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




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##### Table of Contents



TRI-COUNTY FINANCIAL CORPORATION
 FORM 10-Q
 INDEX
 PART I  FINANCIAL INFORMATION
    
    PageItem 1 - Financial Statements (Unaudited)Consolidated Balance Sheets  March 31, 2007
and December 31, 2006
    
    3Consolidated Statements of Income and Comprehensive Income -
Three Months Ended March 31, 2007 and 2006
    
    4-5Consolidated Statements of Cash Flows  Three Months
Ended March 31, 2007 and 2006
    
    6-7Notes to Consolidated Financial Statements
    
    8-11Item 2 - Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    12-19Item 3 - Quantitative and Qualitative Disclosures about Market Risk
    
    19-20Item 4  Controls and Procedures
    
    20PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    20Item 1.A  Risk Factors
    
    21Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    21Item 3  Defaults Upon Senior Securities
    
    21Item 4  Submission of Matters to a Vote of Security Holders
    
    21Item 5  Other Information
    
    21Item 6  Exhibits
    
    21-22SIGNATURES
    
    23EX-10.1 AMENDED AND RESTATED EMPLOYMENT AGREEMENT/ WILLIAM J. PASENELLIEX-10.2 AMENDED AND RESTATED EMPLOYMENT AGREEMENT/ C. MARIE BROWNEX-10.3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT/ GREGORY C. COCKERHAMEX-31 SECTION 302 CERTIFICATIONSEX-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, 2006ASSETSCash and due from banks
    
    $
    2,545,692
    
    
    $
    3,157,595Federal Funds sold
    
    
    608,539
    
    
    
    772,351Interest-bearing deposits with banks
    
    
    11,453,211
    
    
    
    14,260,560Securities available for sale
    
    
    9,129,840
    
    
    
    9,301,676Securities held to maturity  at amortized cost
    
    
    95,180,384
    
    
    
    97,804,849Federal Home Loan Bank and Federal Reserve Bank stock  at cost
    
    
    5,400,900
    
    
    
    6,100,400Loans receivable  net of allowance for loan losses
of $3,984,655 and $3,783,721, respectively
    
    
    436,331,951
    
    
    
    422,479,799Premises and equipment, net
    
    
    7,960,344
    
    
    
    6,822,461Foreclosed real estate
    
    
    460,884
    
    
    
    460,884Accrued interest receivable
    
    
    2,866,145
    
    
    
    2,837,413Investment in bank owned life insurance
    
    
    8,845,278
    
    
    
    8,762,761Other assets
    
    
    2,665,045
    
    
    
    2,735,265TOTAL ASSETS
    
    $
    583,448,213
    
    
    $
    575,496,014LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Noninterest-bearing deposits
    
    $
    48,379,608
    
    
    $
    43,723,436Interest-bearing deposits
    
    
    393,148,950
    
    
    
    374,289,966Total deposits
    
    
    441,528,558
    
    
    
    418,013,402Short-term borrowings
    
    
    609,816
    
    
    
    6,567,702Long-term debt
    
    
    86,035,980
    
    
    
    96,045,936Guaranteed preferred beneficial interest in junior
subordinated debentures
    
    
    12,000,000
    
    
    
    12,000,000Accrued expenses and other liabilities
    
    
    4,499,240
    
    
    
    5,139,637Total liabilities
    
    
    544,673,594
    
    
    
    537,766,677STOCKHOLDERS EQUITY:Common stock  par value $.01; authorized - 15,000,000 shares;
issued 2,647,003 and 2,642,288 shares, respectively
    
    
    26,470
    
    
    
    26,423Additional paid in capital
    
    
    9,538,076
    
    
    
    9,499,946Retained earnings
    
    
    29,349,523
    
    
    
    28,353,792Accumulated other comprehensive loss
    
    
    (42,448
    )
    
    
    (53,822
    )Unearned ESOP shares
    
    
    (97,002
    )
    
    
    (97,002
    )Total stockholders equity
    
    
    38,774,619
    
    
    
    37,729,337TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    583,448,213
    
    
    $
    575,496,014
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2007
    
    
    2006INTEREST INCOME:Interest and fees on loans
    
    $
    8,059,141
    
    
    $
    6,663,527Taxable interest and dividends on investment securities
    
    
    1,428,541
    
    
    
    1,591,302Interest on deposits with banks
    
    
    36,510
    
    
    
    45,130Total interest income
    
    
    9,524,192
    
    
    
    8,299,959INTEREST EXPENSE:Interest on deposits
    
    
    3,646,103
    
    
    
    2,462,742Interest on short-term borrowings
    
    
    28,280
    
    
    
    228,495Interest on long-term debt
    
    
    1,306,649
    
    
    
    1,354,579Total interest expenses
    
    
    4,981,032
    
    
    
    4,045,816NET INTEREST INCOME
    
    
    4,543,160
    
    
    
    4,254,143PROVISION FOR LOAN LOSSES
    
    
    256,526
    
    
    
    86,485NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    4,286,634
    
    
    
    4,167,658
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2007
    
    
    2006NONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    
    63,588
    
    
    
    98,617Net gain on the sale of foreclosed property
    
    
    66,428
    
    
    
    Income from bank owned life insurance
    
    
    82,517
    
    
    
    70,772Gain on the sale of investment securities
    
    
    16,912
    
    
    
    Service charges
    
    
    321,248
    
    
    
    308,329Total noninterest income
    
    
    550,693
    
    
    
    477,718NONINTEREST EXPENSE:Salary and employee benefits
    
    
    1,883,486
    
    
    
    1,661,371Occupancy
    
    
    311,430
    
    
    
    279,307Advertising
    
    
    161,123
    
    
    
    145,208Data processing
    
    
    187,591
    
    
    
    220,234Legal and professional fees
    
    
    116,605
    
    
    
    239,014Depreciation of furniture, fixtures, and equipment
    
    
    119,258
    
    
    
    112,496Telephone communications
    
    
    22,911
    
    
    
    22,721ATM expenses
    
    
    67,017
    
    
    
    57,322Office supplies
    
    
    46,461
    
    
    
    35,711Office equipment
    
    
    11,210
    
    
    
    12,793Other
    
    
    334,058
    
    
    
    344,378Total noninterest expenses
    
    
    3,261,150
    
    
    
    3,130,555INCOME BEFORE INCOME TAXES
    
    
    1,576,177
    
    
    
    1,514,821Income tax expense
    
    
    566,558
    
    
    
    541,684NET INCOME
    
    
    1,009,619
    
    
    
    973,137OTHER COMPREHENSIVE INCOME NET OF TAXNet unrealized holding gains (losses) arising during period
    
    
    11,374
    
    
    
    (161,787
    )COMPREHENSIVE INCOME
    
    $
    1,020,993
    
    
    $
    811,350INCOME PER COMMON SHAREBasic
    
    $
    0.38
    
    
    $
    0.37Diluted
    
    
    0.36
    
    
    
    0.35
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TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2007 AND 2006
 Three Months EndedMarch 31,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,009,619
    
    
    $
    973,137Adjustments to reconcile net income to net
cash provided (used) by operating activities:Stock Based Compensation Expense
    
    
    
    
    
    
    60,000Provision for loan losses
    
    
    256,526
    
    
    
    86,485Gain on sales of investment securities
    
    
    (16,912
    )
    
    
    Depreciation and amortization
    
    
    242,766
    
    
    
    213,856Net 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
    )
    
    
    75,883Increase 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
    )
    
    
    24,228Decrease in other assets
    
    
    234,592
    
    
    
    98,558Net cash provided by operating activities
    
    
    788,676
    
    
    
    1,361,591CASH 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
    
    
    
    163,379Purchase of investment securities held to maturity
    
    
    
    
    
    
    (3,500,000
    )Proceeds from maturities or principal payments
of investment securities held to maturity
    
    
    2,618,216
    
    
    
    5,883,155Net redemption of FHLB and Federal Reserve stock
    
    
    699,500
    
    
    
    121,100Loans originated or acquired
    
    
    (39,525,440
    )
    
    
    (36,968,947
    )Principal collected on loans
    
    
    25,373,129
    
    
    
    26,803,170Purchase 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 EndedMarch 31,2007
    
    
    2006CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    23,515,156
    
    
    
    8,744,990Proceeds from long-term borrowings
    
    
    
    
    
    
    260,000Payments 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
    
    
    
    57,344Redemption of common stock
    
    
    (13,896
    )
    
    
    (144,710
    )Net cash provided by financing activities
    
    
    7,571,601
    
    
    
    4,339,691DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (3,583,064
    )
    
    
    (4,039,262
    )CASH AND CASH EQUIVALENTS  JANUARY 1
    
    
    18,190,506
    
    
    
    22,575,240CASH AND CASH EQUIVALENTS  MARCH 31
    
    $
    14,607,442
    
    
    $
    18,535,978SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the three months for:Interest
    
    $
    5,018,941
    
    
    $
    4,068,462Income taxes
    
    $
    332,600
    
    
    $
    613,000
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1.
    
    BASIS OF PRESENTATIONGeneral- 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 BUSINESSThe 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 TAXESThe 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 SHAREEarnings 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 EndedMarch 31,2007
    
    2006Basic
    
    
    2,643,950
    
    
    
    2,639,962Diluted
    
    
    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 COMPENSATIONThe 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-AverageAverage
    
    
    Aggregate
    
    
    Contractual LifeExercise
    
    
    Intrinsic
    
    
    Remaining InShares
    
    
    Price
    
    
    Value
    
    
    YearsOutstanding at December 31, 2006
    
    
    417,097
    
    
    $
    13.86Granted
    
    
    
    
    
    
    Exercised
    
    
    (5,301
    )
    
    
    7.20Expired
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2007
    
    
    411,796
    
    
    $
    13.95
    
    
    $
    5,272,812
    
    
    
    5.5Exercisable 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 DEBENTURESOn 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 STANDARDSIn 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
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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
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Three Months EndedMarch 31,2007
    
    
    2006Condensed Income StatementInterest Income
    
    $
    9,524,192
    
    
    $
    8,299,959Interest Expense
    
    
    4,981,032
    
    
    
    4,045,816Net Interest Income
    
    
    4,543,160
    
    
    
    4,254,143Provision for Loan Losses
    
    
    256,526
    
    
    
    86,485Noninterest Income
    
    
    550,693
    
    
    
    477,718Noninterest Expense
    
    
    3,261,150
    
    
    
    3,130,555Income Before Income Taxes
    
    
    1,576,177
    
    
    
    1,514,821Income Taxes
    
    
    566,558
    
    
    
    541,684Net Income
    
    $
    1,009,619
    
    
    $
    973,137Per Common ShareBasic Earnings
    
    $
    0.38
    
    
    $
    0.37Diluted Earnings
    
    $
    0.36
    
    
    $
    0.35
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Three Months Ended March 31,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeNONINTEREST 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
    
    
    NAIncome 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
    %
  Three Months Ended March 31,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeNONINTEREST 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
    %
   14




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##### Table of Contents



March 31, 2007
    
    
    December 31, 2006
    
    
    $ Change
    
    
    % ChangeCash 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
    %
   March 31, 2007
    
    
    December 31, 2006Amount
    
    
    %
    
    
    Amount
    
    
    %Real Estate LoansCommercial
    
    $
    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
  15




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##### Table of Contents



3 Months Ended
    
    
    3 Months EndedMarch 31, 2007
    
    
    March 31, 2006Beginning Balance
    
    $
    3,783,721
    
    
    $
    3,383,334Charge Offs
    
    
    57,325
    
    
    
    6,636Recoveries
    
    
    1,733
    
    
    
    Net Charge Offs
    
    
    55,592
    
    
    
    6,636Additions Charged to Operations
    
    
    256,526
    
    
    
    86,485Balance at the end of the Period
    
    $
    3,984,655
    
    
    $
    3,463,183
  Balances as of
    
    
    Balances as ofMarch 31, 2007
    
    
    December 31, 2006Accruing loans which are contractually
past due 90 days or more:
    
    $
    
    
    
    $
    Loans accounted for on a non-accrual
basis
    
    $
    652,604
    
    
    $
    1,046,423Total non-performing loans
    
    $
    652,604
    
    
    $
    1,046,423Non-performing loans to total loans
    
    
    0.15
    %
    
    
    0.25
    %Allowance for loan losses to non
performing loans
    
    
    610.58
    %
    
    
    361.59
    %
   March 31, 2007
    
    
    December 31, 2006
    
    
    $ Change
    
    
    % ChangeNoninterest-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
    %
  16




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##### Table of Contents



March 31, 2007
    
    
    December 31, 2006
    
    
    $ Change
    
    
    % ChangeCommon 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
    %
        17




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##### Table of Contents



18




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Asset/Liability Risk Management
   19




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Projected Percentage change in Net Interest Income at March 31, 2007
 +200
    
    
    +100
    
    
    
    
    
    
    -100
    
    
    -200Basis points
    
    
    Basis points
    
    
    No Change
    
    
    Basis points
    
    
    Basis points1.06
    %
    
    
    1.00
    %
    
    
    0.00
    %
    
    
    (1.93
    )%
    
    
    (7.07
    )%
    
 ITEM 4. CONTROLS AND PROCEDURES
   
 PART II  OTHER INFORMATION
 
  20




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##### Table of Contents



A general housing price decline might have a negative impact
on our operations
 
  (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 Numberof Shares
    
    
    (d)Purchased
    
    
    Maximum(a)
    
    
    
    
    
    
    as Part of
    
    
    Number of SharesTotal
    
    
    (b)
    
    
    Publicly
    
    
    that May Yet BeNumber of
    
    
    Average
    
    
    Announced Plans
    
    
    Purchased UnderShares
    
    
    Price Paid
    
    
    or
    
    
    the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    ProgramsJanuary 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,737February 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    63,737March 2007
    
    
    558
    
    
    
    24.90
    
    
    
    558
    
    
    
    63,179Total
    
    
    558
    
    
    
    24.90
    
    
    
    558
    
    
    
    63,179
  
  
  
  
  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
 21




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22




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##### Table of Contents



SIGNATURES
  TRI-COUNTY FINANCIAL CORPORATIONDate:
    
    May 10, 2007
    
    
    
    By:
    
    /s/ Michael  L. MiddletonMichael L. Middleton, President, Chief
Executive Officer and Chairman of the
BoardDate:
    
    May 10, 2007
    
    
    
    By:
    
    /s/ William J. PasenelliWilliam J. Pasenelli, Executive Vice
President and Chief Financial Officer
 23