity. In case any provision of this Agreement shall be illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining parts hereof, but this Agreement shall be construed and enforced as if such illegal and invalid provision has never been inserted herein.
9.13	Notice. Any notice or filing required or permitted to be given to the Company or Plan Administrator under this Agreement shall be sufficient if in writing and hand-delivered, or sent by registered or certified mail, to the address below:

Community Bank of Tri-County P.O. Box 38

Waldorf, MD 20601

	Such notice shall be deemed given as of the date of delivery or, if delivery is made by mail, as of the date shown on the postmark on the receipt for registration or certification.
	Any notice or filing required or permitted to be given to the Executive under this Agreement shall be sufficient if in writing and hand-delivered; or sent by mail, to the last known address of the Executive.
9.14	Compliance with Section 409A. This Agreement shall at all times be administered and the provisions of this Agreement shall be interpreted consistent with the requirements of Section 409A of the Code and any and all regulations thereunder, including such regulations as may be promulgated after the Effective Date of this Agreement.

     IN WITNESS WHEREOF, the Executive and a duly authorized representative of the Company have signed this Agreement.

EXECUTIVE:	COMPANY:
	COMMUNITY BANK OF TRI-COUNTY
/s/ William J. Pasenelli	By	/s/ Michael L. Middleton
William J. Pasenelli
	Title	President

BENEFICIARY DESIGNATION FORM

þ New Designation
o Change in Designation

I, WILLIAM J. PASENELLI, designate the following as Beneficiary under the Agreement:

Primary:

Contingent:

Notes:

• Please PRINT CLEARLY or TYPE the names of the beneficiaries.

• To name a trust as Beneficiary, please provide the name of the trustee(s) and the exact name and date of the trust agreement.

• To name your estate as Beneficiary, please write “Estate of [your name].”

• Be aware that none of the contingent beneficiaries will receive anything unless ALL of the primary beneficiaries predecease you.

I understand that I may change these beneficiary designations by delivering a new written designation to the Plan Administrator, which shall be effective only upon receipt and acknowledgment by the Plan Administrator prior to my death. I further understand that the designations will be automatically revoked if the Beneficiary predeceases me, or, if I have named my spouse as Beneficiary and our marriage is subsequently dissolved.

Name:
Signature:	Date:

Received by the Plan Administrator this                      day of                                         , 2006

By:

Title:

SCHEDULE A
COMMUNITY BANK OF TRI-COUNTY
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AGREEMENT

William J. Pasenelli

							Change in		Preretirement
			Early Termination		Disability Annual		Control Annual		Annual Death
Date	Age		Annual Benefit (1)		Benefit (1)		Benefit (1)		Benefit (2)
12/31/2006		48	$	1,624	$	1,624	$	7,979	$	18,100
12/31/2007		49	$	3,154	$	3,154	$	8,387	$	18,100
12/31/2008		50	$	4,595	$	4,595	$	8,816	$	18,100
12/31/2009		51	$	5,952	$	5,952	$	9,267	$	18,100
12/31/2010		52	$	7,231	$	7,231	$	9,741	$	18,100
12/31/2011		53	$	8,435	$	8,435	$	10,240	$	18,100
12/31/2012		54	$	9,569	$	9,569	$	10,764	$	18,100
12/31/2013		55	$	10,637	$	10,637	$	11,314	$	18,100
12/31/2014		56	$	11,644	$	11,644	$	11,893	$	18,100
12/31/2015		57	$	12,592	$	12,592	$	12,502	$	18,100
12/31/2016		58	$	13,484	$	13,484	$	13,141	$	18,100
12/31/2017		59	$	14,325	$	14,325	$	13,813	$	18,100
12/31/2018		60	$	15,117	$	15,117	$	14,520	$	18,100
12/31/2019		61	$	15,863	$	15,863	$	15,263	$	18,100
12/31/2020		62	$	16,566	$	16,566	$	16,044	$	18,100
12/31/2021		63	$	17,228	$	17,228	$	16,865	$	18,100
12/31/2022		64	$	17,851	$	17,851	$	17,728	$	18,100
5/29/2023(3)		65	$	18,100	$	18,100	$	18,100	$	18,100

(1)	Payments are made in 180 equal monthly installments commencing with later of (a) the seventh month after the Executive’s Separation from Service, or (b) the month immediately after the month in which the Executive attains the Normal Retirement Age. Refer to Section 2.2 for Early Termination, 2.3 for Disability, and 2.4 for Change in Control.
(2)	Payments are made in 180 equal monthly installments commencing the first day of the month following receipt by the Company of the Executive’s death certificate. Refer to Section 3.1 for Death.
(3)	This is the date the Executive reaches his Normal Retirement Age.

EX-10.3

Exhibit 10.3

EMPLOYMENT AGREEMENT

     AGREEMENT made as of September 6, 2006 (this “Agreement”), by and between TRI-COUNTY FINANCIAL CORPORATION, with its principal place of business at 3035 Leonardtown Road, Waldorf, Maryland 20601 (the “Company”), and MICHAEL L. MIDDLETON (the “Executive”).

     WHEREAS, the Company desires to continue to provide for the Executive’s employment by the Company.

     NOW THEREFORE, in consideration of the mutual covenants contained herein, the Company and the Executive agree as follows:

     1. EMPLOYMENT. The Executive shall serve the Company as President and Chief Executive Officer. In such positions, the Executive shall have the duties, responsibilities, functions, and authority determined and designated from time to time by the Board of Directors of the Company. The Executive also agrees to serve as an officer of one or more Company affiliates upon such designation. The Executive shall render such administrative and management services to the Company and its affiliates as are customarily performed by persons in a similar executive capacity.

     2. EFFECTIVE DATE AND TERM. The Company agrees to employ the Executive for an initial period of five (5) years beginning on the date first above written (the “Effective Date”) and ending on the day before the fifth (5^th) anniversary of the Effective Date, and during the period of any additional extensions described below in this Section 2 (the “Term of Employment”). The parties intend that, at any point in time during the Executive’s employment hereunder, the then-remaining Term of Employment shall be five (5) years. On the day after the Effective Date and on each day thereafter, the Term of Employment shall be extended by one day, such that on any date the Term of Employment will expire on the day before the fifth (5^th) anniversary of such date. These extensions shall continue unless: (i) the Company gives notice to the Executive that it has elected to discontinue the extensions; (ii) the Executive gives notice to the Company that the Executive has elected to discontinue the extensions; or (iii) the Executive’s employment with the Company is terminated, whether by resignation, Disability (as provided in Section 12.1), discharge or otherwise. On the earlier of (i) the date on which such a notice is deemed given or (ii) the effective date of a termination of the Executive’s employment with the Company, the Term of Employment shall be converted to a fixed period of five (5) years ending on the day before the fifth (5^th) anniversary of such date (provided, however, that, subject to any rights of the Executive under this Agreement, the Term of Employment shall terminate on such earlier date as may be specifically provided in this Agreement in the event of the Executive’s death, Retirement, Voluntary Termination or Termination for Just Cause or Termination Without Cause). The last day of such term, as so extended from time to time, is herein sometimes referred to as the “Expiration Date.”

     3. COMPENSATION AND BENEFITS. The compensation and benefits payable to the Executive under this Agreement shall be as follows, it being understood that (i) references to benefits offered by, or to officers of, the Company are intended to include benefits offered by, or to officers of, any affiliate of the Company which employs the Executive and (ii) payments or benefits required to be provided by the Company may be provided by an affiliate:

3.1 SALARY. For all services rendered by the Executive to the Company and its affiliates, the Executive shall be entitled to receive a base salary at an annual rate not less than the Executive’s base salary as in effect on the Effective Date, subject to increase from time to time in accordance with the usual practices of the Company with respect to

review of compensation of its senior executives. Any increase in the Executive’s base salary shall become the “base salary” for purposes of this Agreement. The Executive’s base salary shall be payable in periodic installments in accordance with the Company’s usual practice for its senior executives.

3.2 EMPLOYEE BENEFITS. The Executive shall also be entitled to participate in any and all employee benefit plans, medical insurance plans, disability income plans, retirement plans, bonus incentive plans, and other benefit plans from time to time in effect for senior executives of the Company. Such participation shall be subject to (i) the terms of the applicable plan documents, (ii) generally applicable policies of the Company and (iii) the discretion of the Board or any administrative or other committee provided for in, or contemplated by, such plans.

3.3 INCENTIVE COMPENSATION. The Executive shall be eligible to participate in any incentive compensation or bonus program sponsored by the Company on such terms as the Board of Directors of the Company may establish for the Executive’s participation.

3.4 BUSINESS EXPENSES. The Company shall provide for, or reimburse, the Executive’s reasonable travel and other business expenses (including, without limitation, automobile and cellphone expenses) incurred by the Executive in the performance of the Executive’s duties and responsibilities, subject to such reasonable requirements with respect to substantiation and documentation as may be specified by the Company.

3.5 LEAVE. The Executive shall be entitled to leave (vacation, sick and personal) in accordance with the Company’s standard policies for senior executives; provided, however, that the Executive shall receive not less than four (4) weeks vacation leave during each calendar year.

3.6 GENERAL. Nothing paid to the Executive under any plan, policy or arrangement currently in effect or made available in the future shall be deemed to be in lieu of other compensation to the Executive as described in this Agreement.

3.7 OTHER EMPLOYEE BENEFITS. Executive shall be entitled to participate in any compensatory plans, arrangements or programs the Company makes available to its senior executive officers, including, but not limited to, stock compensation programs, supplemental retirement arrangements, or executive health or life insurance programs, subject to, and on a basis consistent with, the terms and conditions of such plans, arrangements or programs. The Executive’s participation in such plans, arrangements or programs shall not be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement.

     4. EXTENT OF SERVICE. During the Term of Employment, the Executive shall devote the Executive’s full time, best efforts and business judgment, skill and knowledge to the advancement of the Company’s interests and to the discharge of the Executive’s duties and responsibilities hereunder. The Executive shall not engage in any other business activity, except as may be approved by the Board; provided, however, that nothing herein shall be construed as preventing the Executive from:

(a) investing the Executive’s assets in such form or manner as shall not require any material services on the Executive’s part in the operations or affairs of the companies or the other entities in which such investments are made, provided that the Executive may not own any interest in any

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entity that competes with the Company or any affiliate (other than up to 4.9% of the outstanding voting stock of such an entity that is a publicly traded entity); or

(b) serving on the board of directors of any company not in competition with the Company or any affiliate, provided that the Executive shall not render any material services with respect to the operations or affairs of any such company; or

(c) engaging in religious, charitable or other community or non-profit activities which do not impair the Executive’s ability to fulfill his duties and responsibilities under this Agreement.

     5. TERMINATION UPON DEATH. In the event of the Executive’s death during the Term of Employment, the Executive’s employment (and the Term of Employment) shall terminate on the date of the Executive’s death. The Company shall pay to the Executive’s beneficiary, designated in writing to the Company prior to the Executive’s death (or to the Executive’s estate, if the Executive fails to make such designation), (i) any base salary or other compensation earned through the date of death, plus (ii) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Company in which the Executive participated as of his date of death.

6. DISCHARGE FOR CAUSE.

     6.1 NOTICE AND DETERMINATION OF CAUSE. The Company may terminate the Executive’s employment during the Term of Employment for Just Cause. Such termination shall be deemed to have occurred for Just Cause only if:

     (a) the Board of Directors of the Company, by a separate affirmative vote of at least three-fourths (³/4) of the entire membership, determines that the Executive has (i) engaged in acts of personal dishonesty which have resulted in loss to the Company, or one of its affiliates, (ii) intentionally failed to perform stated duties, (iii) committed a willful violation of any law, rule, regulation (other than traffic violations or similar offenses), (iv) become subject to the entry of a final cease and desist order which results in substantial loss to the Company or one of its affiliates, (v) been convicted of a crime or act involving moral turpitude, (vi) willfully breached the Company’s code of conduct and business ethics, (vii) been disqualified or barred by any governmental or self-regulatory authority from serving in the Executive’s then-current employment capacity or (viii) willfully attempted to obstruct or failed to cooperate with any investigation authorized by the Board of Directors or any governmental or self-regulatory entity. No act or failure to act on the part of the Executive shall be considered “willful” unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board of Directors, or upon the advice of legal counsel for the Company, shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company; and

     (b) at least ten (10) days prior to the vote contemplated by Section 6.1(a), the Company has provided the Executive with notice of intent of the Company to discharge the Executive for Just Cause, detailing with particularity the facts and circumstances which are alleged to constitute Just Cause (the “Notice of Intent to Discharge”); and

     (c) after the giving of the Notice of Intent to Discharge and before the taking of the votes contemplated by Section 6.1(a), the Executive (together with the Executive’s

3

legal counsel, if the Executive so desires) is afforded a reasonable opportunity to make both written and oral presentations before the Board of Directors for the purpose of refuting the alleged grounds for Just Cause for the Executive’s discharge; and

     (d) after the vote contemplated by Section 6.1(a), the Company has furnished to the Executive a notice of termination which shall specify the effective date of the Executive’s termination of employment (which shall in no event be earlier than the date on which such notice is deemed given) and include a copy of a resolution or resolutions adopted by the Board of Directors authorizing the termination of the Executive’s employment for Just Cause and stating with particularity the facts and circumstances found to constitute Just Cause for the Executive’s discharge (the “Final Discharge Notice”).

     6.2 SUSPENSION; FINAL DISCHARGE. Following the giving of a Notice of Intent to Discharge, the Company may temporarily suspend the Executive’s duties and authority and, in such event, may also suspend the payment of salary and other cash compensation, but not the Executive’s participation in retirement, insurance and other employee benefit plans. If the Executive is discharged for Just Cause, all payments withheld during the period of suspension shall be deemed forfeited and shall not be payable to the Executive. If the Company does not give a Final Discharge Notice to the Executive within one hundred twenty (120) days after giving a Notice of Intent to Discharge, the Notice of Intent to Discharge shall be deemed withdrawn and any future action to discharge the Executive for Cause shall require the giving of a new Notice of Intent to Discharge.

     6.3 EFFECT OF TERMINATION. In the event of termination pursuant to this Section 6, the Term of Employment shall terminate and the Company shall pay to the Executive an amount equal to the sum of (i) base salary or other compensation earned through the date of termination, plus (ii) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs, if any, of the Company. All other obligations of the Company under this Agreement shall terminate as of the date of termination.

     7. TERMINATION BY THE EXECUTIVE.

     7.1 TERMINATION BY THE EXECUTIVE FOR GOOD REASON.

     (a) The Executive shall be entitled to terminate employment hereunder for or with Good Reason (as defined in Section 7.4). Upon any such termination, the Executive shall be entitled to receive the benefits set forth in Section 9. A termination of employment by the Executive for Good Reason shall be effectuated by giving the Company written notice (“Notice of Termination for Good Reason”) of the termination, setting forth in reasonable detail the specific conduct of the Company that constitutes Good Reason and the specific provision(s) of this Agreement on which the Executive relies. A termination of employment by the Executive for Good Reason shall be effective on the fifth business day following the date when the Notice of Termination for Good Reason is given, unless the notice sets forth a later date (which date shall in no event be later than 30 days after the notice is given).

     (b) The failure to set forth any fact or circumstance in a Notice of Termination for Good Reason shall not constitute a waiver of the right to assert, and shall not preclude the Executive from asserting, such fact or circumstance in an attempt to enforce any right under or provision of this Agreement.

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     7.2 OTHER VOLUNTARY TERMINATION BY THE EXECUTIVE. During the Term of Employment, the Executive may effect, upon sixty (60) days prior written notice to the Company, a Voluntary Termination of employment hereunder and thereupon the Term of Employment shall end. A “Voluntary Termination” shall mean a termination of employment by the Executive on the Executive’s own initiative other than (i) a termination due to death or Disability (as defined in Section 12), (ii) a termination for Good Reason (as defined in Section 7.4), (iii) a termination due to Retirement (as defined in Section 7.3), or (d) a termination as a result of the normal expiration of the full Term of Employment. If, during the Term of Employment, the Executive’s employment is terminated due to a Voluntary Termination, the Term of Employment shall thereupon end and the Company shall pay to the Executive an amount equal to the sum of (i) base salary or other compensation earned through the date of termination, plus (ii) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs, if any, of the Company.

     7.3 TERMINATION DUE TO RETIREMENT. “Retirement” shall mean the termination of the Executive’s employment with the Company for any reason by the Executive at any time after the Executive attains “Retirement Age” (as hereinafter defined). “Retirement Age” mean the earlier to occur of (i) age 65 or (ii) such other age which the Company, by resolution of the Board, may establish as the Executive’s Retirement Age. The Executive may terminate employment hereunder due to Retirement upon thirty (30) days prior written notice to the Company. If, during the Term of Employment, the Executive’s employment is terminated due to Retirement, the Term of Employment shall thereupon end and the Executive shall be entitled to (i) base salary or other compensation earned through the Retirement Date, and (ii) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs, if any, of the Company.

     7.4 GOOD REASON. For purposes of this Agreement, the term “Good Reason” shall mean any of the following:

(i)	any change in the duties, functions or responsibilities of the Executive that is inconsistent in any material and adverse respect with the Executive’s duties, functions or responsibilities with the Company and its affiliates at the Effective Date (including any material and adverse diminution of such duties, functions or responsibilities);
(ii)	a reduction of the Executive’s base salary other than in connection with an across-the-board reduction in base salary for all similarly situated employees;
(iii)	the relocation of the Executive’s office to a location more than thirty (30) miles from its location at the Effective Date; or
(iv)	the taking of any action by the Company or any of its affiliates or successors which would materially and adversely affect the Executive’s overall compensation and benefits package, excluding (A) changes to the compensation and benefits package made on a non-discriminatory basis to substantially all similarly-situated employees and (B) any isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied reasonably promptly after receipt of written notice thereof given by the Executive.
(v)	failure to nominate or reelect the Executive as a member of the Board of

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	Directors of the Company or of the Board of Directors of Community Bank of Tri-County.
(vi)	the liquidation or complete dissolution of the Company; or
(vii)	a material breach of this Agreement by the Company.

Notwithstanding anything in this Agreement to the contrary, during the twenty-four (24) month period beginning on the effective date of a Change in Control (as defined in Section 7.5, and continuing through the second anniversary of such date, the Executive may voluntarily terminate his employment for any reason and such termination shall constitute termination With Good Reason.

     7.5 CHANGE IN CONTROL. For purposes of this Agreement, a “Change in Control” shall be deemed to have occurred in any of the following events:

     (i) individuals who, on the date of this Agreement, constitute the Board of Directors of the Company (the “Incumbent Directors”) cease for any reason to constitute at least half of the Board of Directors of the Company, provided that any person becoming a director subsequent to such time, whose election or nomination for election was approved by a vote of at least two-thirds (2/3) of the Incumbent Directors then on the Board of Directors of the Company (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without written objection to such nomination) shall be an Incumbent Director; provided, however, that no individual initially elected or nominated as a director of the Company as a result of an actual or threatened election contest with respect to directors or as a result of any other actual or threatened solicitation of proxies or consents by or on behalf of any person other than the Board of Directors of the Company shall be deemed to be an Incumbent Director;

     (ii) any “person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the “Exchange Act”) and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board of Directors of the Company (the “Company Voting Securities”); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any subsidiary, (B) by any employee benefit plan (or related trust) sponsored or maintained by the Company or any subsidiary, (C) by any underwriter temporarily holding securities pursuant to an offering of such securities or (D) a transaction (other than one described in (iii) below) in which Company Voting Securities are acquired from the Company, if a majority of the Incumbent Directors approve a resolution providing expressly that the acquisition pursuant to this clause (D) does not constitute a Change in Control under this paragraph (ii);

     (iii) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless

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immediately following such Business Combination: (A) at least 50% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by the Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, is represented by shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among (and only among) the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination, (B) no person (other than any employee benefit plan (or related trust) sponsored or maintained by the Surviving Corporation or the Parent Corporation) is or becomes the beneficial owner, directly or indirectly, of 25% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) and (C) at least 50% of the members of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) following the consummation of the Business Combination were Incumbent Directors at the time of the Company Board’s approval of the execution of the initial agreement providing for such Business Combination; or

     (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale of all or substantially all of the Company’s assets.

     Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because any person acquires beneficial ownership of more than 25% of Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.

     8. TERMINATION BY THE COMPANY WITHOUT CAUSE. The Executive’s employment with the Company may be terminated without Just Cause by the Board of Directors of the Company, provided, however, that the Company shall have the obligation upon any such termination to make the payments to the Executive provided for under Section 9 of this Agreement.

     9. CERTAIN TERMINATION BENEFITS. In the event of termination pursuant to Section 7.1 or 8, the Executive shall be entitled to each of the following benefits:

9.1 EARNINGS TO DATE OF TERMINATION. An amount equal to the sum of (i) base salary or other compensation earned through the date of termination, plus (ii) the Executive’s pro rata share (based on the portion of the then-current calendar year during which the Executive was employed before termination of the Executive’s employment) of the average of the aggregate annual amounts paid to the Executive as bonuses or other cash incentive compensation for the three (3) calendar years preceding the termination of employment, plus (iii) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs, if any, of the Company.

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9.2 LUMP SUM PAYMENT. An unreduced lump sum severance benefit equal to the sum of the following items:

     (a) The base salary (as provided for in Section 3.1 of this Agreement) that would have been paid to the Executive (based on the base salary in effect on the date of the Executive’s termination of employment) through the Expiration Date (including any amount which is contributed by the Company on the Executive’s behalf pursuant to a salary reduction agreement and which is not included in the Executive’s gross income under Sections 125, 132(f) or 402(e)(3) of the Internal Revenue Code of 1986, as amended); and

     (b) five (5) times the most recent annual incentive compensation payment (as provided for pursuant to Section 3.3 of this Agreement) made to the Executive.

Subject to Section 17.20, the severance benefit payment under this Section 9.2 shall be made to the Executive in one lump sum on the date of the Executive’s termination of employment.

     9.3 BENEFIT CONTINUATION. Continuation of the medical, dental and life insurance benefits described in Section 3.2 and existing on the date of termination at the level in effect on, and at the same out-of-pocket premium cost to the Executive, as of the date of termination for a period of sixty (60) months following the Executive’s date of termination of employment.

     9.4 VESTING OF STOCK AWARDS AND OPTIONS. If the Executive’s termination of employment occurs on or after the effective date of a Change in Control, there shall be an acceleration of all vesting provisions, so that as of the date of termination of the Executive’s employment, all stock awards made by the Company to the Executive, to the extent then unvested or forfeitable, shall become immediately and fully vested and non-forfeitable, and all options to purchase common stock of the Company, to the extent then not exercisable, shall become immediately and fully exercisable.

     10. ADJUSTMENT FOR UNAVAILABILITY OF BENEFITS. If the benefits under any benefit plan or program continued pursuant to Section 9.3 may not be provided under any such plan to the Executive or to the Executive’s dependents because the Executive is no longer deemed to be an employee of the Company or an affiliate, the Company shall pay or provide for coverage on a comparable basis for the Executive and, where applicable, the Executive’s dependents.

     11. DEATH OR DISABILITY BEFORE COMPLETION OF CHANGE IN CONTROL.

     11.1 CERTAIN PAYMENTS. The Executive shall be entitled to receive the payments provided for under Section 9 of this Agreement on the date of the Executive’s termination of employment if:

     (a) the Executive’s employment terminates due to Disability pursuant to Section 12 or due to death, and

     (b) either

     (i) such termination of employment occurred within one (1) year after the occurrence of a Change in Control; or

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     (ii) such termination occurred within one (1) year after the occurrence of a Preliminary Change in Control (as hereinafter defined), AND, in addition, a Change in Control occurs within two (2) years after such termination of employment.

     11.2 PRELIMINARY CHANGE IN CONTROL. “Preliminary Change in Control” shall mean each of (i) the signing of a definitive agreement for a transaction that, if consummated, would result in a Change in Control, (ii) the commencement of a tender offer that, if successful, would result in a Change in Control, and (iii) the circulation of a proxy statement seeking proxies in opposition to management in an election contest that, if successful, would result in a Change in Control. Any payment required to be made pursuant to this Section 11 shall be deferred without interest until, and shall be payable immediately upon, the actual occurrence of a Change in Control. Payments to be made pursuant to this Section 11 shall be in lieu of and in substitution for payments required to be made in connection with disability pursuant to Section 12.

     12. DISABILITY.

     12.1 TERMINATION DUE TO DISABILITY. The Company may terminate the Executive’s employment upon a determination, by vote of a majority of the Board of Directors, acting in reliance on the written advice of a medical professional acceptable to the Board of Directors, that the Executive is suffering from a physical or mental impairment which, at the date of the determination, has prevented the Executive from performing the Executive’s assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the one-year period ending with the date of the determination or is likely to result in death or prevent the Executive from performing the Executive’s assigned duties on a substantially full-time basis for a period of at least one hundred and eighty (180) days during the period of one (1) year beginning with the date of the determination (such impairment, the “Disability”). In such event:

     (a) The Company shall pay to the Executive an amount equal to the sum of (i) base salary or other compensation earned through the date of termination, plus (ii) any other compensation and benefits as may be provided in accordance with the terms and provisions of any applicable benefit plans and programs of the Company.

     (b) In addition to the amounts payable pursuant to Section 12.1(a), the Company shall continue to pay the Executive the Executive’s base salary, at the annual rate in effect for the Executive immediately prior to the termination of the Executive’s employment, during the Initial Continuation Period. The “Initial Continuation Period” shall commence on the date of termination of employment pursuant to Section 12.1 and shall end on the earliest of: (i) the expiration of one hundred and eighty (180) days after the date of termination of the Executive’s employment; (ii) the date on which long-term disability insurance benefits are first payable to the Executive under any long-term disability insurance plan (“LTD Plan”) covering employees of the Company (the “LTD Eligibility Date”); (iii) the date of the Executive’s death; and (iv) the Expiration Date. If the end of the Initial Continuation Period is neither the LTD Eligibility Date nor the date of the Executive’s death, the Company shall continue to pay the Executive the Executive’s base salary, at an annual rate equal to sixty percent (60%) of the annual rate in effect for the Executive immediately prior to the termination of the Executive’s employment (the “60% AMOUNT”), during an additional period ending on the earliest of the LTD Eligibility Date, the date of the Executive’s death and the Expiration Date.

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While receiving disability payments under such LTD Plan, the Company shall pay to the Executive an additional payment of such an amount, if any, as may be necessary so that the aggregate of such additional payment and the Executive’s disability income payments will equal the 60% Amount, and the Executive shall continue to participate in the Company’s benefit plans and to receive other benefits as specified in Section 3.2 until the Expiration Date, with all such benefits to be at the level in effect on, and at the same out-of-pocket cost to the Executive, as in effect on the date of the Disability determination.

     12.2 EFFECTIVE DATE OF TERMINATION. A termination of employment due to Disability under this Section 12 shall be effected by notice of termination given to the Executive by the Company and shall take effect on the later of the effective date of termination specified in such notice or the date on which the notice of termination is deemed given to the Executive.

     13. EXCISE TAXES.

     13.1 COVERED BENEFITS. “Covered Benefits” shall mean any payment or benefit paid or provided to the Executive by the Company or any affiliate or any successor in interest to the Company (whether pursuant to this Agreement or otherwise) that will be (or in the opinion of Tax Counsel (as defined below) might reasonably be expected to be) subject to any excise tax (the “Excise Tax”) imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the “Code”). In the event that at any time during or after the Term of Employment the Executive shall receive any Covered Benefits, the Company shall pay to the Executive an additional amount (the “Gross-Up Payment”) such that the net amount retained by the Executive from the Gross-Up Payment, after deduction of any federal, state and local income taxes, Excise Tax, and FICA and Medicare withholding taxes on the Gross-Up Payment, shall be equal to the Excise Tax on the Covered Benefits. For purposes of determining the amount of such Excise Tax on the Covered Benefits, the amount of the Covered Benefits that shall be taken into account in calculating the Excise Tax shall be equal to (i) the Covered Benefits, less (ii) the amount of such Covered Benefits that, in the opinion of tax counsel selected by the Company and reasonably acceptable to the Executive (“Tax Counsel”), are not parachute payments (within the meaning of Section 280G(b)(1) of the Code).

     13.2 CERTAIN ASSUMPTIONS. For purposes of this Section 13, the Executive shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Excise Tax is payable and state and local income taxes at the highest marginal rate of taxation in the state and locality of the Executive’s residence on the effective date of the Executive’s termination, net of the reduction in federal income taxes which could be obtained from deduction of such state and local taxes. Except as otherwise provided herein, all determinations required to be made under this Section 13 shall be made by Tax Counsel, which determinations shall be conclusive and binding on the Executive and Company, absent manifest error.

     13.3 TAX INDEMNIFICATION. The Company shall indemnify and hold the Executive harmless from any and all losses, costs and expenses (including without limitation, reasonable attorney’s fees, reasonable accountant’s fees, interest, fines and penalties of any kind) which the Executive incurs as a result of any administrative or judicial review of the Executive’s liability under Section 4999 of the Code by the Internal Revenue Service or any comparable state agency through and including a final judicial determination or final administrative settlement of any dispute arising out of the Executive’s liability for the Excise Tax or otherwise relating to the classification for purposes of Section 280G of the Code of any of the Covered Benefits or other payment or benefit in the nature of compensation made or provided to the Executive by the

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Company. The Executive shall promptly notify the Company in writing whenever the Executive receives notice of the commencement of any judicial or administrative proceeding, formal or informal, in which the federal tax treatment under Section 4999 of the Code of any amount paid or payable under this Agreement or otherwise is being reviewed or is in dispute (including a notice of audit or other inquiry concerning the reporting of the Executive’s liability under Section 4999). The Company may assume control at its expense over all legal and accounting matters pertaining to such federal or state tax treatment (except to the extent necessary or appropriate for the Executive to resolve any such proceeding with respect to any matter unrelated to the Covered Benefits or other payment or benefit in the nature of compensation made or provided to the Executive by the Company) and the Executive shall cooperate fully with the Company in any such proceeding. The Executive shall not enter into any compromise or settlement or otherwise prejudice any rights the Company may have in connection therewith without prior consent of the Company. In the event that the Company elects not to assume control over such matters, the Company shall promptly reimburse the Executive for all expenses related thereto as and when incurred upon presentation of appropriate documentation relating thereto.

     14. CONFIDENTIAL INFORMATION. The Executive will not disclose to any other Person (as defined in Section 17.2) (except as required by applicable law or in connection with the performance of the Executive’s duties and responsibilities hereunder), or use for the Executive’s own benefit or gain, any confidential information of the Company or any affiliate obtained by the Executive incident to the Executive’s employment with the Company or its affiliates. The term “Confidential Information” includes, without limitation, financial information, business plans, prospects and opportunities (such as lending relationships, financial product developments, or possible acquisitions or dispositions of business or facilities) which have been discussed or considered by the management of the Company or its affiliates but does not include any information which has become part of the public domain by means other than the Executive’s failure to honor the obligations hereunder.

     15. NO MITIGATION; NO OFFSET. In the event of any termination of employment under this Agreement, the Executive shall be under no obligation to seek other employment or to mitigate damages, and there shall be no offset against any amounts due to the Executive under this Agreement for any reason, including, without limitation, on account of any remuneration attributable to any subsequent employment that the Executive may obtain. Any amounts due under this Agreement are in the nature of severance payments or liquidated damages, or both, and are not in the nature of a penalty.

     16. INDEMNIFICATION AND INSURANCE.

     16.1 INDEMNIFICATION. To the maximum extent permitted under applicable law, during the Term of Employment and for a period of six years thereafter, the Company shall indemnify the Executive against and hold the Executive harmless from any costs, liabilities, losses and exposures to the fullest extent and on the most favorable terms and conditions that similar indemnification is offered to any director or officer of the Company or any affiliate thereof.

     16.2 INSURANCE. During the Term of Employment and for a period of six years thereafter, the Company shall cause the Executive to be covered by and named as an insured under any policy or contract of insurance obtained by either Company to insure directors and officers against personal liability for acts or omissions in connection with service as an officer or director of the Company or any of its affiliates service in other capacities at its request. The coverage provided to the Executive pursuant to this Section 16 shall be of the same scope and on the same terms and conditions as the coverage (if any) provided to other officers or directors of the Company.

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     17. MISCELLANEOUS.

     17.1 CONFLICTING AGREEMENTS. The Executive hereby represents and warrants that the execution of this Agreement and the performance of the Executive’s obligations hereunder will not breach or be in conflict with any other agreement to which the Executive is a party or is bound, and that the Executive is not now subject to any covenants against competition or similar covenants which would affect the performance of the Executive’s obligations hereunder.

     17.2 DEFINITION OF “PERSON”. For purposes of this Agreement, the term “PERSON” shall mean an individual, a corporation, an association, a partnership, an estate, a trust and any other entity or organization.

     17.3 WITHHOLDING. All payments made under this Agreement shall be net of any tax or other amounts required to be withheld under applicable law.

     17.4 ARBITRATION. The Company and Executive agree that any claim, dispute or controversy arising under or in connection with this Agreement (including, without limitation, any such claim, dispute or controversy arising under any federal, state or local statute, regulation or ordinance or any of the Company’s employee benefit plans, policies or programs) shall be resolved solely and exclusively by binding arbitration. The arbitration shall be held in the County of Charles, Maryland (or at such other location as shall be mutually agreed by the parties). The arbitration shall be conducted in accordance with the Commercial Arbitration Rules (the “Rules”) of the American Arbitration Association (the “AAA”) in effect at the time of the arbitration, except that the arbitrator shall be selected by alternatively striking from a list of five arbitrators supplied by the AAA. All fees and expenses of the arbitration, excluding a transcript, shall be borne equally by the parties. Each party will pay for the fees and expenses of its own attorneys, experts, witnesses, and preparation and presentation of proofs and post-hearing briefs (unless the Executive prevails on a claim for which attorney’s fees are recoverable under the Agreement). Any action to enforce or vacate the arbitrator’s award shall be governed by the Federal Arbitration Act, if applicable, and otherwise by applicable state law. If either the Company or Executive pursues any claim, dispute or controversy against the other in a proceeding other than the arbitration provided for herein, the responding party shall be entitled to dismissal or injunctive relief regarding such action and recovery of all costs, losses and attorney’s fees related to such action. Notwithstanding the provisions of this paragraph, either party may seek injunctive relief in a court of competent jurisdiction, whether or not the case is then pending before the panel of arbitrators. Following the court’s determination of the injunction issue, the case shall continue in arbitration as provided herein.

     17.5 INDEMNIFICATION FOR ATTORNEYS’ FEES. In the event any dispute or controversy arising under or in connection with Executive’s termination or this Agreement is resolved in favor or Executive, whether by judgment, arbitration or settlement, Executive shall be entitled to the payment of: (i) all legal fees and expenses incurred by Executive in resolving such dispute or controversy, and (ii) any back-pay, including salary, bonuses and any other cash compensation, fringe benefits and any compensation and benefits due Executive under this Agreement.

     17.6 INTERPRETATION. The recitals hereto constitute an integral part of this Agreement. References to Sections include subsections, which are part of the related Section (e.g., a section numbered “Section 5.5” would be part of “Section 5” and references to “Section

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5” would also refer to material contained in the subsection described as “Section 5.5”).

     17.7 ASSIGNMENT; SUCCESSORS AND ASSIGNS, ETC.

     (a) This Agreement is personal to the Executive and, without the prior written consent of the Company, shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive’s legal representatives.

     (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and permitted assigns.

     (c) The Company may not assign this Agreement or any interest herein without the prior written consent of the Executive and without such consent any attempted transfer or assignment shall be null and void and of no effect; provided, however, that the Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company expressly to assume and to agree to perform this Agreement in the same manner and to the same extent that the Company would have been required to perform it if no such succession had taken place. As used in this Agreement, “the Company” shall mean both the Company as defined above and any successor that assumes and agrees to perform this Agreement, by operation of law or otherwise.

     17.8 ENFORCEABILITY. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law.

     17.9 REDUCTIONS; REGULATORY REQUIREMENTS. Notwithstanding anything to the contrary contained in this Agreement, any and all payments and benefits to be provided to the Executive hereunder are subject to reduction to the extent required by applicable statutes, regulations, rules and directives of federal, state and other governmental and regulatory bodies having jurisdiction over the Company and its affiliates. The Executive confirms that the Executive is aware of the fact that the Federal Deposit Insurance Corporation has the power to preclude the Company or its affiliates from making payments to the Executive under this Agreement under certain circumstances. The Executive agrees that neither the Company or its affiliates shall be deemed to be in breach of this Agreement if it is precluded from making a payment otherwise payable hereunder by reason of regulatory requirements binding on the Company or its affiliates, as the case may be.

     17.10 WAIVER. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any term or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such term or obligation or be deemed a waiver of any subsequent breach.

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     17.11 NOTICES. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, and addressed to the Executive at the Executive’s last known address on the books of the Company or, in the case of the Company, at its main office, attention of the Chair of the Compensation Committee of the Board of Directors.

     17.12 ELECTION OF REMEDIES. An election by the Executive to resign for Good Reason under the provisions of this Agreement shall not constitute a breach by the Executive of any agreement the Executive may have with the Company and shall not be deemed a voluntary termination of employment by the Executive for the purpose of interpreting the provisions of any of the Company’s benefit plans, programs or policies.

     17.13 AMENDMENT. This Agreement may be amended or modified only by a written instrument signed by the Executive and a duly authorized representative of the Company.

     17.14 NO EFFECT ON LENGTH OF SERVICE. Nothing in this Agreement shall be deemed to prohibit the Company from terminating the Executive’s employment before the end of the Term of Employment with or without notice for any reason. This Agreement shall determine the relative rights and obligations of the Company and the Executive in the event of any such termination. In addition, nothing in this Agreement shall require the termination of the Executive’s employment at the expiration of the Term of Employment. Any continuation of the Executive’s employment beyond the expiration of the Term of Employment shall be on an “at-will” basis, unless the Company and the Executive agree otherwise.

     17.15 ALLOCATION OF OBLIGATIONS AS BETWEEN THE COMPANY AND ITS AFFILIATES. The parties understand that the Executive will perform substantial services for the Company and its affiliates. Unless otherwise determined by the Board of Directors of the Company, the Executive shall not be entitled to compensation in addition to the compensation set forth in Section 3 of this Agreement as a result of the Executive’s serving as an officer of any affiliate of the Company. The Company and its affiliates shall apportion between them the amounts to be paid under this Agreement, based upon the services rendered by the Executive to each of the affiliates and the Company, respectively. Any entitlement of the Executive to severance compensation or other termination benefits under this Agreement shall be determined on the basis of the aggregate compensation payable to the Executive by the affiliates and the Company, and liability therefor shall be apportioned between the affiliates and the Company in the same manner as compensation paid to the Executive for services to each of them. It is the intent and purpose of this Section 17.15 that the Executive have the same legal and economic rights that the Executive would have if all of the Executive’s services were rendered to and all of the Executive’s compensation were paid by the Company.

     17.16 PAYMENTS TO ESTATE OR BENEFICIARIES. In the event of the Executive’s death prior to the completion by the Company of all payments due the Executive under this Agreement, the Company shall continue such payments (other than payments which by their terms cease upon death) to the Executive’s beneficiary, as designated in writing by the Executive and provided to the Company prior to the Executive’s death (or to the Executive’s estate, if the Executive fails to make such designation) and, as applicable, to the Executive’s surviving dependents.

     17.17 ENTIRE AGREEMENT; EFFECT ON PRIOR AGREEMENTS. This Agreement constitutes the entire agreement between the parties pertaining to its subject matter and supersedes all prior and contemporaneous agreements, understandings, negotiations, prior

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draft agreements, and discussions of the parties, whether oral or written.

     17.18 COUNTERPARTS AND FACSIMILE SIGNATURES. This Agreement may be executed in two or more counterparts, all of which shall be considered one and the same agreement and shall become effective when one or more counterparts have been signed by each party and delivered to the other party, it being understood that all parties need not sign the same counterpart. This Agreement may be executed by facsimile signatures.

     17.19 GOVERNING LAW. This is a Maryland contract and shall be construed under and be governed in all respects by the laws of the State of Maryland without giving effect to its conflicts of law principles.

     17.20 EFFECT OF CODE SECTION 409A. Notwithstanding anything in this Agreement to the contrary, if the Company in good faith determines that amounts that, as of the effective date of the Executive’s termination of employment are or may become payable to the Executive hereunder, are required to be suspended or delayed for six months in order to satisfy the requirements of Section 409A of the Code, then the Company will so advise the Executive, and any such payments shall be suspended and accrued for six months, whereupon they shall be paid to the Executive in a lump sum (together with interest thereon at the then-prevailing prime rate). The Executive agrees that the Company shall be deemed to be in breach of this Agreement if it delays making a payment otherwise payable hereunder by reason of Section 409A.

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     IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument by the Company, by its duly authorized officer, and by the Executive, as of the date first above written.

TRI-COUNTY FINANCIAL CORPORATION            EXECUTIVE

By:	/s/ H. Beaman Smith	/s/ Michael L. Middleton
		Michael L. Middleton
Its:	Secretary/ Treasurer
Attest:	/s/ Diane Deskins	Witness:	/s/ Christy M. Lombardi

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EX-31.1

EXHIBIT 31.1

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: November 13, 2006

/s/ Michael L. Middleton Michael L. Middleton

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

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: November 13, 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 September 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: November 13, 2006	By:	/s/ Michael L. Middleton Michael L. Middleton
		President and Chief Executive Officer
Date: November 13, 2006	By:	/s/ William J. Pasenelli William J. Pasenelli
		Executive Vice President and Chief Financial Officer