Exhibit 10.3
EMPLOYMENT AGREEMENT
     AGREEMENT made as of September 6, 2006 (this “Agreement”), by and between
TRI-COUNTY FINANCIAL CORPORATION, with its principal place of business at 3035
Leonardtown Road, Waldorf, Maryland 20601 (the “Company”), and MICHAEL L.
MIDDLETON (the “Executive”).
     WHEREAS, the Company desires to continue to provide for the Executive’s
employment by the Company.
     NOW THEREFORE, in consideration of the mutual covenants contained herein,
the Company and the Executive agree as follows:
     1. EMPLOYMENT. The Executive shall serve the Company as President and Chief
Executive Officer. In such positions, the Executive shall have the duties,
responsibilities, functions, and authority determined and designated from time
to time by the Board of Directors of the Company. The Executive also agrees to
serve as an officer of one or more Company affiliates upon such designation. The
Executive shall render such administrative and management services to the
Company and its affiliates as are customarily performed by persons in a similar
executive capacity.
     2. EFFECTIVE DATE AND TERM. The Company agrees to employ the Executive for
an initial period of five (5) years beginning on the date first above written
(the “Effective Date”) and ending on the day before the fifth (5th) anniversary
of the Effective Date, and during the period of any additional extensions
described below in this Section 2 (the “Term of Employment”). The parties intend
that, at any point in time during the Executive’s employment hereunder, the
then-remaining Term of Employment shall be five (5) years. On the day after the
Effective Date and on each day thereafter, the Term of Employment shall be
extended by one day, such that on any date the Term of Employment will expire on
the day before the fifth (5th) anniversary of such date. These extensions shall
continue unless: (i) the Company gives notice to the Executive that it has
elected to discontinue the extensions; (ii) the Executive gives notice to the
Company that the Executive has elected to discontinue the extensions; or
(iii) the Executive’s employment with the Company is terminated, whether by
resignation, Disability (as provided in Section 12.1), discharge or otherwise.
On the earlier of (i) the date on which such a notice is deemed given or
(ii) the effective date of a termination of the Executive’s employment with the
Company, the Term of Employment shall be converted to a fixed period of five
(5) years ending on the day before the fifth (5th) anniversary of such date
(provided, however, that, subject to any rights of the Executive under this
Agreement, the Term of Employment shall terminate on such earlier date as may be
specifically provided in this Agreement in the event of the Executive’s death,
Retirement, Voluntary Termination or Termination for Just Cause or Termination
Without Cause). The last day of such term, as so extended from time to time, is
herein sometimes referred to as the “Expiration Date.”
     3. COMPENSATION AND BENEFITS. The compensation and benefits payable to the
Executive under this Agreement shall be as follows, it being understood that
(i) references to benefits offered by, or to officers of, the Company are
intended to include benefits offered by, or to officers of, any affiliate of the
Company which employs the Executive and (ii) payments or benefits required to be
provided by the Company may be provided by an affiliate:
3.1 SALARY. For all services rendered by the Executive to the Company and its
affiliates, the Executive shall be entitled to receive a base salary at an
annual rate not less than the Executive’s base salary as in effect on the
Effective Date, subject to increase from time to time in accordance with the
usual practices of the Company with respect to

 

--------------------------------------------------------------------------------

 

review of compensation of its senior executives. Any increase in the Executive’s
base salary shall become the “base salary” for purposes of this Agreement. The
Executive’s base salary shall be payable in periodic installments in accordance
with the Company’s usual practice for its senior executives.
3.2 EMPLOYEE BENEFITS. The Executive shall also be entitled to participate in
any and all employee benefit plans, medical insurance plans, disability income
plans, retirement plans, bonus incentive plans, and other benefit plans from
time to time in effect for senior executives of the Company. Such participation
shall be subject to (i) the terms of the applicable plan documents,
(ii) generally applicable policies of the Company and (iii) the discretion of
the Board or any administrative or other committee provided for in, or
contemplated by, such plans.
3.3 INCENTIVE COMPENSATION. The Executive shall be eligible to participate in
any incentive compensation or bonus program sponsored by the Company on such
terms as the Board of Directors of the Company may establish for the Executive’s
participation.
3.4 BUSINESS EXPENSES. The Company shall provide for, or reimburse, the
Executive’s reasonable travel and other business expenses (including, without
limitation, automobile and cellphone expenses) incurred by the Executive in the
performance of the Executive’s duties and responsibilities, subject to such
reasonable requirements with respect to substantiation and documentation as may
be specified by the Company.
3.5 LEAVE. The Executive shall be entitled to leave (vacation, sick and
personal) in accordance with the Company’s standard policies for senior
executives; provided, however, that the Executive shall receive not less than
four (4) weeks vacation leave during each calendar year.
3.6 GENERAL. Nothing paid to the Executive under any plan, policy or arrangement
currently in effect or made available in the future shall be deemed to be in
lieu of other compensation to the Executive as described in this Agreement.
3.7 OTHER EMPLOYEE BENEFITS. Executive shall be entitled to participate in any
compensatory plans, arrangements or programs the Company makes available to its
senior executive officers, including, but not limited to, stock compensation
programs, supplemental retirement arrangements, or executive health or life
insurance programs, subject to, and on a basis consistent with, the terms and
conditions of such plans, arrangements or programs. The Executive’s
participation in such plans, arrangements or programs shall not be deemed to be
in lieu of other compensation to which the Executive is entitled under this
Agreement.
     4. EXTENT OF SERVICE. During the Term of Employment, the Executive shall
devote the Executive’s full time, best efforts and business judgment, skill and
knowledge to the advancement of the Company’s interests and to the discharge of
the Executive’s duties and responsibilities hereunder. The Executive shall not
engage in any other business activity, except as may be approved by the Board;
provided, however, that nothing herein shall be construed as preventing the
Executive from:
(a) investing the Executive’s assets in such form or manner as shall not require
any material services on the Executive’s part in the operations or affairs of
the companies or the other entities in which such investments are made, provided
that the Executive may not own any interest in any

2

--------------------------------------------------------------------------------

 

entity that competes with the Company or any affiliate (other than up to 4.9% of
the outstanding voting stock of such an entity that is a publicly traded
entity); or
(b) serving on the board of directors of any company not in competition with the
Company or any affiliate, provided that the Executive shall not render any
material services with respect to the operations or affairs of any such company;
or
(c) engaging in religious, charitable or other community or non-profit
activities which do not impair the Executive’s ability to fulfill his duties and
responsibilities under this Agreement.
     5. TERMINATION UPON DEATH. In the event of the Executive’s death during the
Term of Employment, the Executive’s employment (and the Term of Employment)
shall terminate on the date of the Executive’s death. The Company shall pay to
the Executive’s beneficiary, designated in writing to the Company prior to the
Executive’s death (or to the Executive’s estate, if the Executive fails to make
such designation), (i) any base salary or other compensation earned through the
date of death, plus (ii) any other compensation and benefits as may be provided
in accordance with the terms and provisions of any applicable plans and programs
of the Company in which the Executive participated as of his date of death.
6. DISCHARGE FOR CAUSE.
     6.1 NOTICE AND DETERMINATION OF CAUSE. The Company may terminate the
Executive’s employment during the Term of Employment for Just Cause. Such
termination shall be deemed to have occurred for Just Cause only if:
     (a) the Board of Directors of the Company, by a separate affirmative vote
of at least three-fourths (3/4) of the entire membership, determines that the
Executive has (i) engaged in acts of personal dishonesty which have resulted in
loss to the Company, or one of its affiliates, (ii) intentionally failed to
perform stated duties, (iii) committed a willful violation of any law, rule,
regulation (other than traffic violations or similar offenses), (iv) become
subject to the entry of a final cease and desist order which results in
substantial loss to the Company or one of its affiliates, (v) been convicted of
a crime or act involving moral turpitude, (vi) willfully breached the Company’s
code of conduct and business ethics, (vii) been disqualified or barred by any
governmental or self-regulatory authority from serving in the Executive’s
then-current employment capacity or (viii) willfully attempted to obstruct or
failed to cooperate with any investigation authorized by the Board of Directors
or any governmental or self-regulatory entity. No act or failure to act on the
part of the Executive shall be considered “willful” unless it is done, or
omitted to be done, by the Executive in bad faith or without reasonable belief
that the Executive’s action or omission was in the best interests of the
Company. Any act or failure to act that is based upon authority given pursuant
to a resolution duly adopted by the Board of Directors, or upon the advice of
legal counsel for the Company, shall be conclusively presumed to be done, or
omitted to be done, by the Executive in good faith and in the best interests of
the Company; and
     (b) at least ten (10) days prior to the vote contemplated by
Section 6.1(a), the Company has provided the Executive with notice of intent of
the Company to discharge the Executive for Just Cause, detailing with
particularity the facts and circumstances which are alleged to constitute Just
Cause (the “Notice of Intent to Discharge”); and
     (c) after the giving of the Notice of Intent to Discharge and before the
taking of the votes contemplated by Section 6.1(a), the Executive (together with
the Executive’s

3

--------------------------------------------------------------------------------

 

legal counsel, if the Executive so desires) is afforded a reasonable opportunity
to make both written and oral presentations before the Board of Directors for
the purpose of refuting the alleged grounds for Just Cause for the Executive’s
discharge; and
     (d) after the vote contemplated by Section 6.1(a), the Company has
furnished to the Executive a notice of termination which shall specify the
effective date of the Executive’s termination of employment (which shall in no
event be earlier than the date on which such notice is deemed given) and include
a copy of a resolution or resolutions adopted by the Board of Directors
authorizing the termination of the Executive’s employment for Just Cause and
stating with particularity the facts and circumstances found to constitute Just
Cause for the Executive’s discharge (the “Final Discharge Notice”).
     6.2 SUSPENSION; FINAL DISCHARGE. Following the giving of a Notice of Intent
to Discharge, the Company may temporarily suspend the Executive’s duties and
authority and, in such event, may also suspend the payment of salary and other
cash compensation, but not the Executive’s participation in retirement,
insurance and other employee benefit plans. If the Executive is discharged for
Just Cause, all payments withheld during the period of suspension shall be
deemed forfeited and shall not be payable to the Executive. If the Company does
not give a Final Discharge Notice to the Executive within one hundred twenty
(120) days after giving a Notice of Intent to Discharge, the Notice of Intent to
Discharge shall be deemed withdrawn and any future action to discharge the
Executive for Cause shall require the giving of a new Notice of Intent to
Discharge.
     6.3 EFFECT OF TERMINATION. In the event of termination pursuant to this
Section 6, the Term of Employment shall terminate and the Company shall pay to
the Executive an amount equal to the sum of (i) base salary or other
compensation earned through the date of termination, plus (ii) any other
compensation and benefits as may be provided in accordance with the terms and
provisions of any applicable plans and programs, if any, of the Company. All
other obligations of the Company under this Agreement shall terminate as of the
date of termination.
     7. TERMINATION BY THE EXECUTIVE.
     7.1 TERMINATION BY THE EXECUTIVE FOR GOOD REASON.
     (a) The Executive shall be entitled to terminate employment hereunder for
or with Good Reason (as defined in Section 7.4). Upon any such termination, the
Executive shall be entitled to receive the benefits set forth in Section 9. A
termination of employment by the Executive for Good Reason shall be effectuated
by giving the Company written notice (“Notice of Termination for Good Reason”)
of the termination, setting forth in reasonable detail the specific conduct of
the Company that constitutes Good Reason and the specific provision(s) of this
Agreement on which the Executive relies. A termination of employment by the
Executive for Good Reason shall be effective on the fifth business day following
the date when the Notice of Termination for Good Reason is given, unless the
notice sets forth a later date (which date shall in no event be later than
30 days after the notice is given).
     (b) The failure to set forth any fact or circumstance in a Notice of
Termination for Good Reason shall not constitute a waiver of the right to
assert, and shall not preclude the Executive from asserting, such fact or
circumstance in an attempt to enforce any right under or provision of this
Agreement.

4

--------------------------------------------------------------------------------

 

     7.2 OTHER VOLUNTARY TERMINATION BY THE EXECUTIVE. During the Term of
Employment, the Executive may effect, upon sixty (60) days prior written notice
to the Company, a Voluntary Termination of employment hereunder and thereupon
the Term of Employment shall end. A “Voluntary Termination” shall mean a
termination of employment by the Executive on the Executive’s own initiative
other than (i) a termination due to death or Disability (as defined in
Section 12), (ii) a termination for Good Reason (as defined in Section 7.4),
(iii) a termination due to Retirement (as defined in Section 7.3), or (d) a
termination as a result of the normal expiration of the full Term of Employment.
If, during the Term of Employment, the Executive’s employment is terminated due
to a Voluntary Termination, the Term of Employment shall thereupon end and the
Company shall pay to the Executive an amount equal to the sum of (i) base salary
or other compensation earned through the date of termination, plus (ii) any
other compensation and benefits as may be provided in accordance with the terms
and provisions of any applicable plans and programs, if any, of the Company.
     7.3 TERMINATION DUE TO RETIREMENT. “Retirement” shall mean the termination
of the Executive’s employment with the Company for any reason by the Executive
at any time after the Executive attains “Retirement Age” (as hereinafter
defined). “Retirement Age” mean the earlier to occur of (i) age 65 or (ii) such
other age which the Company, by resolution of the Board, may establish as the
Executive’s Retirement Age. The Executive may terminate employment hereunder due
to Retirement upon thirty (30) days prior written notice to the Company. If,
during the Term of Employment, the Executive’s employment is terminated due to
Retirement, the Term of Employment shall thereupon end and the Executive shall
be entitled to (i) base salary or other compensation earned through the
Retirement Date, and (ii) any other compensation and benefits as may be provided
in accordance with the terms and provisions of any applicable plans and
programs, if any, of the Company.
     7.4 GOOD REASON. For purposes of this Agreement, the term “Good Reason”
shall mean any of the following:

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

5

--------------------------------------------------------------------------------

 

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

Notwithstanding anything in this Agreement to the contrary, during the
twenty-four (24) month period beginning on the effective date of a Change in
Control (as defined in Section 7.5, and continuing through the second
anniversary of such date, the Executive may voluntarily terminate his employment
for any reason and such termination shall constitute termination With Good
Reason.
     7.5 CHANGE IN CONTROL. For purposes of this Agreement, a “Change in
Control” shall be deemed to have occurred in any of the following events:
     (i) individuals who, on the date of this Agreement, constitute the Board of
Directors of the Company (the “Incumbent Directors”) cease for any reason to
constitute at least half of the Board of Directors of the Company, provided that
any person becoming a director subsequent to such time, whose election or
nomination for election was approved by a vote of at least two-thirds (2/3) of
the Incumbent Directors then on the Board of Directors of the Company (either by
a specific vote or by approval of the proxy statement of the Company in which
such person is named as a nominee for director, without written objection to
such nomination) shall be an Incumbent Director; provided, however, that no
individual initially elected or nominated as a director of the Company as a
result of an actual or threatened election contest with respect to directors or
as a result of any other actual or threatened solicitation of proxies or
consents by or on behalf of any person other than the Board of Directors of the
Company shall be deemed to be an Incumbent Director;
     (ii) any “person” (as such term is defined in Section 3(a)(9) of the
Securities Exchange Act of 1934 (the “Exchange Act”) and as used in
Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial
owner” (as defined in Rule 13d-3 under the Exchange Act), directly or
indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company’s then outstanding securities eligible to
vote for the election of the Board of Directors of the Company (the “Company
Voting Securities”); provided, however, that the event described in this
paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of
the following acquisitions: (A) by the Company or any subsidiary, (B) by any
employee benefit plan (or related trust) sponsored or maintained by the Company
or any subsidiary, (C) by any underwriter temporarily holding securities
pursuant to an offering of such securities or (D) a transaction (other than one
described in (iii) below) in which Company Voting Securities are acquired from
the Company, if a majority of the Incumbent Directors approve a resolution
providing expressly that the acquisition pursuant to this clause (D) does not
constitute a Change in Control under this paragraph (ii);
     (iii) the consummation of a merger, consolidation, statutory share exchange
or similar form of corporate transaction involving the Company or any of its
subsidiaries that requires the approval of the Company’s stockholders, whether
for such transaction or the issuance of securities in the transaction (a
“Business Combination”), unless

6

--------------------------------------------------------------------------------

 

immediately following such Business Combination: (A) at least 50% of the total
voting power of (x) the corporation resulting from such Business Combination
(the “Surviving Corporation”), or (y) if applicable, the ultimate parent
corporation that directly or indirectly has beneficial ownership of 100% of the
voting securities eligible to elect directors of the Surviving Corporation (the
“Parent Corporation”), is represented by the Company Voting Securities that were
outstanding immediately prior to such Business Combination (or, if applicable,
is represented by shares into which such Company Voting Securities were
converted pursuant to such Business Combination), and such voting power among
(and only among) the holders thereof is in substantially the same proportion as
the voting power of such Company Voting Securities among the holders thereof
immediately prior to the Business Combination, (B) no person (other than any
employee benefit plan (or related trust) sponsored or maintained by the
Surviving Corporation or the Parent Corporation) is or becomes the beneficial
owner, directly or indirectly, of 25% or more of the total voting power of the
outstanding voting securities eligible to elect directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
and (C) at least 50% of the members of the board of directors of the Parent
Corporation (or, if there is no Parent Corporation, the Surviving Corporation)
following the consummation of the Business Combination were Incumbent Directors
at the time of the Company Board’s approval of the execution of the initial
agreement providing for such Business Combination; or
     (iv) the stockholders of the Company approve a plan of complete liquidation
or dissolution of the Company or a sale of all or substantially all of the
Company’s assets.
     Notwithstanding the foregoing, a Change in Control shall not be deemed to
occur solely because any person acquires beneficial ownership of more than 25%
of Company Voting Securities as a result of the acquisition of Company Voting
Securities by the Company which reduces the number of Company Voting Securities
outstanding; provided, that if after such acquisition by the Company such person
becomes the beneficial owner of additional Company Voting Securities that
increases the percentage of outstanding Company Voting Securities beneficially
owned by such person, a Change in Control of the Company shall then occur.
     8. TERMINATION BY THE COMPANY WITHOUT CAUSE. The Executive’s employment
with the Company may be terminated without Just Cause by the Board of Directors
of the Company, provided, however, that the Company shall have the obligation
upon any such termination to make the payments to the Executive provided for
under Section 9 of this Agreement.
     9. CERTAIN TERMINATION BENEFITS. In the event of termination pursuant to
Section 7.1 or 8, the Executive shall be entitled to each of the following
benefits:
9.1 EARNINGS TO DATE OF TERMINATION. An amount equal to the sum of (i) base
salary or other compensation earned through the date of termination, plus
(ii) the Executive’s pro rata share (based on the portion of the then-current
calendar year during which the Executive was employed before termination of the
Executive’s employment) of the average of the aggregate annual amounts paid to
the Executive as bonuses or other cash incentive compensation for the three
(3) calendar years preceding the termination of employment, plus (iii) any other
compensation and benefits as may be provided in accordance with the terms and
provisions of any applicable plans and programs, if any, of the Company.

7

--------------------------------------------------------------------------------

 

9.2 LUMP SUM PAYMENT. An unreduced lump sum severance benefit equal to the sum
of the following items:
     (a) The base salary (as provided for in Section 3.1 of this Agreement) that
would have been paid to the Executive (based on the base salary in effect on the
date of the Executive’s termination of employment) through the Expiration Date
(including any amount which is contributed by the Company on the Executive’s
behalf pursuant to a salary reduction agreement and which is not included in the
Executive’s gross income under Sections 125, 132(f) or 402(e)(3) of the Internal
Revenue Code of 1986, as amended); and
     (b) five (5) times the most recent annual incentive compensation payment
(as provided for pursuant to Section 3.3 of this Agreement) made to the
Executive.
Subject to Section 17.20, the severance benefit payment under this Section 9.2
shall be made to the Executive in one lump sum on the date of the Executive’s
termination of employment.
     9.3 BENEFIT CONTINUATION. Continuation of the medical, dental and life
insurance benefits described in Section 3.2 and existing on the date of
termination at the level in effect on, and at the same out-of-pocket premium
cost to the Executive, as of the date of termination for a period of sixty
(60) months following the Executive’s date of termination of employment.
     9.4 VESTING OF STOCK AWARDS AND OPTIONS. If the Executive’s termination of
employment occurs on or after the effective date of a Change in Control, there
shall be an acceleration of all vesting provisions, so that as of the date of
termination of the Executive’s employment, all stock awards made by the Company
to the Executive, to the extent then unvested or forfeitable, shall become
immediately and fully vested and non-forfeitable, and all options to purchase
common stock of the Company, to the extent then not exercisable, shall become
immediately and fully exercisable.
     10. ADJUSTMENT FOR UNAVAILABILITY OF BENEFITS. If the benefits under any
benefit plan or program continued pursuant to Section 9.3 may not be provided
under any such plan to the Executive or to the Executive’s dependents because
the Executive is no longer deemed to be an employee of the Company or an
affiliate, the Company shall pay or provide for coverage on a comparable basis
for the Executive and, where applicable, the Executive’s dependents.
     11. DEATH OR DISABILITY BEFORE COMPLETION OF CHANGE IN CONTROL.
     11.1 CERTAIN PAYMENTS. The Executive shall be entitled to receive the
payments provided for under Section 9 of this Agreement on the date of the
Executive’s termination of employment if:
     (a) the Executive’s employment terminates due to Disability pursuant to
Section 12 or due to death, and
     (b) either
     (i) such termination of employment occurred within one (1) year after the
occurrence of a Change in Control; or

8

--------------------------------------------------------------------------------

 

     (ii) such termination occurred within one (1) year after the occurrence of
a Preliminary Change in Control (as hereinafter defined), AND, in addition, a
Change in Control occurs within two (2) years after such termination of
employment.
     11.2 PRELIMINARY CHANGE IN CONTROL. “Preliminary Change in Control” shall
mean each of (i) the signing of a definitive agreement for a transaction that,
if consummated, would result in a Change in Control, (ii) the commencement of a
tender offer that, if successful, would result in a Change in Control, and
(iii) the circulation of a proxy statement seeking proxies in opposition to
management in an election contest that, if successful, would result in a Change
in Control. Any payment required to be made pursuant to this Section 11 shall be
deferred without interest until, and shall be payable immediately upon, the
actual occurrence of a Change in Control. Payments to be made pursuant to this
Section 11 shall be in lieu of and in substitution for payments required to be
made in connection with disability pursuant to Section 12.
     12. DISABILITY.
     12.1 TERMINATION DUE TO DISABILITY. The Company may terminate the
Executive’s employment upon a determination, by vote of a majority of the Board
of Directors, acting in reliance on the written advice of a medical professional
acceptable to the Board of Directors, that the Executive is suffering from a
physical or mental impairment which, at the date of the determination, has
prevented the Executive from performing the Executive’s assigned duties on a
substantially full-time basis for a period of at least one hundred and eighty
(180) days during the one-year period ending with the date of the determination
or is likely to result in death or prevent the Executive from performing the
Executive’s assigned duties on a substantially full-time basis for a period of
at least one hundred and eighty (180) days during the period of one (1) year
beginning with the date of the determination (such impairment, the
“Disability”). In such event:
     (a) The Company shall pay to the Executive an amount equal to the sum of
(i) base salary or other compensation earned through the date of termination,
plus (ii) any other compensation and benefits as may be provided in accordance
with the terms and provisions of any applicable benefit plans and programs of
the Company.
     (b) In addition to the amounts payable pursuant to Section 12.1(a), the
Company shall continue to pay the Executive the Executive’s base salary, at the
annual rate in effect for the Executive immediately prior to the termination of
the Executive’s employment, during the Initial Continuation Period. The “Initial
Continuation Period” shall commence on the date of termination of employment
pursuant to Section 12.1 and shall end on the earliest of: (i) the expiration of
one hundred and eighty (180) days after the date of termination of the
Executive’s employment; (ii) the date on which long-term disability insurance
benefits are first payable to the Executive under any long-term disability
insurance plan (“LTD Plan”) covering employees of the Company (the “LTD
Eligibility Date”); (iii) the date of the Executive’s death; and (iv) the
Expiration Date. If the end of the Initial Continuation Period is neither the
LTD Eligibility Date nor the date of the Executive’s death, the Company shall
continue to pay the Executive the Executive’s base salary, at an annual rate
equal to sixty percent (60%) of the annual rate in effect for the Executive
immediately prior to the termination of the Executive’s employment (the “60%
AMOUNT”), during an additional period ending on the earliest of the LTD
Eligibility Date, the date of the Executive’s death and the Expiration Date.

9

--------------------------------------------------------------------------------

 

While receiving disability payments under such LTD Plan, the Company shall pay
to the Executive an additional payment of such an amount, if any, as may be
necessary so that the aggregate of such additional payment and the Executive’s
disability income payments will equal the 60% Amount, and the Executive shall
continue to participate in the Company’s benefit plans and to receive other
benefits as specified in Section 3.2 until the Expiration Date, with all such
benefits to be at the level in effect on, and at the same out-of-pocket cost to
the Executive, as in effect on the date of the Disability determination.
     12.2 EFFECTIVE DATE OF TERMINATION. A termination of employment due to
Disability under this Section 12 shall be effected by notice of termination
given to the Executive by the Company and shall take effect on the later of the
effective date of termination specified in such notice or the date on which the
notice of termination is deemed given to the Executive.
     13. EXCISE TAXES.
     13.1 COVERED BENEFITS. “Covered Benefits” shall mean any payment or benefit
paid or provided to the Executive by the Company or any affiliate or any
successor in interest to the Company (whether pursuant to this Agreement or
otherwise) that will be (or in the opinion of Tax Counsel (as defined below)
might reasonably be expected to be) subject to any excise tax (the “Excise Tax”)
imposed under Section 4999 of the Internal Revenue Code of 1986, as amended (the
“Code”). In the event that at any time during or after the Term of Employment
the Executive shall receive any Covered Benefits, the Company shall pay to the
Executive an additional amount (the “Gross-Up Payment”) such that the net amount
retained by the Executive from the Gross-Up Payment, after deduction of any
federal, state and local income taxes, Excise Tax, and FICA and Medicare
withholding taxes on the Gross-Up Payment, shall be equal to the Excise Tax on
the Covered Benefits. For purposes of determining the amount of such Excise Tax
on the Covered Benefits, the amount of the Covered Benefits that shall be taken
into account in calculating the Excise Tax shall be equal to (i) the Covered
Benefits, less (ii) the amount of such Covered Benefits that, in the opinion of
tax counsel selected by the Company and reasonably acceptable to the Executive
(“Tax Counsel”), are not parachute payments (within the meaning of
Section 280G(b)(1) of the Code).
     13.2 CERTAIN ASSUMPTIONS. For purposes of this Section 13, the Executive
shall be deemed to pay federal income taxes at the highest marginal rate of
federal income taxation in the calendar year in which the Excise Tax is payable
and state and local income taxes at the highest marginal rate of taxation in the
state and locality of the Executive’s residence on the effective date of the
Executive’s termination, net of the reduction in federal income taxes which
could be obtained from deduction of such state and local taxes. Except as
otherwise provided herein, all determinations required to be made under this
Section 13 shall be made by Tax Counsel, which determinations shall be
conclusive and binding on the Executive and Company, absent manifest error.
     13.3 TAX INDEMNIFICATION. The Company shall indemnify and hold the
Executive harmless from any and all losses, costs and expenses (including
without limitation, reasonable attorney’s fees, reasonable accountant’s fees,
interest, fines and penalties of any kind) which the Executive incurs as a
result of any administrative or judicial review of the Executive’s liability
under Section 4999 of the Code by the Internal Revenue Service or any comparable
state agency through and including a final judicial determination or final
administrative settlement of any dispute arising out of the Executive’s
liability for the Excise Tax or otherwise relating to the classification for
purposes of Section 280G of the Code of any of the Covered Benefits or other
payment or benefit in the nature of compensation made or provided to the
Executive by the

10

--------------------------------------------------------------------------------

 

Company. The Executive shall promptly notify the Company in writing whenever the
Executive receives notice of the commencement of any judicial or administrative
proceeding, formal or informal, in which the federal tax treatment under
Section 4999 of the Code of any amount paid or payable under this Agreement or
otherwise is being reviewed or is in dispute (including a notice of audit or
other inquiry concerning the reporting of the Executive’s liability under
Section 4999). The Company may assume control at its expense over all legal and
accounting matters pertaining to such federal or state tax treatment (except to
the extent necessary or appropriate for the Executive to resolve any such
proceeding with respect to any matter unrelated to the Covered Benefits or other
payment or benefit in the nature of compensation made or provided to the
Executive by the Company) and the Executive shall cooperate fully with the
Company in any such proceeding. The Executive shall not enter into any
compromise or settlement or otherwise prejudice any rights the Company may have
in connection therewith without prior consent of the Company. In the event that
the Company elects not to assume control over such matters, the Company shall
promptly reimburse the Executive for all expenses related thereto as and when
incurred upon presentation of appropriate documentation relating thereto.
     14. CONFIDENTIAL INFORMATION. The Executive will not disclose to any other
Person (as defined in Section 17.2) (except as required by applicable law or in
connection with the performance of the Executive’s duties and responsibilities
hereunder), or use for the Executive’s own benefit or gain, any confidential
information of the Company or any affiliate obtained by the Executive incident
to the Executive’s employment with the Company or its affiliates. The term
“Confidential Information” includes, without limitation, financial information,
business plans, prospects and opportunities (such as lending relationships,
financial product developments, or possible acquisitions or dispositions of
business or facilities) which have been discussed or considered by the
management of the Company or its affiliates but does not include any information
which has become part of the public domain by means other than the Executive’s
failure to honor the obligations hereunder.
     15. NO MITIGATION; NO OFFSET. In the event of any termination of employment
under this Agreement, the Executive shall be under no obligation to seek other
employment or to mitigate damages, and there shall be no offset against any
amounts due to the Executive under this Agreement for any reason, including,
without limitation, on account of any remuneration attributable to any
subsequent employment that the Executive may obtain. Any amounts due under this
Agreement are in the nature of severance payments or liquidated damages, or
both, and are not in the nature of a penalty.
     16. INDEMNIFICATION AND INSURANCE.
     16.1 INDEMNIFICATION. To the maximum extent permitted under applicable law,
during the Term of Employment and for a period of six years thereafter, the
Company shall indemnify the Executive against and hold the Executive harmless
from any costs, liabilities, losses and exposures to the fullest extent and on
the most favorable terms and conditions that similar indemnification is offered
to any director or officer of the Company or any affiliate thereof.
     16.2 INSURANCE. During the Term of Employment and for a period of six years
thereafter, the Company shall cause the Executive to be covered by and named as
an insured under any policy or contract of insurance obtained by either Company
to insure directors and officers against personal liability for acts or
omissions in connection with service as an officer or director of the Company or
any of its affiliates service in other capacities at its request. The coverage
provided to the Executive pursuant to this Section 16 shall be of the same scope
and on the same terms and conditions as the coverage (if any) provided to other
officers or directors of the Company.

11

--------------------------------------------------------------------------------

 

     17. MISCELLANEOUS.
     17.1 CONFLICTING AGREEMENTS. The Executive hereby represents and warrants
that the execution of this Agreement and the performance of the Executive’s
obligations hereunder will not breach or be in conflict with any other agreement
to which the Executive is a party or is bound, and that the Executive is not now
subject to any covenants against competition or similar covenants which would
affect the performance of the Executive’s obligations hereunder.
     17.2 DEFINITION OF “PERSON”. For purposes of this Agreement, the term
“PERSON” shall mean an individual, a corporation, an association, a partnership,
an estate, a trust and any other entity or organization.
     17.3 WITHHOLDING. All payments made under this Agreement shall be net of
any tax or other amounts required to be withheld under applicable law.
     17.4 ARBITRATION. The Company and Executive agree that any claim, dispute
or controversy arising under or in connection with this Agreement (including,
without limitation, any such claim, dispute or controversy arising under any
federal, state or local statute, regulation or ordinance or any of the Company’s
employee benefit plans, policies or programs) shall be resolved solely and
exclusively by binding arbitration. The arbitration shall be held in the County
of Charles, Maryland (or at such other location as shall be mutually agreed by
the parties). The arbitration shall be conducted in accordance with the
Commercial Arbitration Rules (the “Rules”) of the American Arbitration
Association (the “AAA”) in effect at the time of the arbitration, except that
the arbitrator shall be selected by alternatively striking from a list of five
arbitrators supplied by the AAA. All fees and expenses of the arbitration,
excluding a transcript, shall be borne equally by the parties. Each party will
pay for the fees and expenses of its own attorneys, experts, witnesses, and
preparation and presentation of proofs and post-hearing briefs (unless the
Executive prevails on a claim for which attorney’s fees are recoverable under
the Agreement). Any action to enforce or vacate the arbitrator’s award shall be
governed by the Federal Arbitration Act, if applicable, and otherwise by
applicable state law. If either the Company or Executive pursues any claim,
dispute or controversy against the other in a proceeding other than the
arbitration provided for herein, the responding party shall be entitled to
dismissal or injunctive relief regarding such action and recovery of all costs,
losses and attorney’s fees related to such action. Notwithstanding the
provisions of this paragraph, either party may seek injunctive relief in a court
of competent jurisdiction, whether or not the case is then pending before the
panel of arbitrators. Following the court’s determination of the injunction
issue, the case shall continue in arbitration as provided herein.
     17.5 INDEMNIFICATION FOR ATTORNEYS’ FEES. In the event any dispute or
controversy arising under or in connection with Executive’s termination or this
Agreement is resolved in favor or Executive, whether by judgment, arbitration or
settlement, Executive shall be entitled to the payment of: (i) all legal fees
and expenses incurred by Executive in resolving such dispute or controversy, and
(ii) any back-pay, including salary, bonuses and any other cash compensation,
fringe benefits and any compensation and benefits due Executive under this
Agreement.
     17.6 INTERPRETATION. The recitals hereto constitute an integral part of
this Agreement. References to Sections include subsections, which are part of
the related Section (e.g., a section numbered “Section 5.5” would be part of
“Section 5” and references to “Section

12

--------------------------------------------------------------------------------

 

5” would also refer to material contained in the subsection described as
“Section 5.5”).
     17.7 ASSIGNMENT; SUCCESSORS AND ASSIGNS, ETC.
     (a) This Agreement is personal to the Executive and, without the prior
written consent of the Company, shall not be assignable by the Executive
otherwise than by will or the laws of descent and distribution. This Agreement
shall inure to the benefit of and be enforceable by the Executive’s legal
representatives.
     (b) This Agreement shall inure to the benefit of and be binding upon the
Company and its successors and permitted assigns.
     (c) The Company may not assign this Agreement or any interest herein
without the prior written consent of the Executive and without such consent any
attempted transfer or assignment shall be null and void and of no effect;
provided, however, that the Company shall require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company expressly to
assume and to agree to perform this Agreement in the same manner and to the same
extent that the Company would have been required to perform it if no such
succession had taken place. As used in this Agreement, “the Company” shall mean
both the Company as defined above and any successor that assumes and agrees to
perform this Agreement, by operation of law or otherwise.
     17.8 ENFORCEABILITY. If any portion or provision of this Agreement shall to
any extent be declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, shall not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
     17.9 REDUCTIONS; REGULATORY REQUIREMENTS. Notwithstanding anything to the
contrary contained in this Agreement, any and all payments and benefits to be
provided to the Executive hereunder are subject to reduction to the extent
required by applicable statutes, regulations, rules and directives of federal,
state and other governmental and regulatory bodies having jurisdiction over the
Company and its affiliates. The Executive confirms that the Executive is aware
of the fact that the Federal Deposit Insurance Corporation has the power to
preclude the Company or its affiliates from making payments to the Executive
under this Agreement under certain circumstances. The Executive agrees that
neither the Company or its affiliates shall be deemed to be in breach of this
Agreement if it is precluded from making a payment otherwise payable hereunder
by reason of regulatory requirements binding on the Company or its affiliates,
as the case may be.
     17.10 WAIVER. No waiver of any provision hereof shall be effective unless
made in writing and signed by the waiving party. The failure of any party to
require the performance of any term or obligation of this Agreement, or the
waiver by any party of any breach of this Agreement, shall not prevent any
subsequent enforcement of such term or obligation or be deemed a waiver of any
subsequent breach.

13

--------------------------------------------------------------------------------

 

     17.11 NOTICES. Any notices, requests, demands and other communications
provided for by this Agreement shall be sufficient if in writing and delivered
in person or sent by registered or certified mail, postage prepaid, and
addressed to the Executive at the Executive’s last known address on the books of
the Company or, in the case of the Company, at its main office, attention of the
Chair of the Compensation Committee of the Board of Directors.
     17.12 ELECTION OF REMEDIES. An election by the Executive to resign for Good
Reason under the provisions of this Agreement shall not constitute a breach by
the Executive of any agreement the Executive may have with the Company and shall
not be deemed a voluntary termination of employment by the Executive for the
purpose of interpreting the provisions of any of the Company’s benefit plans,
programs or policies.
     17.13 AMENDMENT. This Agreement may be amended or modified only by a
written instrument signed by the Executive and a duly authorized representative
of the Company.
     17.14 NO EFFECT ON LENGTH OF SERVICE. Nothing in this Agreement shall be
deemed to prohibit the Company from terminating the Executive’s employment
before the end of the Term of Employment with or without notice for any reason.
This Agreement shall determine the relative rights and obligations of the
Company and the Executive in the event of any such termination. In addition,
nothing in this Agreement shall require the termination of the Executive’s
employment at the expiration of the Term of Employment. Any continuation of the
Executive’s employment beyond the expiration of the Term of Employment shall be
on an “at-will” basis, unless the Company and the Executive agree otherwise.
     17.15 ALLOCATION OF OBLIGATIONS AS BETWEEN THE COMPANY AND ITS AFFILIATES.
The parties understand that the Executive will perform substantial services for
the Company and its affiliates. Unless otherwise determined by the Board of
Directors of the Company, the Executive shall not be entitled to compensation in
addition to the compensation set forth in Section 3 of this Agreement as a
result of the Executive’s serving as an officer of any affiliate of the Company.
The Company and its affiliates shall apportion between them the amounts to be
paid under this Agreement, based upon the services rendered by the Executive to
each of the affiliates and the Company, respectively. Any entitlement of the
Executive to severance compensation or other termination benefits under this
Agreement shall be determined on the basis of the aggregate compensation payable
to the Executive by the affiliates and the Company, and liability therefor shall
be apportioned between the affiliates and the Company in the same manner as
compensation paid to the Executive for services to each of them. It is the
intent and purpose of this Section 17.15 that the Executive have the same legal
and economic rights that the Executive would have if all of the Executive’s
services were rendered to and all of the Executive’s compensation were paid by
the Company.
     17.16 PAYMENTS TO ESTATE OR BENEFICIARIES. In the event of the Executive’s
death prior to the completion by the Company of all payments due the Executive
under this Agreement, the Company shall continue such payments (other than
payments which by their terms cease upon death) to the Executive’s beneficiary,
as designated in writing by the Executive and provided to the Company prior to
the Executive’s death (or to the Executive’s estate, if the Executive fails to
make such designation) and, as applicable, to the Executive’s surviving
dependents.
     17.17 ENTIRE AGREEMENT; EFFECT ON PRIOR AGREEMENTS. This Agreement
constitutes the entire agreement between the parties pertaining to its subject
matter and supersedes all prior and contemporaneous agreements, understandings,
negotiations, prior

14

--------------------------------------------------------------------------------

 

draft agreements, and discussions of the parties, whether oral or written.
     17.18 COUNTERPARTS AND FACSIMILE SIGNATURES. This Agreement may be executed
in two or more counterparts, all of which shall be considered one and the same
agreement and shall become effective when one or more counterparts have been
signed by each party and delivered to the other party, it being understood that
all parties need not sign the same counterpart. This Agreement may be executed
by facsimile signatures.
     17.19 GOVERNING LAW. This is a Maryland contract and shall be construed
under and be governed in all respects by the laws of the State of Maryland
without giving effect to its conflicts of law principles.
     17.20 EFFECT OF CODE SECTION 409A. Notwithstanding anything in this
Agreement to the contrary, if the Company in good faith determines that amounts
that, as of the effective date of the Executive’s termination of employment are
or may become payable to the Executive hereunder, are required to be suspended
or delayed for six months in order to satisfy the requirements of Section 409A
of the Code, then the Company will so advise the Executive, and any such
payments shall be suspended and accrued for six months, whereupon they shall be
paid to the Executive in a lump sum (together with interest thereon at the
then-prevailing prime rate). The Executive agrees that the Company shall be
deemed to be in breach of this Agreement if it delays making a payment otherwise
payable hereunder by reason of Section 409A.

15

--------------------------------------------------------------------------------

 

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

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

16