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 March 31, 2007

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	52-1652138
(State of other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

3035 Leonardtown Road, Waldorf, Maryland	20601
(Address of principal executive offices)	(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 12b-2 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 12b-2 of the Exchange Act). Yes o     No þ

As of April 26, 2007 the registrant had 2,653,806 shares of common stock outstanding.

TRI-COUNTY FINANCIAL CORPORATION

FORM 10-Q

INDEX

PART I — FINANCIAL INFORMATION	Page
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets – March 31, 2007 and December 31, 2006	3
Consolidated Statements of Income and Comprehensive Income - Three Months Ended March 31, 2007 and 2006	4-5
Consolidated Statements of Cash Flows — Three Months Ended March 31, 2007 and 2006	6-7
Notes to Consolidated Financial Statements	8-11
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations	12-19
Item 3 - Quantitative and Qualitative Disclosures about Market Risk	19-20
Item 4 – Controls and Procedures	20
PART II — OTHER INFORMATION
Item 1 – Legal Proceedings	20
Item 1.A – Risk Factors	21
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3 – Defaults Upon Senior Securities	21
Item 4 – Submission of Matters to a Vote of Security Holders	21
Item 5 – Other Information	21
Item 6 – Exhibits	21-22
SIGNATURES	23
EX-10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT/ WILLIAM J. PASENELLI
EX-10.2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT/ C. MARIE BROWN
EX-10.3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT/ GREGORY C. COCKERHAM
EX-31 SECTION 302 CERTIFICATIONS
EX-32 SECTION 906 CERTIFICATIONS

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PART I FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

TRI-COUNTY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS MARCH 31, 2007 AND DECEMBER 31, 2006 (UNAUDITED)

	March 31, 2007			December 31, 2006
ASSETS
Cash and due from banks	$	2,545,692		$	3,157,595
Federal Funds sold		608,539			772,351
Interest-bearing deposits with banks		11,453,211			14,260,560
Securities available for sale		9,129,840			9,301,676
Securities held to maturity — at amortized cost		95,180,384			97,804,849
Federal Home Loan Bank and Federal Reserve Bank stock — at cost		5,400,900			6,100,400
Loans receivable — net of allowance for loan losses of $3,984,655 and $3,783,721, respectively		436,331,951			422,479,799
Premises and equipment, net		7,960,344			6,822,461
Foreclosed real estate		460,884			460,884
Accrued interest receivable		2,866,145			2,837,413
Investment in bank owned life insurance		8,845,278			8,762,761
Other assets		2,665,045			2,735,265
TOTAL ASSETS	$	583,448,213		$	575,496,014
LIABILITIES AND STOCKHOLDERS’ EQUITY
LIABILITIES:
Noninterest-bearing deposits	$	48,379,608		$	43,723,436
Interest-bearing deposits		393,148,950			374,289,966
Total deposits		441,528,558			418,013,402
Short-term borrowings		609,816			6,567,702
Long-term debt		86,035,980			96,045,936
Guaranteed preferred beneficial interest in junior subordinated debentures		12,000,000			12,000,000
Accrued expenses and other liabilities		4,499,240			5,139,637
Total liabilities		544,673,594			537,766,677
STOCKHOLDERS’ EQUITY:
Common stock — par value $.01; authorized - 15,000,000 shares; issued 2,647,003 and 2,642,288 shares, respectively		26,470			26,423
Additional paid in capital		9,538,076			9,499,946
Retained earnings		29,349,523			28,353,792
Accumulated other comprehensive loss		(42,448	)		(53,822	)
Unearned ESOP shares		(97,002	)		(97,002	)
Total stockholders’ equity		38,774,619			37,729,337
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	583,448,213		$	575,496,014

See notes to consolidated financial statements

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TRI-COUNTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2007 AND 2006

	2007		2006
INTEREST INCOME:
Interest and fees on loans	$	8,059,141	$	6,663,527
Taxable interest and dividends on investment securities		1,428,541		1,591,302
Interest on deposits with banks		36,510		45,130
Total interest income		9,524,192		8,299,959
INTEREST EXPENSE:
Interest on deposits		3,646,103		2,462,742
Interest on short-term borrowings		28,280		228,495
Interest on long-term debt		1,306,649		1,354,579
Total interest expenses		4,981,032		4,045,816
NET INTEREST INCOME		4,543,160		4,254,143
PROVISION FOR LOAN LOSSES		256,526		86,485
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		4,286,634		4,167,658

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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2007 AND 2006

	2007		2006
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges		63,588		98,617
Net gain on the sale of foreclosed property		66,428		—
Income from bank owned life insurance		82,517		70,772
Gain on the sale of investment securities		16,912		—
Service charges		321,248		308,329
Total noninterest income		550,693		477,718
NONINTEREST EXPENSE:
Salary and employee benefits		1,883,486		1,661,371
Occupancy		311,430		279,307
Advertising		161,123		145,208
Data processing		187,591		220,234
Legal and professional fees		116,605		239,014
Depreciation of furniture, fixtures, and equipment		119,258		112,496
Telephone communications		22,911		22,721
ATM expenses		67,017		57,322
Office supplies		46,461		35,711
Office equipment		11,210		12,793
Other		334,058		344,378
Total noninterest expenses		3,261,150		3,130,555
INCOME BEFORE INCOME TAXES		1,576,177		1,514,821
Income tax expense		566,558		541,684
NET INCOME		1,009,619		973,137
OTHER COMPREHENSIVE INCOME NET OF TAX
Net unrealized holding gains (losses) arising during period		11,374		(161,787	)
COMPREHENSIVE INCOME	$	1,020,993	$	811,350
INCOME PER COMMON SHARE
Basic	$	0.38	$	0.37
Diluted		0.36		0.35

See notes to consolidated financial statements

5

TRI-COUNTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2007 AND 2006

	Three Months Ended
	March 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	1,009,619		$	973,137
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Stock Based Compensation Expense		—			60,000
Provision for loan losses		256,526			86,485
Gain on sales of investment securities		(16,912	)		—
Depreciation and amortization		242,766			213,856
Net amortization of premium/discount on investment securities		6,758			(10,502	)
Increase in cash surrender of bank owned life insurance		(82,517	)		(70,772	)
Deferred income tax (benefit) expense		(170,232	)		75,883
Increase in accrued interest receivable		(28,732	)		(60,021	)
Increase (decrease) in deferred loan fees		43,633			(29,261	)
Increase (decrease) in accounts payable, accrued expenses, other liabilities		(706,825	)		24,228
Decrease in other assets		234,592			98,558
Net cash provided by operating activities		788,676			1,361,591
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale		(36,429	)		(11,694	)
Proceeds from sale, redemption or principal payments of investment securities available for sale		241,903			163,379
Purchase of investment securities held to maturity		—			(3,500,000	)
Proceeds from maturities or principal payments of investment securities held to maturity		2,618,216			5,883,155
Net redemption of FHLB and Federal Reserve stock		699,500			121,100
Loans originated or acquired		(39,525,440	)		(36,968,947	)
Principal collected on loans		25,373,129			26,803,170
Purchase of Bank Owned Life Insurance		—			(2,000,000	)
Purchase of premises and equipment		(1,380,648	)		(230,707	)
Proceeds from foreclosed real estate		66,428			—
Net cash used in investing activities		(11,943,341	)		(9,740,544	)

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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2007 AND 2006

	Three Months Ended
	March 31,
	2007			2006
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		23,515,156			8,744,990
Proceeds from long-term borrowings		—			260,000
Payments of long-term borrowings		(10,009,956	)		(8,546	)
Net decrease in short term borrowings		(5,957,886	)		(4,569,387	)
Exercise of stock options		38,183			57,344
Redemption of common stock		(13,896	)		(144,710	)
Net cash provided by financing activities		7,571,601			4,339,691
DECREASE IN CASH AND CASH EQUIVALENTS		(3,583,064	)		(4,039,262	)
CASH AND CASH EQUIVALENTS — JANUARY 1		18,190,506			22,575,240
CASH AND CASH EQUIVALENTS — MARCH 31	$	14,607,442		$	18,535,978
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the three months for:
Interest	$	5,018,941		$	4,068,462
Income taxes	$	332,600		$	613,000

See notes to consolidated financial statements

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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, 2006 have been derived from audited financial statements. There have been no significant changes to the Company’s accounting policies as disclosed in the 2006 Annual Report. The results of operations for the three months ended March 31, 2007 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 2007 presentation.
	It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report for the year ended December 31, 2006.
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. The Company also adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN48”) on January 1, 2007. FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN 48 provides guidance on de-recognition, classification, interest and penalties, and accounting in interim periods and requires expanded disclosure with respect to the uncertainty in income taxes. There was no cumulative effect as a result of applying FIN 48. No adjustment was made to our opening balance of retained earnings.
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 net income 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 March 31, 2007, there were no shares excluded from the diluted net income per share computation because inclusion of these options would be anti-dilutive. Basic and diluted earnings per share, have been computed based on weighted-average common and common equivalent shares outstanding as follows:

	Three Months Ended
	March 31,
	2007		2006
Basic		2,643,950		2,639,962
Diluted		2,829,778		2,811,823

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	Share and per share data have been adjusted to reflect the three for two common stock split effected in November 2006 as if it had occurred on January 1, 2006.
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, 2006. No compensation related expense related to stock options has been recognized in the quarter ended March 31, 2007 and during 2006.
	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.
	A summary of the Company’s stock option plans as of March 31, 2007 and changes during the three-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, 2006		417,097		$	13.86
Granted		—			—
Exercised		(5,301	)		7.20
Expired		—			—
Forfeited		—			—
Outstanding at March 31, 2007		411,796		$	13.95	$	5,272,812		5.5
Exercisable at March 31, 2007		411,796		$	13.95	$	5,272,812		5.5

Share and per share data have been adjusted to reflect the three for two common stock split effected in November 2006 as if it had occurred on January 1, 2006.

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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 capital securities with an interest rate of 5.07% in a private pooled transaction. The rate is based on the 90-day LIBOR rate plus 1.70%. 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 and the trust preferred securities is variable and adjusts quarterly. The Company has, through various contractual arrangements, fully and unconditionally guaranteed all of Capital Trust II’s obligations with respect to the capital securities. These capital securities qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust II and the junior subordinated debentures are scheduled to mature on June 15, 2035, unless called by the Company not earlier than June 15, 2010.
	On July 22, 2004, Tri County Capital Trust I (“Capital Trust I”), a Delaware business trust formed, funded and wholly owned by the Company, issued $7,000,000 of capital securities with an interest rate of 4.22% in a private pooled transaction. The rate is based on the 90-day LIBOR rate plus 2.60%. 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 and the trust preferred securities is variable and adjusts quarterly. 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 September 2006, the Financial Accounting Standards Board, the (“FASB”) issued Statements of Financial Accounting Standards (“SFAS”) 157, Fair Value Measurements. SFAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 applies to existing accounting pronouncements that require or permit fair value measurements in which FASB had previously concluded fair value is the most relevant measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, with early adoption encouraged. The Company is currently evaluating the impact the adoption of this interpretation will have on its financial condition and results of operations.
	SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” SFAS 159 permits entities to choose to measure eligible items at fair value at specified election dates. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. The fair value option (i) may be applied instrument by instrument, with certain exceptions, (ii) is irrevocable (unless a new election date occurs) and (iii) is applied only to entire instruments and not to portions of instruments. SFAS 159 is effective for the Corporation on January 1, 2008 and is not expected to have a significant impact on the Corporation’s financial statements.
	In September 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements. EITF 06-4 requires the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods as defined in SFAS No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. The EITF reached a consensus that Bank Owned Life Insurance policies purchased for this purpose do not effectively settle the entity’s obligation to the employee in this regard and, thus, the entity must record compensation costs and a related liability. Entities should recognize the effects of applying this Issue through either, (a) a change in

10

accounting principle through a cumulative-effective adjustment to retained earnings or to other components of equity or net assets in the balance sheet as of the beginning of the year of adoption, or (b) a change in accounting principle through retrospective application to all prior periods. This Issue is effective for fiscal years beginning after December 15, 2007. Management is currently evaluating the impact of adopting this Issue on the Company’s financial statements.

In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN48”). FIN 48 is an interpretation of FASB Statement No. 109, “Accounting for Income Taxes,” and seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN 48 provides guidance on de-recognition, classification, interest and penalties, and accounting in interim periods and requires expanded disclosure with respect to the uncertainty in income taxes. We adopted the provisions of FIN 48 on January 1, 2007. There was no cumulative effect as a result of applying FIN 48. No adjustment was made to our opening balance of retained earnings.

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

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

GENERAL

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

The Bank serves the Southern Maryland area through its main office and eight branches located in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, Prince Frederick and California, Maryland. The Bank is engaged in the commercial and retail banking business as authorized by the banking statutes of the State of Maryland and applicable Federal regulations. The Bank accepts demand and time deposits and uses these funds along with borrowings from the Federal Home Loan Bank (the “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 commercial loans including secured and unsecured loans. The Bank is a member of the Federal Reserve and FHLB Systems. The Federal Deposit Insurance Corporation 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 away from residential first mortgage lending 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 for the year ended December 31, 2006.

After a series of increases in the Federal Funds rate, the Federal Reserve has not changed the Federal Funds rate since June 2006. The increases enacted up to June 2006 had the effect of pushing short-term rates higher while longer-term rates remained essentially unchanged. The difference between short- and long-term rates has decreased, creating a “flat” yield curve. For the last several quarters, many market participants have signaled through price expectations that they

12

expect a Federal Funds rate cut in response to their perceptions of a slowing economy and a deflation in housing prices. However, official Federal Reserve documents indicate that the Federal Reserve still believe that consumer price inflation remains a threat. As a result of these and other factors the Federal Reserve has decided to leave the Federal Funds rate unchanged.

     SELECTED FINANCIAL DATA

	Three Months Ended
	March 31,
	2007		2006
Condensed Income Statement
Interest Income	$	9,524,192	$	8,299,959
Interest Expense		4,981,032		4,045,816
Net Interest Income		4,543,160		4,254,143
Provision for Loan Losses		256,526		86,485
Noninterest Income		550,693		477,718
Noninterest Expense		3,261,150		3,130,555
Income Before Income Taxes		1,576,177		1,514,821
Income Taxes		566,558		541,684
Net Income	$	1,009,619	$	973,137
Per Common Share
Basic Earnings	$	0.38	$	0.37
Diluted Earnings	$	0.36	$	0.35

Share and per share data have been adjusted to reflect the three for two common stock split effected in November 2006 as if it had occurred on January 1, 2006.

RESULTS OF OPERATIONS

Net income for the three-month period ended March 31, 2007 totaled $1,009,619 ($0.38 basic and $0.36 diluted earnings per share) compared to $973,137 ($0.37 basic and $0.35 diluted earnings per share) for the same period in the prior year. This increase of $36,482, or 3.75%, was caused by increases in net interest and noninterest income partially offset by increases in provision for loan losses and noninterest expenses.

For the three-month period ended March 31, 2007, interest income increased by $1,224,233, or 14.75%, to $9,524,192. The increase was due to higher average balances of earning assets and higher rates earned on these assets. The Bank continued to increase balances of loans which tend to have higher yields and decrease balances of cash and investment securities which tend to have lower yields. Interest expense increased to $4,981,032 in the three-month period ended March 31, 2007 as compared to $4,045,816 in the same period in the prior year, an increase of $935,216 or 23.12%. 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.

Provision for loan losses increased to $256,526 for the three months ended March 31, 2007 from $86,485 for the three-month period ended March 31, 2006. The increase in the provision was caused by the 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. In addition, the Bank experienced $57,325 of loan charge-offs in the current period compared to $6,636 in the corresponding period in 2006. Higher charge-offs were caused by developments in certain individual loans and do not appear to indicate systemic weaknesses in our loan standards. While loan charge-offs have increased in the current period, total delinquency has decreased from December 31, 2006. Management will continue to periodically review its allowance for loan losses and the related provision and adjust as deemed necessary. This review will include a review of economic conditions nationally and locally, as well as a review of the performance of significant major loans and the overall portfolio.

13

	Three Months Ended March 31,
	2007		2006		$ Change			% Change
NONINTEREST INCOME:
Loan appraisal, credit, and miscellaneous charges	$	63,588	$	98,617		(35,029	)		(35.52	)%
Net gain on the sale of foreclosed property		66,428		—		66,428		NA
Income from bank owned life insurance		82,517		70,772		11,745			16.60	%
Gain on sale of investment securities		16,912		—		16,912			100.00	%
Service charges		321,248		308,329		12,919			4.19	%
Total noninterest income	$	550,693	$	477,718		72,975			15.28	%

Loan appraisal, credit, and miscellaneous charges decreased based upon changes in market conditions which have made it harder to charge for certain fees. The increase in gain on the sale of foreclosed property reflects sale of property for $66,428 in 2007 compared to no foreclosed property sold in the prior year. Income from bank-owned life insurance reflects a higher average balance of Bank owned life insurance in the current year. The change in gain on sale of investment securities reflects the sale of $233,743 in investment securities in 2007 compared to no investment sales in 2006. The increase in service charges reflects higher transaction account balances as well as increased fees.

	Three Months Ended March 31,
	2007		2006		$ Change			% Change
NONINTEREST EXPENSE:
Salary and employee benefits	$	1,883,486	$	1,661,371	$	222,115			13.37	%
Occupancy		311,430		279,307		32,123			11.50	%
Advertising		161,123		145,208		15,915			10.96	%
Data processing		187,591		220,234		(32,643	)		(14.82	)%
Legal and professional fees		116,605		239,014		(122,409	)		(51.21	)%
Depreciation of furniture, fixtures, and equipment		119,258		112,496		6,762			6.01	%
Telephone communications		22,911		22,721		190			0.84	%
ATM expenses		67,017		57,322		9,695			16.91	%
Office supplies		46,461		35,711		10,750			30.10	%
Office equipment		11,210		12,793		(1,583	)		(12.37	)%
Other		334,058		344,378		(10,320	)		(3.00	)%
Total noninterest expenses	$	3,261,150	$	3,130,555	$	130,595			4.17	%

Salary and employee benefits costs increased because of increases in the number of personnel employed by the Bank and increased benefits costs. Employees were added to staff some administrative and sales 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 temporary space in connection with the rebuilding of a branch, as well as increases in land rentals on certain properties. Advertising expenses increased as the Bank has continued to focus on increasing market presence in southern Maryland. The drop in data processing expense reflects improved pricing in this area from certain vendors. The declines in legal and professional fees reflect the high level of Sarbanes-Oxley preparation activity in the prior year compared to the current year. Depreciation expense includes increases due to a remodeled home office and additional branch equipment. ATM expenses reflect the replacement of older machines at some locations and additional usage of existing machines.

Income tax expense increased to $566,558, or 35.95%, of pretax income, in the current year, from $541,684, or 35.76%, of pretax income, in the prior year.

14

FINANCIAL CONDITION

Assets

	March 31, 2007		December 31, 2006		$ Change			% Change
Cash and due from banks	$	2,545,692	$	3,157,595	$	(611,903	)		(19.38	)%
Federal Funds sold		608,539		772,351		(163,812	)		(21.21	)%
Interest-bearing deposits with banks		11,453,211		14,260,560		(2,807,349	)		(19.69	)%
Securities available for sale		9,129,840		9,301,676		(171,836	)		(1.85	)%
Securities held to maturity — at amortized cost		95,180,384		97,804,849		(2,624,465	)		(2.68	)%
Federal Home Loan Bank and Federal Reserve Bank stock — at cost		5,400,900		6,100,400		(699,500	)		(11.47	)%
Loans receivable — net of allowance for loan losses of $3,984,655 and $3,783,721 respectively		436,331,951		422,479,799		13,852,152			3.28	%
Premises and equipment, net		7,960,344		6,822,461		1,137,883			16.68	%
Foreclosed real estate		460,884		460,884		—			0.00	%
Accrued interest receivable		2,866,145		2,837,413		28,732			1.01	%
Investment in bank owned life insurance		8,845,278		8,762,761		82,517			0.94	%
Other assets		2,665,045		2,735,265		(70,220	)		(2.57	)%
TOTAL ASSETS	$	583,448,213	$	575,496,014	$	7,952,199			1.38	%

Cash and due from banks, Federal Funds sold and interest-bearing deposits with banks decreased as the funds were used to fund growth in loans. Investment securities, including both the available for sale and held to maturity portfolios, decreased because the Bank has continued to use investment repayments, which have lower yields, as a source of funds to build its loan portfolio, which have higher yields and to pay down short-term borrowings. The Bank’s holdings of Federal Reserve and Federal Home Loan Bank stock decreased because the Bank has decreased its borrowings from the Federal Home Loan Bank system, which decreased its stock ownership requirements. The loan portfolio increased as a result of increases in the Bank’s portfolio of residential construction loans, commercial real estate loans, and commercial lines of credit due to continued marketing emphasis on these loan types.

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

	March 31, 2007					December 31, 2006
	Amount		%			Amount		%
Real Estate Loans
Commercial	$	179,362,216		40.69	%	$	177,923,349		41.69	%
Residential first mortgages		81,366,596		18.46	%		80,781,271		18.93	%
Residential construction		54,311,102		12.32	%		42,746,306		10.01	%
Second mortgage loans		24,202,421		5.49	%		24,572,235		5.76	%
Commercial lines of credit		80,033,046		18.15	%		79,629,910		18.66	%
Consumer loans		2,670,238		0.60	%		2,812,945		0.66	%
Commercial equipment		18,904,955		4.29	%		18,287,840		4.29	%
		440,850,574		100.00	%		426,753,856		100.00	%
Less:
Deferred loan fees		533,968		0.12	%		490,335		0.11	%
Allowance for loan loss		3,984,655		0.90	%		3,783,721		0.89	%
		4,518,623					4,274,056
	$	436,331,951				$	422,479,800

At March 31, 2007, the Bank’s allowance for loan losses totaled $3,984,655 or 0.90% of loan balances as compared to $3,783,721 or 0.89% of loan balances at December 31, 2006. Management’s determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio with consideration given to the overall loss experience; current economic conditions; volume, growth and composition of the loan portfolio; financial condition of the borrowers; and other relevant factors that, in management’s judgment, warrant recognition in providing an adequate allowance. Management believes that the allowance is adequate. Additional loan information for prior years is presented in the Company’s Form 10-K.

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

	3 Months Ended		3 Months Ended
	March 31, 2007		March 31, 2006
Beginning Balance	$	3,783,721	$	3,383,334
Charge Offs		57,325		6,636
Recoveries		1,733		—
Net Charge Offs		55,592		6,636
Additions Charged to Operations		256,526		86,485
Balance at the end of the Period	$	3,984,655	$	3,463,183

The following table provides information with respect to our non-performing loans at the dates indicated.

	Balances as of			Balances as of
	March 31, 2007			December 31, 2006
Accruing loans which are contractually past due 90 days or more:	$	—		$	—
Loans accounted for on a non-accrual basis	$	652,604		$	1,046,423
Total non-performing loans	$	652,604		$	1,046,423
Non-performing loans to total loans		0.15	%		0.25	%
Allowance for loan losses to non performing loans		610.58	%		361.59	%

No loans were considered impaired under SFAS 114.

Liabilities

	March 31, 2007		December 31, 2006		$ Change			% Change
Noninterest-bearing deposits	$	48,379,608	$	43,723,436	$	4,656,172			10.65	%
Interest-bearing deposits		393,148,950		374,289,966		18,858,984			5.04	%
Total deposits		441,528,558		418,013,402		23,515,156			5.63	%
Short-term borrowings		609,816		6,567,702		(5,957,886	)		(90.71	)%
Long-term debt		86,035,980		96,045,936		(10,009,956	)		(10.42	)%
Guaranteed preferred beneficial interest in junior subordinated debentures		12,000,000		12,000,000		—			0.00	%
Accrued expenses and other liabilities		4,499,240		5,139,637		(640,397	)		(12.46	)%
Total liabilities	$	544,673,594	$	537,766,677	$	6,906,917			1.28	%

Deposit balances increased due to the Bank’s continuing efforts to increase its market share through advertising, branch improvements, and other marketing efforts. Non-interest bearing deposits increased during the three month period but many of these deposits are highly variable as to balances. The increases in deposits were used to reduce the balances of

16

long-term debt and short-term borrowings. Accrued expenses and other liabilities declined due to the payment of incentives after year end and the payment of certain tax obligations.

Stockholders’ Equity

	March 31, 2007			December 31, 2006			$ Change		% Change
Common stock	$	26,470		$	26,423		$	47		0.18	%
Additional paid in capital		9,538,076			9,499,946			38,130		0.40	%
Retained earnings		29,349,523			28,353,792			995,731		3.51	%
Accumulated other comprehensive loss		(42,448	)		(53,822	)		11,374		(21.13	)%
Unearned ESOP shares		(97,002	)		(97,002	)		—		0.00	%
Total stockholders’ equity	$	38,774,619		$	37,729,337		$	1,045,282		2.77	%

Common stock and additional paid in capital increased due to the exercise of options. Retained earnings increased because of earnings, offset by the repurchase of 558 shares at a cost of $13,890. Book value per share increased from $14.28 per share to $14.65 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 for 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, principal and interest payments on loans, interest received on investment securities and proceeds from sale and maturity of investment securities. Its principal funding commitments are for the origination or purchase of loans, the purchase of investment securities and the payment of maturing deposits. Deposits are considered a primary source of funds supporting the Bank’s lending and investment activities. The Bank also uses various wholesale funding instruments including FHLB advances and reverse repurchase agreements. The Bank may borrow up to 40% of consolidated Bank assets on a line of credit available from the FHLB. As of March 31, 2007, the maximum available under this line was $232 million, while outstanding advances totaled $86 million. In order to draw on this line the Bank must have sufficient collateral. Qualifying collateral includes residential 1-4 family first mortgage loans, certain second mortgage loans, certain commercial real estate loans, and various investment securities. At March 31, 2007, the Bank had pledged collateral sufficient to draw $201,862,880 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 future deposit flows.

Cash, cash equivalents, and interest-bearing deposits with banks as of March 31, 2007 totaled $14,607,442, a decrease of $3,583,064, or 19.70%, from the December 31, 2006 total of $18,190,506. 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 flows are its financing activities including deposits and borrowings. During the first quarter in 2007, all financing activities provided $7,571,601 in cash compared to $4,339,691 for the first quarter of 2006. The increase in cash flows from financing activities during the most recent period was principally due to increases in net deposits partially offset by net decreases in borrowing activities. Payments of long-term borrowings increased to $10,009,956 in the first quarter of 2007 compared to $8,546 in the same period of 2006. In addition, there was a net decrease in short-term borrowings in the current period of $5,957,886 compared to a $4,569,387 decrease in the same period in 2006. During the first quarter of 2007, net deposit growth was $23,515,156 compared to $8,744,990 in 2006. Operating activities provided cash of $788,676 in the first quarter of 2007 compared to providing cash of $1,361,591 in the first quarter of 2006. The change was caused primarily by a decrease of accounts payable and other accrued expenses in 2007.

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The Bank’s principal use of cash has been in investments in loans, investment securities and other assets. During the quarter ended March 31, 2007, the Bank invested a total of $11,943,341 compared to $9,740,544 in 2006. The principal reasons for the increase in cash used in investing activities was the purchase of premises and equipment and receipt of a lower amount of proceeds from maturing securities in 2007.

REGULATORY MATTERS

The Bank is subject to Federal Reserve Board capital requirements as well as statutory capital requirements imposed under Maryland law. At March 31, 2007, the Bank’s tangible, leverage and risk-based capital ratios were 8.41%, 10.55% and 11.42%, respectively. These levels are in excess of the required 4.0%, 4.0% and 8.0% ratios required by the Federal Reserve Board as well as the 5.0%, 5.0%, and 10% ratios required to be considered well capitalized. At March 31, 2006, the Company’s tangible, leverage and risk-based capital ratios were 8.79%, 11.03% and 11.90%, respectively. These levels are also in excess of the 4.0%, 4.0% and 8.0% ratios required by the Federal Reserve Board as well as the 5.0%, 5.0%, and 10% ratios required to be considered well capitalized.

CRITICAL ACCOUNTING POLICIES

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

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

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

18

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Asset/Liability Risk Management

Net interest income (“NII”), the primary component of the Company’s net income, arises from the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities and the relative amounts of such assets and liabilities. As interest rates change, the yield on interest-earning assets and the cost of interest bearing liabilities will also change. These changes can have a negative impact on net interest income as costs may rise faster than interest income. The variance in future financial performance caused by changes in interest rates can be broadly termed interest rate risk. Elements of interest rate risk include a mismatch between expected lives of current assets and liabilities (asset/liability mismatch), the ability of borrowers to prepay loans without penalty (prepayment risk), periodic and interest rate caps built into various loan types which limit upward interest rate adjustments, and adjustable rate liabilities and assets pricing being based upon different indices (basis risk).

The Company attempts to measure and control these risks through various tools including financial modeling of current and projected balance sheets. Financial modeling simulates the effects on the Company’s financial position and net interest income of various interest rate scenarios. The Company uses several measures to gauge its interest rate risk including measuring the effect on NII of various interest rate scenarios, measuring the “gap” or mismatch in assets and liabilities repricing during a particular time period, and measuring the amount that the estimated market value of assets and liabilities would change given specific changes in interest rates. Modeling these calculations is inherently complex, as many important factors in these calculations are estimates of future consumer behavior based upon historical patterns. The Company uses a steady state balance sheet and parallel rate shifts in interest rates as the basis of many simulations. The Company also looks at results under non-parallel rate shifts.

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Presented below are the projected changes in NII given the parallel changes noted above:

Projected Percentage change in Net Interest Income at March 31, 2007

+200			+100						-100			-200
Basis points			Basis points			No Change			Basis points			Basis points
	1.06	%		1.00	%		0.00	%		(1.93	)%		(7.07	)%

The rate scenarios noted above show a slight positive change for the two higher interest rate scenarios. The down 100 basis point scenario shows a slight negative change while the down 200 basis point scenario shows a larger negative effect. The results shown above are slightly better in each interest rate scenario than those obtained as of December 31, 2006. These slight improvements reflect the maturity of certain financial instruments which had a negative effect on the results shown above.

Most of the declines in net interest income are small relative to the Company’s net income and primarily result from the projected actions of customers and others taking advantage of the optionality built into the various financial instruments which make up the Company’s assets and liabilities. The Company will continue to evaluate possible courses of action to control the risk of large interest rate declines on its operations.

Management will continue to analyze, simulate, and control interest rate risk as the Company grows. The Company may from time to time determine that the use of different financial instruments including interest rate caps, floors, swaps, long term borrowings, or other arrangements may be prudent. It is management’s belief that the changes in the Company’s balance sheet, including the increased emphasis on commercial lines of credit and certain other loans which tend to rapidly adjust to interest rate changes, and the declining importance of certain liabilities such as short term borrowings including reverse repurchase agreements and other short term liabilities will decrease the negative effects of changing interest rates on NII. However, these loans carry an increased risk of default, and increases in retail deposits will tend to increase non-interest expenses.

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.

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Item 1A – Risk Factors — A general housing price decline might have a negative impact on our operations Recent developments in the housing market, including a dramatic rise in “sub-prime” mortgage foreclosure rates, have negatively impacted many financial institutions. Currently, the Bank has little direct exposure to these issues. In addition, the Bank has no direct exposure to “exotic” mortgage products such as option ARM’s or interest only residential mortgage products. However, to the extent that the widespread availability of these products increased the demand and price of housing in our market area, the current higher foreclosure rates and the lack of available funding for certain prospective home buyers may lead to a general price decline in certain markets. A general housing price decline might have a negative impact on our operations leading to higher levels of loan losses and foreclosed assets. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2006, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks we face. Additional risks and uncertainties not currently known to us or that we have deemed to be immaterial also may materially adversely affect our business, financial condition, and/or operating results.

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds

(a)	Not applicable
(b)	Not applicable
(c)	The following table sets forth information regarding the Company’s repurchases of its Common Stock during the quarter ended March 31, 2007.

					(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		per Share		Programs		Programs
January 2007		—		—		—		63,737
February 2007		—		—		—		63,737
March 2007		558		24.90		558		63,179
Total		558		24.90		558		63,179

On October 25, 2004, Tri-County Financial Corporation announced a repurchase program under which it would repurchase 127,500 shares of its common stock (as adjusted for the three for two stock splits declared in October 2004, December 2005, and October 2006). 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 Amended and Restated Employment Agreement by and among Community Bank of Tri-County, William J. Pasenelli and Tri-County Financial Corporation, as guarantor

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           Exhibit 10.2 Amended and Restated Employment Agreement by and among Community Bank of Tri-County, C. Marie Brown, and Tri-County Financial Corporation, as guarantor

          Exhibit 10.3 Amended and Restated Employment Agreement by and among Community Bank of Tri-County, Gregory C. Cockerham, and Tri-County Financial Corporation, as guarantor

          Exhibit 31 Rule 13a-14(a) Certifications

          Exhibit 32 Section 1350 Certifications

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SIGNATURES

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

		TRI-COUNTY FINANCIAL CORPORATION
Date:	May 10, 2007	By:	/s/ Michael L. Middleton
			Michael L. Middleton, President, Chief Executive Officer and Chairman of the Board
Date:	May 10, 2007	By:	/s/ William J. Pasenelli
			William J. Pasenelli, Executive Vice President and Chief Financial Officer

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EX-10.1

Exhibit 10.1

AMENDED AND RESTATED
EMPLOYMENT AGREEMENT

      THIS AGREEMENT (the “Agreement”) is entered into this 20 day of April, 2007, by and between Community Bank of Tri-County, with its principal place of business at 3035 Leonardtown Road, Waldorf, Maryland 20601 (the “Bank”), William J. Pasenelli (the “Employee”), and Tri-County Financial Corporation (the “Company”), solely as guarantor of the Bank’s obligations hereunder, and is effective as of the date hereof (the “Effective Date”).

     WHEREAS, the parties desire by this writing to set forth the continuing employment relationship between the Bank and the Employee; and

     WHEREAS, the parties desire by this writing to set forth the current terms and conditions of the employment relationship between the Bank and Executive; and

     WHEREAS, this Agreement shall supersede any and all prior Employment Agreements, by and between the Bank and the Employee, and any amendments thereto; and any and all prior Guaranty Agreements, by and between the Company and the Employee.

     NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Bank and the Employee hereby agree as follows:

     1. EMPLOYMENT. The Employee shall serve the Bank as Executive Vice President and Chief Financial Officer. In such position, the Employee shall have the duties, responsibilities, functions and authority determined and designated from time to time by the Board of Directors (the “Board”) and the Chief Executive Officer. The Employee shall render such administrative and management services to the Bank and its affiliates as are customarily performed by persons in a similar executive capacity.

     2. EFFECTIVE DATE AND TERM. The Bank agrees to employ the Employee for an initial period of three (3) years, beginning on the Effective Date and ending on the day before the third (3rd) anniversary of the Effective Date, and during the period of any additional extensions described below (the “Term of Employment”). The parties intend that, at any point in time during the Employee’s employment hereunder, the then-remaining Term of Employment shall be three (3) years. On the day after the Effective Date and on each day thereafter, the Term of Employment shall extend by one day, so that, on any date, the term of Employment will expire on the day before the third (3^rd) anniversary of such date. These extensions shall continue unless (a) the Bank notifies the Employee that it has elected to discontinue the extensions; (b) the Employee notifies the Bank of the Employee’s election to discontinue the extensions; or (c) the Employee’s employment with the Bank is terminated, whether by resignation, discharge or otherwise. On the earlier of (i) the date on which such notice is given; or (ii) the effective date of a termination of Employee’s Employment with the Bank, the Term of Employment will convert to a fixed period of three (3) years ending on the day before the third (3^rd) anniversary of such date (provided, however, that subject to any rights of the Employee 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 Employee’s death, voluntary termination, Disability or termination for Cause). The last day of the Agreement term, as extended in accordance with this Section 2, is referred to in this Agreement as the “Expiration Date.”

     3. COMPENSATION AND BENEFITS.

          3.1 BASE SALARY. During the Term of Employment, the Bank agrees to pay the Employee base salary at the rate of $170,000 per annum, subject to increase from time to time in accordance with the usual practices of the Bank with respect to its review of compensation for senior executives. Any increase in the Employee’s base salary shall become the “base salary” for purposes of this Agreement. The Employee’s base salary shall be payable in periodic installments in accordance with the Bank’s usual practice.

          3.2 EMPLOYEE BENEFITS. The Employee 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 Bank. Such participation shall be subject to (a) the terms of the applicable plan documents, (b) generally applicable policies of the Bank and (c) the discretion of the Board or any administrative or other committee provided for in, or contemplated by, such plans.

          3.3 INCENTIVE COMPENSATION. The Employee shall be eligible to participate in any incentive compensation or bonus programs sponsored by the Bank on such terms as the Board may establish for the Employee’s participation.

          3.4 BUSINESS EXPENSES. The Bank shall pay, or reimburse, the Employee for reasonable travel and other business expenses incurred by the Employee in the performance of the Employee’s duties and responsibilities, subject to such reasonable requirements with respect to substantiation and documentation as may be specified by the Bank.

          3.5 LEAVE. The Employee shall be entitled to leave (vacation, sick and personal) in accordance with the Bank’s standard policies for senior executives. Further, the Board, in its discretion, may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as the Board, in its discretion, may determine.

          3.6 OTHER EMPLOYEE BENEFITS. The Employee shall be entitled to participate in any compensatory plans, arrangements or programs the Bank 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.

          3.7 GENERAL. The Employee’s participation in any plans, arrangements or programs currently in effect or made available in the future shall not be deemed to be in lieu of other compensation to which the Employee is entitled as described under this Agreement.

     4. EXTENT OF SERVICE. During the Term of Employment, the Employee shall devote his full time, best efforts and business judgment, skills and knowledge to the advancement of the Bank’s interests and to the discharge of his responsibilities under this Agreement; provided, however, that the Employee may:

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     (a) invest personal assets in such form or manner as shall not require any material services on the Employee’s part in the operations or affairs of the entities in which such investments are made, provided that the Employee may not own any interest in an entity that competes with the Bank or any affiliate (other than up to 4.9% of the outstanding voting stock of such entity that is a publicly-traded entity); or

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

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

     5. DEATH. In the event of the Employee’s death during the Term of Employment, the Employee’s employment (and the Term of Employment) shall terminate on the date of death. The Bank shall pay to the Employee’s beneficiary, or estate, (a) any compensation due the Employee through the last day of the calendar month in which death occurred, plus (b) any other compensation or benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Bank in which the Employee participated as of the date of death.

     6. DISCHARGE FOR CAUSE.

          6.1 NOTICE AND DETERMINATION OF CAUSE. The Bank may terminate the Employee’s employment at any time during the Term of Employment for Cause, as defined below. Such termination shall be deemed to have occurred for Cause only if:

     (a) The Board, by a separate affirmative vote of at least three-fourths (3/4) of the entire membership, determines that the Employee has: (i) engaged in acts of personal dishonesty which have resulted in loss to the Bank 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 Bank or one of its affiliates; (v) been convicted of a crime or act involving moral turpitude; (vi) willfully breached the Bank’s or 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 Employee’s then-current employment capacity or (viii) willfully attempted to obstruct or failed to cooperate with any investigation authorized by the Board or any governmental or self-regulatory entity. No act or failure to act on the part of the Employee shall be considered “willful” unless it is done, or omitted to be done, by the Employee in bad faith or without reasonable belief that the Employee’s action or omission was in the best interests of the Bank. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board, or upon the advice of legal counsel for the Bank, shall be conclusively presumed to be done, or omitted to be done, by the Employee in good faith and in the best interests of the Bank and its affiliates; and

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

     (c) After giving the Employee Notice of Intent to Discharge and before taking the vote contemplated by Section 6.1(a), the Employee is afforded a reasonable opportunity to make both written and oral presentations before the Board for the purpose of refuting the alleged grounds for Cause for discharge; and

     (d) After the vote contemplated by Section 6.1(a), the Bank has furnished to the Employee a notice of termination which specifies the effective date of the Employee’s termination of employment (which shall not 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 Employee for Cause and stating with particularity the facts and circumstances found to constitute Cause for discharge (the “Final Discharge Notice”).

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

          6.3 EFFECT OF TERMINATION FOR CAUSE. In the event of termination pursuant to this Section 6, the Term of Employment shall terminate and the Bank shall pay to the Employee an amount equal to the sum of (a) base salary or other compensation earned through the date of termination, plus (b) any other compensation or vested benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Bank. All other obligations of the Bank shall terminate as of the date of termination.

     7. DISABILITY. The Bank may terminate the Employee’s employment (and the Term of Employment) after having established the Employee’s Disability. For purposes of this Agreement, “Disability” means a physical or mental infirmity that impairs the Employee’s ability to substantially perform his duties under this Agreement and results in the Employee becoming eligible for long-term disability benefits under the Bank’s long-term disability plan (or, if the Bank has no such plan in effect, that impairs the Employee’s ability to substantially perform full-time duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Employee shall be entitled to the compensation and benefits provided for under this Agreement for (a) any period during the Term of Employment and prior to the establishment of the Employee’s Disability during which the Employee is

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unable to work due to physical or mental infirmity, or (b) any period of Disability which is prior to the Employee’s termination of employment pursuant to this Section 7.

     8. TERMINATION WITHOUT CAUSE. The Board may, by written notice to the Employee, immediately terminate his employment at any time for a reason other than Cause, in which event the Employee shall be entitled to receive the termination payment set forth in Section 10.2 of this Agreement, payable in one lump sum within ten (10) days of termination. The Bank shall also continue to provide the Employee with benefit continuation as set forth in Section 10.3 of this Agreement.

     9. VOLUNTARY TERMINATION BY EMPLOYEE. Subject to Section 11 hereof, the Employee may voluntarily terminate employment with the Bank during the term of this Agreement, upon at least 60 days’ prior written notice, in which case the Term of Employment shall end and the Bank shall pay to the Employee an amount equal to the (a) base salary or other compensation earned through the date of termination plus (b) 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 Bank.

     10. CHANGE IN CONTROL.

          10.1 DEFINITION OF CHANGE IN CONTROL. For purposes of this Agreement, a “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: (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 (c) below) in

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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 (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: (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

     (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.

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          10.2 TERMINATION PAYMENT. Notwithstanding any provision herein to the contrary, if the Bank (i) terminates the Employee’s employment pursuant to Section 8 of this Agreement or (ii) terminates the Employee’s employment under this Agreement without the Employee’s prior written consent and for a reason other than Cause, in connection with or within twelve (12) months after a Change in Control, then the Employee shall be paid an unreduced lump sum severance benefit equal to the sum of the following items:

     (a) Two (2) times the Employee’s annual base salary (as provided for in Section 3 of this Agreement) at the rate in effect on the date of the Employee’s termination of employment (including any amount contributed by the Bank on the Employee’s behalf pursuant to a salary reduction agreement and which is not included in the Employee’s gross income under Sections 125, 132(f) or 402(e)(3) of the Internal Revenue Code of 1986, as amended); and

     (b) Two (2) times the most recent annual incentive compensation payment made to the Employee (as provided for in Section 3 of this Agreement).

     The severance benefit payment under this Section 10.2 shall be made to the Employee in one lump sum within ten (10) days of the Employee’s termination of employment.

          10.3 BENEFIT CONTINUATION. Employee shall also be entitled to continuation of the medical, dental and life insurance benefits existing on the date of termination at the level in effect, and at the same out-of-pocket premium cost to the Employee, as on the date of termination for a period of thirty-six (36) months following the Employee’s termination of employment. If the benefits under any benefit plan or program continued pursuant to this Section 10.3 may not be provided because the Employee is no longer an employee of the Bank or an affiliate, the Bank shall pay or provide for coverage on a comparable basis for the Employee and, where applicable, the Employee’s dependents.

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          10.4 OTHER TERMINATION. Notwithstanding any other provision of this Agreement to the contrary, the Employee may voluntarily terminate employment under this Agreement within twelve (12) months following a Change in Control of the Bank or Corporation, and the Employee shall be entitled to receive the payments and benefits described in Sections 10.2 and 10.3 of this Agreement, upon the occurrence of any of the following events, or within ninety (90) days thereafter, which have not been consented to in advance by the Employee in writing: (a) the requirement that the Employee move a primary personal residence, or perform the Employee’s principal executive functions, more than thirty-five (35) miles from the Employee’s primary office as of the date of the Change in Control; (b) a material reduction in the Employee’s base salary as in effect on the date of the Change in Control or as the same may be increased from time to time; (c) the failure of the Bank to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Bank which would directly or indirectly reduce any such benefits or deprive the Employee of any material fringe benefit provided by the Bank at the time of the Change in Control; (d) the assignment to the Employee of duties and responsibilities materially different from those normally associated with the Employee’s position as referenced in Section l; (e) a failure to elect or reelect the Employee to the Board if the Employee is serving on the Board on the date of the Change in Control; or (f) a material diminution or reduction in the Employee’s responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank.

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     11. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and benefits provided pursuant to Section 10 of this Agreement, either alone or together with other payments and benefits the Employee has the right to receive from the Bank, would constitute a “parachute payment” under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the payments and benefits pursuant to Section 10 shall be reduced or revised, in the manner determined by the Employee, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits under Section 10 being non-deductible to the Bank pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The Bank’s independent public accountants will determine any reduction in the payments and benefits to be made pursuant to Section 10; the Bank will pay for the accountant’s opinion. If the Bank and/or the Employee do not agree with the accountant’s opinion, the Bank will pay to the Employee the maximum amount of payments and benefits pursuant to Section 10, as selected by the Employee, that the opinion indicates have a high probability of not causing any of the payments and benefits to be non-deductible to the Bank and subject to the excise tax imposed under Section 4999 of the Code. The Bank may also request, and the Employee has the right to demand that the Bank request, a ruling from the IRS as to whether the disputed payments and benefits pursuant to Section 10 have such tax consequences. The Bank will promptly prepare and file the request for a ruling from the IRS, but in no event will the Bank make this filing later than thirty (30) days from the date of the accountant’s opinion referred to above. The request will be subject to the Employee’s approval prior to filing; the Employee shall not unreasonably withhold such approval. The Bank and the Employee agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any IRS rulings, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained in this Agreement shall result in a reduction of any payments or benefits to which the Employee may be entitled upon termination of employment other than pursuant to Section 10 hereof, or a reduction in the payments and benefits specified in Section 10, below zero.

     12. NO MITIGATION. In the event of any termination of employment under this Agreement, the Employee shall be under no obligation to seek other employment or to otherwise mitigate damages, and there shall be no offset against any amounts due to the Employee under this Agreement for any reason, including, without limitation, on account of any remuneration attributable to subsequent employment. 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.

13. MISCELLANEOUS PROVISIONS.

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

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

          13.3 ARBITRATION. The Bank and the Employee 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 Bank’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 upon 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 Employee 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 Bank or the Employee pursues any claim, dispute or controversy against the other in a legal 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 attorneys’ 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.

          13.4 INDEMNIFICATION FOR ATTORNEYS’ FEES. In the event any dispute or controversy arising under or in connection with the Employee’s termination of employment or this Agreement is resolved in favor of the Employee, whether by judgment, arbitration or settlement, the Employee shall be entitled to the payment of: (i) all legal fees and expenses incurred by the Employee 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 to the Employee under this Agreement.

          13.5 ASSIGNMENT; SUCCESSORS AND ASSIGNS, ETC.

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

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

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

          13.6 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.

          13.7 REDUCTIONS; REGULATORY REQUIREMENTS. Notwithstanding anything to the contrary contained in this Agreement, any and all payments and benefits to be provided to the Employee under this Agreement 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 Bank and its affiliates. The Employee is aware and acknowledges that the Federal Deposit Insurance Corporation has the power to preclude the Bank or its affiliates from making payments to the Employee under this Agreement under certain circumstances. The Employee agrees that neither the Bank nor 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 Bank or its affiliates, as the case may be.

          13.8 WAIVER. No waiver of any provision of this Agreement 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.

          13.9 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 Employee at the Employee’s last known address on the books of the Bank or, in the case of the Bank, at its main office, attention of the Chief Executive Officer of the Board of Directors.

          13.10 AMENDMENT. This Agreement may be amended or modified only by a written instrument signed by the Employee and a duly authorized representative of the Bank.

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          13.11 NO EFFECT ON LENGTH OF SERVICE. Nothing in this Agreement shall be deemed to prohibit the Bank from terminating the Employee’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 Bank and the Employee in the event of any such termination. In addition, nothing in this Agreement shall require the termination of the Employee’s employment at the expiration of the Term of Employment. Any continuation of the Employee’s employment beyond the expiration of the Term of Employment shall be on an “at-will” basis, unless the parties agree otherwise.

          13.12 SOURCE OF PAYMENTS. The Bank shall make in a timely manner all payments provided for under this Agreement in cash or check from its general funds. The Company, however, unconditionally guarantees payment and the provision of all amounts and benefits due to the Employee under this Agreement. If the Bank does not timely pay or provide such amounts and benefits, the Company shall pay or provide such amounts and benefits.

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

          13.14 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.

          13.15 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.

     14. EFFECT OF CODE SECTION 409A. Notwithstanding anything in this Agreement to the contrary, if the Bank in good faith determines, as of the effective date of the Employee’s termination of employment, that amounts payable to the Employee 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 Bank will so advise the Employee, and any such payments shall be suspended and accrued for six months, whereupon they shall be paid to the Employee in a lump sum (together with interest thereon at the then-prevailing prime rate). The Employee agrees that the Bank 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, the parties have executed this Agreement on the day and year first above the written.

ATTEST:	/s/ Diane M. Deskins	COMMUNITY BANK OF TRI-COUNTY
		/s/ Michael L. Middleton
		Michael L. Middleton President

ATTEST:	/s/ Diane M. Deskins	TRI-COUNTY FINANCIAL CORPORATION (As Guarantor)
		/s/ Michael L. Middleton
		Michael L. Middleton President

WITNESS:	/s/ Diane M. Deskins	EMPLOYEE
		/s/ William J. Pasenelli
		William J. Pasenelli

EX-10.2

Exhibit 10.2

AMENDED AND RESTATED
EMPLOYMENT AGREEMENT

     THIS AGREEMENT (the “Agreement”) is entered into this 20 day of April, 2007, by and between Community Bank of Tri-County, with its principal place of business at 3035 Leonardtown Road, Waldorf, Maryland 20601 (the “Bank”), C. Marie Brown (the “Employee”), and Tri-County Financial Corporation (the “Company”), solely as guarantor of the Bank’s obligations hereunder, and is effective as of the date hereof (the “Effective Date”).

     WHEREAS, the parties desire by this writing to set forth the continuing employment relationship between the Bank and the Employee; and

     WHEREAS, the parties desire by this writing to set forth the current terms and conditions of the employment relationship between the Bank and Executive; and

     WHEREAS, this Agreement shall supersede any and all prior Employment Agreements, by and between the Bank and the Employee, and any amendments thereto; and any and all prior Guaranty Agreements, by and between the Company and the Employee.

     NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Bank and the Employee hereby agree as follows:

     1. EMPLOYMENT. The Employee shall serve the Bank as Executive Vice President and Chief Operating Officer. In such position, the Employee shall have the duties, responsibilities, functions and authority determined and designated from time to time by the Board of Directors (the “Board”) and the Chief Executive Officer. The Employee shall render such administrative and management services to the Bank and its affiliates as are customarily performed by persons in a similar executive capacity.

     2. EFFECTIVE DATE AND TERM. The Bank agrees to employ the Employee for an initial period of three (3) years, beginning on the Effective Date and ending on the day before the third (3rd) anniversary of the Effective Date, and during the period of any additional extensions described below (the “Term of Employment”). The parties intend that, at any point in time during the Employee’s employment hereunder, the then-remaining Term of Employment shall be three (3) years. On the day after the Effective Date and on each day thereafter, the Term of Employment shall extend by one day, so that, on any date, the term of Employment will expire on the day before the third (3^rd) anniversary of such date. These extensions shall continue unless (a) the Bank notifies the Employee that it has elected to discontinue the extensions; (b) the Employee notifies the Bank of the Employee’s election to discontinue the extensions; or (c) the Employee’s employment with the Bank is terminated, whether by resignation, discharge or otherwise. On the earlier of (i) the date on which such notice is given; or (ii) the effective date of a termination of Employee’s Employment with the Bank, the Term of Employment will convert to a fixed period of three (3) years ending on the day before the third (3^rd) anniversary of such date (provided, however, that subject to any rights of the Employee 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 Employee’s death, voluntary termination, Disability or termination for Cause). The last day of the Agreement term, as extended in accordance with this Section 2, is referred to in this Agreement as the “Expiration Date.”

     3. COMPENSATION AND BENEFITS.

          3.1 BASE SALARY. During the Term of Employment, the Bank agrees to pay the Employee base salary at the rate of $175,000 per annum, subject to increase from time to time in accordance with the usual practices of the Bank with respect to its review of compensation for senior executives. Any increase in the Employee’s base salary shall become the “base salary” for purposes of this Agreement. The Employee’s base salary shall be payable in periodic installments in accordance with the Bank’s usual practice.

          3.2 EMPLOYEE BENEFITS. The Employee 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 Bank. Such participation shall be subject to (a) the terms of the applicable plan documents, (b) generally applicable policies of the Bank and (c) the discretion of the Board or any administrative or other committee provided for in, or contemplated by, such plans.

          3.3 INCENTIVE COMPENSATION. The Employee shall be eligible to participate in any incentive compensation or bonus programs sponsored by the Bank on such terms as the Board may establish for the Employee’s participation.

          3.4 BUSINESS EXPENSES. The Bank shall pay, or reimburse, the Employee for reasonable travel and other business expenses incurred by the Employee in the performance of the Employee’s duties and responsibilities, subject to such reasonable requirements with respect to substantiation and documentation as may be specified by the Bank.

          3.5 LEAVE. The Employee shall be entitled to leave (vacation, sick and personal) in accordance with the Bank’s standard policies for senior executives. Further, the Board, in its discretion, may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as the Board, in its discretion, may determine.

          3.6 OTHER EMPLOYEE BENEFITS. The Employee shall be entitled to participate in any compensatory plans, arrangements or programs the Bank 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.

          3.7 GENERAL. The Employee’s participation in any plans, arrangements or programs currently in effect or made available in the future shall not be deemed to be in lieu of other compensation to which the Employee is entitled as described under this Agreement.

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     4. EXTENT OF SERVICE. During the Term of Employment, the Employee shall devote her full time, best efforts and business judgment, skills and knowledge to the advancement of the Bank’s interests and to the discharge of her responsibilities under this Agreement; provided, however, that the Employee may:

     (a) invest personal assets in such form or manner as shall not require any material services on the Employee’s part in the operations or affairs of the entities in which such investments are made, provided that the Employee may not own any interest in an entity that competes with the Bank or any affiliate (other than up to 4.9% of the outstanding voting stock of such entity that is a publicly-traded entity); or

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

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

     5. DEATH. In the event of the Employee’s death during the Term of Employment, the Employee’s employment (and the Term of Employment) shall terminate on the date of death. The Bank shall pay to the Employee’s beneficiary, or estate, (a) any compensation due the Employee through the last day of the calendar month in which death occurred, plus (b) any other compensation or benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Bank in which the Employee participated as of the date of death.

     6. DISCHARGE FOR CAUSE.

          6.1 NOTICE AND DETERMINATION OF CAUSE. The Bank may terminate the Employee’s employment at any time during the Term of Employment for Cause, as defined below. Such termination shall be deemed to have occurred for Cause only if:

     (a) The Board, by a separate affirmative vote of at least three-fourths (3/4) of the entire membership, determines that the Employee has: (i) engaged in acts of personal dishonesty which have resulted in loss to the Bank 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 Bank or one of its affiliates; (v) been convicted of a crime or act involving moral turpitude; (vi) willfully breached the Bank’s or 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 Employee’s then-current employment capacity or (viii) willfully attempted to obstruct or failed to cooperate with any investigation authorized by the Board or any governmental or self-regulatory entity. No act or failure to act on the part of the Employee shall be considered “willful” unless it is done, or omitted to be done, by the Employee in bad faith or without reasonable belief that the

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Employee’s action or omission was in the best interests of the Bank. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board, or upon the advice of legal counsel for the Bank, shall be conclusively presumed to be done, or omitted to be done, by the Employee in good faith and in the best interests of the Bank and its affiliates; and

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

     (c) After giving the Employee Notice of Intent to Discharge and before taking the vote contemplated by Section 6.1(a), the Employee is afforded a reasonable opportunity to make both written and oral presentations before the Board for the purpose of refuting the alleged grounds for Cause for discharge; and

     (d) After the vote contemplated by Section 6.1(a), the Bank has furnished to the Employee a notice of termination which specifies the effective date of the Employee’s termination of employment (which shall not 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 Employee for Cause and stating with particularity the facts and circumstances found to constitute Cause for discharge (the “Final Discharge Notice”).

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

          6.3 EFFECT OF TERMINATION FOR CAUSE. In the event of termination pursuant to this Section 6, the Term of Employment shall terminate and the Bank shall pay to the Employee an amount equal to the sum of (a) base salary or other compensation earned through the date of termination, plus (b) any other compensation or vested benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Bank. All other obligations of the Bank shall terminate as of the date of termination.

     7. DISABILITY. The Bank may terminate the Employee’s employment (and the Term of Employment) after having established the Employee’s Disability. For purposes of this Agreement, “Disability” means a physical or mental infirmity that impairs the Employee’s ability to substantially perform her duties under this Agreement and results in the Employee becoming eligible for long-term

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disability benefits under the Bank’s long-term disability plan (or, if the Bank has no such plan in effect, that impairs the Employee’s ability to substantially perform full-time duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Employee shall be entitled to the compensation and benefits provided for under this Agreement for (a) any period during the Term of Employment and prior to the establishment of the Employee’s Disability during which the Employee is unable to work due to physical or mental infirmity, or (b) any period of Disability which is prior to the Employee’s termination of employment pursuant to this Section 7.

     8. TERMINATION WITHOUT CAUSE. The Board may, by written notice to the Employee, immediately terminate her employment at any time for a reason other than Cause, in which event the Employee shall be entitled to receive the termination payment set forth in Section 10.2 of this Agreement, payable in one lump sum within ten (10) days of termination. The Bank shall also continue to provide the Employee with benefit continuation as set forth in Section 10.3 of this Agreement.

     9. VOLUNTARY TERMINATION BY EMPLOYEE. Subject to Section 11 hereof, the Employee may voluntarily terminate employment with the Bank during the term of this Agreement, upon at least 60 days’ prior written notice, in which case the Term of Employment shall end and the Bank shall pay to the Employee an amount equal to the (a) base salary or other compensation earned through the date of termination plus (b) 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 Bank.

     10. CHANGE IN CONTROL.

          10.1 DEFINITION OF CHANGE IN CONTROL. For purposes of this Agreement, a “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”);

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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: (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 (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 (D) 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: (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

     (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.

          10.2 TERMINATION PAYMENT. Notwithstanding any provision herein to the contrary, if the Bank (i) terminates the Employee’s employment pursuant to Section 8 of this Agreement or

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or (ii) terminates the Employee’s employment under this Agreement without the Employee’s prior written consent and for a reason other than Cause, in connection with or within twelve (12) months after a Change in Control, then the Employee shall be paid an unreduced lump sum severance benefit equal to the sum of the following items:

     (a) Two (2) times the Employee’s annual base salary (as provided for in Section 3 of this Agreement) at the rate in effect on the date of the Employee’s termination of employment (including any amount contributed by the Bank on the Employee’s behalf pursuant to a salary reduction agreement and which is not included in the Employee’s gross income under Sections 125, 132(f) or 402(e)(3) of the Internal Revenue Code of 1986, as amended); and

     (b) Two (2) times the most recent annual incentive compensation payment made to the Employee (as provided for in Section 3 of this Agreement).

     The severance benefit payment under this Section 10.2 shall be made to the Employee in one lump sum within ten (10) days of the Employee’s termination of employment.

          10.3 BENEFIT CONTINUATION. Employee shall also be entitled to continuation of the medical, dental and life insurance benefits existing on the date of termination at the level in effect, and at the same out-of-pocket premium cost to the Employee, as on the date of termination for a period of thirty-six (36) months following the Employee’s termination of employment. If the benefits under any benefit plan or program continued pursuant to this Section 10.3 may not be provided because the Employee is no longer an employee of the Bank or an affiliate, the Bank shall pay or provide for coverage on a comparable basis for the Employee and, where applicable, the Employee’s dependents.

          10.4 OTHER TERMINATION. Notwithstanding any other provision of this Agreement to the contrary, the Employee may voluntarily terminate employment under this Agreement within twelve (12) months following a Change in Control of the Bank or Corporation, and the Employee shall be entitled to receive the payments and benefits described in Sections 10.2 and 10.3 of this Agreement, upon the occurrence of any of the following events, or within ninety (90) days thereafter, which have not been consented to in advance by the Employee in writing: (a) the requirement that the Employee move a primary personal residence, or perform the Employee’s principal executive functions, more than thirty-five (35) miles from the Employee’s primary office as of the date of the Change in Control; (b) a material reduction in the Employee’s base salary as in effect on the date of the Change in Control or as the same may be increased from time to time; (c) the failure of the Bank to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Bank which would directly or indirectly reduce any such benefits or deprive the Employee of any material fringe benefit provided by the Bank at the time of the Change in Control; (d) the assignment to the Employee of duties and responsibilities materially different from those normally associated with the Employee’s position as referenced in Section l; (e) a failure to elect or reelect the Employee to the Board if the Employee is serving on the Board on the date of the Change in Control; or (f) a material diminution or reduction in the Employee’s responsibilities or authority (including reporting responsibilities) in connection with her employment with the Bank.

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     11. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and benefits provided pursuant to Section 10 of this Agreement, either alone or together with other payments and benefits the Employee has the right to receive from the Bank, would constitute a “parachute payment” under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the payments and benefits pursuant to Section 10 shall be reduced or revised, in the manner determined by the Employee, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits under Section 10 being non-deductible to the Bank pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The Bank’s independent public accountants will determine any reduction in the payments and benefits to be made pursuant to Section 10; the Bank will pay for the accountant’s opinion. If the Bank and/or the Employee do not agree with the accountant’s opinion, the Bank will pay to the Employee the maximum amount of payments and benefits pursuant to Section 10, as selected by the Employee, that the opinion indicates have a high probability of not causing any of the payments and benefits to be non-deductible to the Bank and subject to the excise tax imposed under Section 4999 of the Code. The Bank may also request, and the Employee has the right to demand that the Bank request, a ruling from the IRS as to whether the disputed payments and benefits pursuant to Section 10 have such tax consequences. The Bank will promptly prepare and file the request for a ruling from the IRS, but in no event will the Bank make this filing later than thirty (30) days from the date of the accountant’s opinion referred to above. The request will be subject to the Employee’s approval prior to filing; the Employee shall not unreasonably withhold such approval. The Bank and the Employee agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any IRS rulings, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained in this Agreement shall result in a reduction of any payments or benefits to which the Employee may be entitled upon termination of employment other than pursuant to Section 10 hereof, or a reduction in the payments and benefits specified in Section 10, below zero.

     12. NO MITIGATION. In the event of any termination of employment under this Agreement, the Employee shall be under no obligation to seek other employment or to otherwise mitigate damages, and there shall be no offset against any amounts due to the Employee under this Agreement for any reason, including, without limitation, on account of any remuneration attributable to subsequent employment. 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.

13. MISCELLANEOUS PROVISIONS.

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

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

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          13.3 ARBITRATION. The Bank and the Employee 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 Bank’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 upon 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 Employee 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 Bank or the Employee pursues any claim, dispute or controversy against the other in a legal 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 attorneys’ 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.

          13.4 INDEMNIFICATION FOR ATTORNEYS’ FEES. In the event any dispute or controversy arising under or in connection with the Employee’s termination of employment or this Agreement is resolved in favor of the Employee, whether by judgment, arbitration or settlement, the Employee shall be entitled to the payment of: (i) all legal fees and expenses incurred by the Employee 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 to the Employee under this Agreement.

          13.5 ASSIGNMENT; SUCCESSORS AND ASSIGNS, ETC.

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

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

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

          13.6 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.

          13.7 REDUCTIONS; REGULATORY REQUIREMENTS. Notwithstanding anything to the contrary contained in this Agreement, any and all payments and benefits to be provided to the Employee under this Agreement 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 Bank and its affiliates. The Employee is aware and acknowledges that the Federal Deposit Insurance Corporation has the power to preclude the Bank or its affiliates from making payments to the Employee under this Agreement under certain circumstances. The Employee agrees that neither the Bank nor 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 Bank or its affiliates, as the case may be.

          13.8 WAIVER. No waiver of any provision of this Agreement 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.

          13.9 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 Employee at the Employee’s last known address on the books of the Bank or, in the case of the Bank, at its main office, attention of the Chief Executive Officer of the Board of Directors.

          13.10 AMENDMENT. This Agreement may be amended or modified only by a written instrument signed by the Employee and a duly authorized representative of the Bank.

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          13.11 NO EFFECT ON LENGTH OF SERVICE. Nothing in this Agreement shall be deemed to prohibit the Bank from terminating the Employee’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 Bank and the Employee in the event of any such termination. In addition, nothing in this Agreement shall require the termination of the Employee’s employment at the expiration of the Term of Employment. Any continuation of the Employee’s employment beyond the expiration of the Term of Employment shall be on an “at-will” basis, unless the parties agree otherwise.

          13.12 SOURCE OF PAYMENTS. The Bank shall make in a timely manner all payments provided for under this Agreement in cash or check from its general funds. The Company, however, unconditionally guarantees payment and the provision of all amounts and benefits due to the Employee under this Agreement. If the Bank does not timely pay or provide such amounts and benefits, the Company shall pay or provide such amounts and benefits.

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

          13.14 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.

          13.15 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.

     14. EFFECT OF CODE SECTION 409A. Notwithstanding anything in this Agreement to the contrary, if the Bank in good faith determines, as of the effective date of the Employee’s termination of employment, that amounts payable to the Employee 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 Bank will so advise the Employee, and any such payments shall be suspended and accrued for six months, whereupon they shall be paid to the Employee in a lump sum (together with interest thereon at the then-prevailing prime rate). The Employee agrees that the Bank 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, the parties have executed this Agreement on the day and year first above the written.

ATTEST:	/s/ Diane M. Deskins	COMMUNITY BANK OF TRI-COUNTY
		/s/ Michael L. Middleton
		Michael L. Middleton President

ATTEST:	/s/ Diane M. Deskins	TRI-COUNTY FINANCIAL CORPORATION (As Guarantor)
		/s/ Michael L. Middleton
		Michael L. Middleton President

WITNESS:	/s/ Diane M. Deskins	EMPLOYEE
		/s/ C. Marie Brown
		C. Marie Brown

EX-10.3

Exhibit 10.3

AMENDED AND RESTATED
EMPLOYMENT AGREEMENT

     THIS AGREEMENT (the “Agreement”) is entered into this 20 day of April, 2007, by and between Community Bank of Tri-County, with its principal place of business at 3035 Leonardtown Road, Waldorf, Maryland 20601 (the “Bank”), Gregory C. Cockerham (the “Employee”), and Tri-County Financial Corporation (the “Company”), solely as guarantor of the Bank’s obligations hereunder, and is effective as of the date hereof (the “Effective Date”).

     WHEREAS, the parties desire by this writing to set forth the continuing employment relationship between the Bank and the Employee; and

     WHEREAS, the parties desire by this writing to set forth the current terms and conditions of the employment relationship between the Bank and Executive; and

     WHEREAS, this Agreement shall supersede any and all prior Employment Agreements, by and between the Bank and the Employee, and any amendments thereto; and any and all prior Guaranty Agreements, by and between the Company and the Employee.

     NOW, THEREFORE, in consideration of the mutual covenants contained herein, the Bank and the Employee hereby agree as follows:

     1. EMPLOYMENT. The Employee shall serve the Bank as Executive Vice President and Chief Lending Officer. In such position, the Employee shall have the duties, responsibilities, functions and authority determined and designated from time to time by the Board of Directors (the “Board”) and the Chief Executive Officer. The Employee shall render such administrative and management services to the Bank and its affiliates as are customarily performed by persons in a similar executive capacity.

     2. EFFECTIVE DATE AND TERM. The Bank agrees to employ the Employee for an initial period of three (3) years, beginning on the Effective Date and ending on the day before the third (3rd) anniversary of the Effective Date, and during the period of any additional extensions described below (the “Term of Employment”). The parties intend that, at any point in time during the Employee’s employment hereunder, the then-remaining Term of Employment shall be three (3) years. On the day after the Effective Date and on each day thereafter, the Term of Employment shall extend by one day, so that, on any date, the term of Employment will expire on the day before the third (3^rd) anniversary of such date. These extensions shall continue unless (a) the Bank notifies the Employee that it has elected to discontinue the extensions; (b) the Employee notifies the Bank of the Employee’s election to discontinue the extensions; or (c) the Employee’s employment with the Bank is terminated, whether by resignation, discharge or otherwise. On the earlier of (i) the date on which such notice is given; or (ii) the effective date of a termination of Employee’s Employment with the Bank, the Term of Employment will convert to a fixed period of three (3) years ending on the day before the third (3^rd) anniversary of such date (provided, however, that subject to any rights of the Employee 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 Employee’s death, voluntary termination, Disability or termination for Cause). The last day of the Agreement term, as extended in accordance with this Section 2, is referred to in this Agreement as the “Expiration Date.”

     3. COMPENSATION AND BENEFITS.

          3.1 BASE SALARY. During the Term of Employment, the Bank agrees to pay the Employee base salary at the rate of $172,500 per annum, subject to increase from time to time in accordance with the usual practices of the Bank with respect to its review of compensation for senior executives. Any increase in the Employee’s base salary shall become the “base salary” for purposes of this Agreement. The Employee’s base salary shall be payable in periodic installments in accordance with the Bank’s usual practice.

          3.2 EMPLOYEE BENEFITS. The Employee 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 Bank. Such participation shall be subject to (a) the terms of the applicable plan documents, (b) generally applicable policies of the Bank and (c) the discretion of the Board or any administrative or other committee provided for in, or contemplated by, such plans.

          3.3 INCENTIVE COMPENSATION. The Employee shall be eligible to participate in any incentive compensation or bonus programs sponsored by the Bank on such terms as the Board may establish for the Employee’s participation.

          3.4 BUSINESS EXPENSES. The Bank shall pay, or reimburse, the Employee for reasonable travel and other business expenses incurred by the Employee in the performance of the Employee’s duties and responsibilities, subject to such reasonable requirements with respect to substantiation and documentation as may be specified by the Bank.

          3.5 LEAVE. The Employee shall be entitled to leave (vacation, sick and personal) in accordance with the Bank’s standard policies for senior executives. Further, the Board, in its discretion, may grant to the Employee a leave or leaves of absence, with or without pay, at such time or times and upon such terms and conditions as the Board, in its discretion, may determine.

          3.6 OTHER EMPLOYEE BENEFITS. The Employee shall be entitled to participate in any compensatory plans, arrangements or programs the Bank 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.

          3.7 GENERAL. The Employee’s participation in any plans, arrangements or programs currently in effect or made available in the future shall not be deemed to be in lieu of other compensation to which the Employee is entitled as described under this Agreement.

     4. EXTENT OF SERVICE. During the Term of Employment, the Employee shall devote his full time, best efforts and business judgment, skills and knowledge to the advancement of the Bank’s interests and to the discharge of his responsibilities under this Agreement; provided, however, that the Employee may:

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     (a) invest personal assets in such form or manner as shall not require any material services on the Employee’s part in the operations or affairs of the entities in which such investments are made, provided that the Employee may not own any interest in an entity that competes with the Bank or any affiliate (other than up to 4.9% of the outstanding voting stock of such entity that is a publicly-traded entity); or

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

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

     5. DEATH. In the event of the Employee’s death during the Term of Employment, the Employee’s employment (and the Term of Employment) shall terminate on the date of death. The Bank shall pay to the Employee’s beneficiary, or estate, (a) any compensation due the Employee through the last day of the calendar month in which death occurred, plus (b) any other compensation or benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Bank in which the Employee participated as of the date of death.

     6. DISCHARGE FOR CAUSE.

          6.1 NOTICE AND DETERMINATION OF CAUSE. The Bank may terminate the Employee’s employment at any time during the Term of Employment for Cause, as defined below. Such termination shall be deemed to have occurred for Cause only if:

     (a) The Board, by a separate affirmative vote of at least three-fourths (3/4) of the entire membership, determines that the Employee has: (i) engaged in acts of personal dishonesty which have resulted in loss to the Bank 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 Bank or one of its affiliates; (v) been convicted of a crime or act involving moral turpitude; (vi) willfully breached the Bank’s or 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 Employee’s then-current employment capacity or (viii) willfully attempted to obstruct or failed to cooperate with any investigation authorized by the Board or any governmental or self-regulatory entity. No act or failure to act on the part of the Employee shall be considered “willful” unless it is done, or omitted to be done, by the Employee in bad faith or without reasonable belief that the Employee’s action or omission was in the best interests of the Bank. Any act or failure to act that is based upon authority given pursuant to a resolution duly adopted by the Board, or upon the advice of legal counsel for the Bank, shall be conclusively presumed to be done, or omitted to be done, by the Employee in good faith and in the best interests of the Bank and its affiliates; and

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

     (c) After giving the Employee Notice of Intent to Discharge and before taking the vote contemplated by Section 6.1(a), the Employee is afforded a reasonable opportunity to make both written and oral presentations before the Board for the purpose of refuting the alleged grounds for Cause for discharge; and

     (d) After the vote contemplated by Section 6.1(a), the Bank has furnished to the Employee a notice of termination which specifies the effective date of the Employee’s termination of employment (which shall not 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 Employee for Cause and stating with particularity the facts and circumstances found to constitute Cause for discharge (the “Final Discharge Notice”).

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

          6.3 EFFECT OF TERMINATION FOR CAUSE. In the event of termination pursuant to this Section 6, the Term of Employment shall terminate and the Bank shall pay to the Employee an amount equal to the sum of (a) base salary or other compensation earned through the date of termination, plus (b) any other compensation or vested benefits as may be provided in accordance with the terms and provisions of any applicable plans and programs of the Bank. All other obligations of the Bank shall terminate as of the date of termination.

     7. DISABILITY. The Bank may terminate the Employee’s employment (and the Term of Employment) after having established the Employee’s Disability. For purposes of this Agreement, “Disability” means a physical or mental infirmity that impairs the Employee’s ability to substantially perform his duties under this Agreement and results in the Employee becoming eligible for long-term disability benefits under the Bank’s long-term disability plan (or, if the Bank has no such plan in effect, that impairs the Employee’s ability to substantially perform full-time duties under this Agreement for a period of one hundred eighty (180) consecutive days). The Employee shall be entitled to the compensation and benefits provided for under this Agreement for (a) any period during the Term of Employment and prior to the establishment of the Employee’s Disability during which the Employee is

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unable to work due to physical or mental infirmity, or (b) any period of Disability which is prior to the Employee’s termination of employment pursuant to this Section 7.

     8. TERMINATION WITHOUT CAUSE. The Board may, by written notice to the Employee, immediately terminate his employment at any time for a reason other than Cause, in which event the Employee shall be entitled to receive the termination payment set forth in Section 10.2 of this Agreement, payable in one lump sum within ten (10) days of termination. The Bank shall also continue to provide the Employee with benefit continuation as set forth in Section 10.3 of this Agreement.

     9. VOLUNTARY TERMINATION BY EMPLOYEE. Subject to Section 11 hereof, the Employee may voluntarily terminate employment with the Bank during the term of this Agreement, upon at least 60 days’ prior written notice, in which case the Term of Employment shall end and the Bank shall pay to the Employee an amount equal to the (a) base salary or other compensation earned through the date of termination plus (b) 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 Bank.

     10. CHANGE IN CONTROL.

          10.1 DEFINITION OF CHANGE IN CONTROL. For purposes of this Agreement, a “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: (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 (c) below) in

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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 (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: (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

     (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.

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          10.2 TERMINATION PAYMENT. Notwithstanding any provision herein to the contrary, if the Bank (i) terminates the Employee’s employment pursuant to Section 8 of this Agreement or (ii) terminates the Employee’s employment under this Agreement without the Employee’s prior written consent and for a reason other than Cause, in connection with or within twelve (12) months after a Change in Control, then the Employee shall be paid an unreduced lump sum severance benefit equal to the sum of the following items:

     (a) Two (2) times the Employee’s annual base salary (as provided for in Section 3 of this Agreement) at the rate in effect on the date of the Employee’s termination of employment (including any amount contributed by the Bank on the Employee’s behalf pursuant to a salary reduction agreement and which is not included in the Employee’s gross income under Sections 125, 132(f) or 402(e)(3) of the Internal Revenue Code of 1986, as amended); and

     (b) Two (2) times the most recent annual incentive compensation payment made to the Employee (as provided for in Section 3 of this Agreement).

     The severance benefit payment under this Section 10.2 shall be made to the Employee in one lump sum within ten (10) days of the Employee’s termination of employment.

          10.3 BENEFIT CONTINUATION. Employee shall also be entitled to continuation of the medical, dental and life insurance benefits existing on the date of termination at the level in effect, and at the same out-of-pocket premium cost to the Employee, as on the date of termination for a period of thirty-six (36) months following the Employee’s termination of employment. If the benefits under any benefit plan or program continued pursuant to this Section 10.3 may not be provided because the Employee is no longer an employee of the Bank or an affiliate, the Bank shall pay or provide for coverage on a comparable basis for the Employee and, where applicable, the Employee’s dependents.

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          10.4 OTHER TERMINATION. Notwithstanding any other provision of this Agreement to the contrary, the Employee may voluntarily terminate employment under this Agreement within twelve (12) months following a Change in Control of the Bank or Corporation, and the Employee shall be entitled to receive the payments and benefits described in Sections 10.2 and 10.3 of this Agreement, upon the occurrence of any of the following events, or within ninety (90) days thereafter, which have not been consented to in advance by the Employee in writing: (a) the requirement that the Employee move a primary personal residence, or perform the Employee’s principal executive functions, more than thirty-five (35) miles from the Employee’s primary office as of the date of the Change in Control; (b) a material reduction in the Employee’s base salary as in effect on the date of the Change in Control or as the same may be increased from time to time; (c) the failure of the Bank to continue to provide the Employee with compensation and benefits provided for under this Agreement, as the same may be increased from time to time, or with benefits substantially similar to those provided under any of the employee benefit plans in which the Employee now or hereafter becomes a participant, or the taking of any action by the Bank which would directly or indirectly reduce any such benefits or deprive the Employee of any material fringe benefit provided by the Bank at the time of the Change in Control; (d) the assignment to the Employee of duties and responsibilities materially different from those normally associated with the Employee’s position as referenced in Section l; (e) a failure to elect or reelect the Employee to the Board if the Employee is serving on the Board on the date of the Change in Control; or (f) a material diminution or reduction in the Employee’s responsibilities or authority (including reporting responsibilities) in connection with his employment with the Bank.

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     11. LIMITATION OF BENEFITS UNDER CERTAIN CIRCUMSTANCES. If the payments and benefits provided pursuant to Section 10 of this Agreement, either alone or together with other payments and benefits the Employee has the right to receive from the Bank, would constitute a “parachute payment” under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”), the payments and benefits pursuant to Section 10 shall be reduced or revised, in the manner determined by the Employee, by the amount, if any, which is the minimum necessary to result in no portion of the payments and benefits under Section 10 being non-deductible to the Bank pursuant to Section 280G of the Code and subject to the excise tax imposed under Section 4999 of the Code. The Bank’s independent public accountants will determine any reduction in the payments and benefits to be made pursuant to Section 10; the Bank will pay for the accountant’s opinion. If the Bank and/or the Employee do not agree with the accountant’s opinion, the Bank will pay to the Employee the maximum amount of payments and benefits pursuant to Section 10, as selected by the Employee, that the opinion indicates have a high probability of not causing any of the payments and benefits to be non-deductible to the Bank and subject to the excise tax imposed under Section 4999 of the Code. The Bank may also request, and the Employee has the right to demand that the Bank request, a ruling from the IRS as to whether the disputed payments and benefits pursuant to Section 10 have such tax consequences. The Bank will promptly prepare and file the request for a ruling from the IRS, but in no event will the Bank make this filing later than thirty (30) days from the date of the accountant’s opinion referred to above. The request will be subject to the Employee’s approval prior to filing; the Employee shall not unreasonably withhold such approval. The Bank and the Employee agree to be bound by any ruling received from the IRS and to make appropriate payments to each other to reflect any IRS rulings, together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. Nothing contained in this Agreement shall result in a reduction of any payments or benefits to which the Employee may be entitled upon termination of employment other than pursuant to Section 10 hereof, or a reduction in the payments and benefits specified in Section 10, below zero.

     12. NO MITIGATION. In the event of any termination of employment under this Agreement, the Employee shall be under no obligation to seek other employment or to otherwise mitigate damages, and there shall be no offset against any amounts due to the Employee under this Agreement for any reason, including, without limitation, on account of any remuneration attributable to subsequent employment. 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.

     13. MISCELLANEOUS PROVISIONS.

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

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

          13.3 ARBITRATION. The Bank and the Employee 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 Bank’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 upon 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 Employee 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 Bank or the Employee pursues any claim, dispute or controversy against the other in a legal 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 attorneys’ 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.

          13.4 INDEMNIFICATION FOR ATTORNEYS’ FEES. In the event any dispute or controversy arising under or in connection with the Employee’s termination of employment or this Agreement is resolved in favor of the Employee, whether by judgment, arbitration or settlement, the Employee shall be entitled to the payment of: (i) all legal fees and expenses incurred by the Employee 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 to the Employee under this Agreement.

          13.5 ASSIGNMENT; SUCCESSORS AND ASSIGNS, ETC.

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

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

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

          13.6 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.

          13.7 REDUCTIONS; REGULATORY REQUIREMENTS. Notwithstanding anything to the contrary contained in this Agreement, any and all payments and benefits to be provided to the Employee under this Agreement 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 Bank and its affiliates. The Employee is aware and acknowledges that the Federal Deposit Insurance Corporation has the power to preclude the Bank or its affiliates from making payments to the Employee under this Agreement under certain circumstances. The Employee agrees that neither the Bank nor 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 Bank or its affiliates, as the case may be.

          13.8 WAIVER. No waiver of any provision of this Agreement 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.

          13.9 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 Employee at the Employee’s last known address on the books of the Bank or, in the case of the Bank, at its main office, attention of the Chief Executive Officer of the Board of Directors.

          13.10 AMENDMENT. This Agreement may be amended or modified only by a written instrument signed by the Employee and a duly authorized representative of the Bank.

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          13.11 NO EFFECT ON LENGTH OF SERVICE. Nothing in this Agreement shall be deemed to prohibit the Bank from terminating the Employee’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 Bank and the Employee in the event of any such termination. In addition, nothing in this Agreement shall require the termination of the Employee’s employment at the expiration of the Term of Employment. Any continuation of the Employee’s employment beyond the expiration of the Term of Employment shall be on an “at-will” basis, unless the parties agree otherwise.

          13.12 SOURCE OF PAYMENTS. The Bank shall make in a timely manner all payments provided for under this Agreement in cash or check from its general funds. The Company, however, unconditionally guarantees payment and the provision of all amounts and benefits due to the Employee under this Agreement. If the Bank does not timely pay or provide such amounts and benefits, the Company shall pay or provide such amounts and benefits.

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

          13.14 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.

          13.15 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.

     14. EFFECT OF CODE SECTION 409A. Notwithstanding anything in this Agreement to the contrary, if the Bank in good faith determines, as of the effective date of the Employee’s termination of employment, that amounts payable to the Employee 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 Bank will so advise the Employee, and any such payments shall be suspended and accrued for six months, whereupon they shall be paid to the Employee in a lump sum (together with interest thereon at the then-prevailing prime rate). The Employee agrees that the Bank 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, the parties have executed this Agreement on the day and year first above the written.

ATTEST:	/s/ Diane M. Deskins	COMMUNITY BANK OF TRI-COUNTY
		/s/ Michael L. Middleton
		Michael L. Middleton President

ATTEST:	/s/ Diane M. Deskins	TRI-COUNTY FINANCIAL CORPORATION (As Guarantor)
		/s/ Michael L. Middleton
		Michael L. Middleton President

WITNESS:	/s/ Diane M. Deskins	EMPLOYEE
		/s/ Gregory C. Cockerham
		Gregory C. Cockerham

EX-31

Exhibit 31

Certification

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

1.	I have reviewed this Quarterly Report on Form 10-Q of Tri-County Financial Corporation;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(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: May 10, 2007  

/s/ Michael L. Middleton  

Michael L. Middleton 

President and Chief Executive Officer 

Certification

I, William J. Pasenelli, Executive Vice President 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 13a-15(e) and 15d-15(e)) for the registrant and have:

(d)	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;
(e)	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
(f)	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):

(c)	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
(d)	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: May 10, 2007

/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 March 31, 2007 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:	May 10, 2007	By:	/s/ Michael L. Middleton
			Michael L. Middleton
			President, Chief Executive Officer
Date:	May 10, 2007	By:	/s/ William J. Pasenelli
			William J. Pasenelli
			Executive Vice President and Chief Financial Officer