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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, 2006
 OR
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _______ to ______
 Commission File Number 0-18279
 Tri-County Financial Corporation
  Maryland
(State of other jurisdiction of
incorporation or organization)
    
    52-1652138
(I.R.S. Employer
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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TRI-COUNTY FINANCIAL CORPORATION
 FORM 10-Q
 INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1  Financial Statements (Unaudited)Consolidated Balance Sheets  March 31, 2006
and December 31, 2005
    
    
    3Consolidated
Statements of Income and Comprehensive Income 
Three Months Ended March 31, 2006 and 2005
    
    
    4  5Consolidated Statements of Cash Flows  Three Months
Ended March 31, 2006 and 2005
    
    
    6  7Notes to Consolidated Financial Statements
    
    
    8  10Item 2
 Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    11  18Item 3
 Quantitative and Qualitative Disclosures about Market Risk
    
    
    18Item 4  Controls and Procedures
    
    
    18PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    19Item 1.A  Risk Factors
    
    
    19Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3  Defaults Upon Senior Securities
    
    
    19Item 4  Submission of Matters to a Vote of Security Holders
    
    
    19Item 5  Other Information
    
    
    19Item 6  Exhibits
    
    
    19SIGNATURES
    
    
    20EX-3 AMENDED AND RESTATED BYLAWSEX-31 SECTION 302 CERTIFICATION OF CEO AND CFOEX-32 SECTION 906 CERTIFICATION OF CEO AND CFO




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PART I  FINANCIAL INFORMATION
 
 ITEM I. FINANCIAL STATEMENTS
 TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS MARCH 31, 2006 AND DECEMBER 31, 2005
 March 31, 2006
    
    
    December 31, 2005(Unaudited)ASSETSCash and due from banks
    
    $
    6,242,760
    
    
    $
    7,262,547Federal Funds sold
    
    
    1,410,626
    
    
    
    640,818Interest-bearing deposits with banks
    
    
    10,882,592
    
    
    
    14,671,875Securities available for sale  at fair value
    
    
    6,771,806
    
    
    
    7,178,894Securities held to maturity  at amortized cost
    
    
    114,124,302
    
    
    
    116,486,685Federal Home Loan Bank and Federal Reserve Bank stock  at cost
    
    
    7,069,200
    
    
    
    7,190,300Loans receivable  net of allowance for loan losses
of $3,463,183 and $3,383,334, respectively
    
    
    379,700,806
    
    
    
    369,592,253Premises and equipment, net
    
    
    6,477,396
    
    
    
    6,460,545Foreclosed real estate
    
    
    475,561
    
    
    
    475,561Accrued interest receivable
    
    
    2,466,563
    
    
    
    2,406,542Investment in bank-owned life insurance
    
    
    8,504,947
    
    
    
    6,434,175Other assets
    
    
    2,396,185
    
    
    
    2,487,280TOTAL ASSETS
    
    $
    546,522,744
    
    
    $
    541,287,475LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Noninterest-bearing deposits
    
    $
    42,935,031
    
    
    $
    44,325,083Interest-bearing deposits
    
    
    329,183,699
    
    
    
    319,048,657Total deposits
    
    
    372,118,730
    
    
    
    363,373,740Short-term borrowings
    
    
    15,505,588
    
    
    
    20,074,975Long-term debt
    
    
    108,075,213
    
    
    
    107,823,759Guaranteed preferred beneficial interest in junior subordinated
debentures
    
    
    12,000,000
    
    
    
    12,000,000Accrued expenses and other liabilities
    
    
    3,521,073
    
    
    
    3,436,845Total liabilities
    
    
    511,220,604
    
    
    
    506,709,319STOCKHOLDERS EQUITY:Common stock
 par value $.01; authorized  15,000,000 shares;
issued 1,761,508 and 1,760,991 shares, respectively
    
    
    17,615
    
    
    
    17,610Additional paid in capital
    
    
    9,115,101
    
    
    
    9,057,805Retained earnings
    
    
    26,409,104
    
    
    
    25,580,634Accumulated other comprehensive (loss) income
    
    
    (112,425
    )
    
    
    49,362Unearned ESOP shares
    
    
    (127,255
    )
    
    
    (127,255
    )Total stockholders equity
    
    
    35,302,140
    
    
    
    34,578,156TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    546,522,744
    
    
    $
    541,287,475
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TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 2006
    
    
    2005INTEREST INCOME:Interest and fees on loans
    
    $
    6,663,527
    
    
    $
    4,811,653Taxable interest and dividends on investment securities
    
    
    1,591,302
    
    
    
    1,739,523Interest on deposits with banks
    
    
    45,130
    
    
    
    13,692Total interest income
    
    
    8,299,959
    
    
    
    6,564,868INTEREST EXPENSE:Interest on deposits
    
    
    2,462,742
    
    
    
    1,011,619Interest on short-term borrowings
    
    
    228,495
    
    
    
    800,303Interest on long-term debt
    
    
    1,354,579
    
    
    
    997,158Total interest expense
    
    
    4,045,816
    
    
    
    2,809,080NET INTEREST INCOME
    
    
    4,254,143
    
    
    
    3,755,788PROVISION FOR LOAN LOSSES
    
    
    86,485
    
    
    
    63,027NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    4,167,658
    
    
    
    3,692,761
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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 2006
    
    
    2005NONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    $
    98,617
    
    
    $
    62,907Net gain on the sale of foreclosed property
    
    
    
    
    
    
    36,000Income from bank-owned life insurance
    
    
    70,772
    
    
    
    61,129Loss on sale of investment securities
    
    
    
    
    
    
    (14,581
    )Service charges
    
    
    308,329
    
    
    
    255,874Total noninterest income
    
    
    477,718
    
    
    
    401,329NONINTEREST EXPENSE:Salary and employee benefits
    
    
    1,661,371
    
    
    
    1,463,962Occupancy
    
    
    279,307
    
    
    
    231,873Advertising
    
    
    145,208
    
    
    
    87,412Data processing
    
    
    220,234
    
    
    
    160,824Legal and professional fees
    
    
    239,014
    
    
    
    119,445Depreciation of furniture, fixtures and equipment
    
    
    112,496
    
    
    
    87,100Telephone communications
    
    
    22,721
    
    
    
    29,194ATM expenses
    
    
    57,322
    
    
    
    69,794Office supplies
    
    
    35,711
    
    
    
    30,364Office equipment
    
    
    12,793
    
    
    
    9,702Other
    
    
    344,378
    
    
    
    259,044Total noninterest expenses
    
    
    3,130,555
    
    
    
    2,548,714INCOME BEFORE INCOME TAXES
    
    
    1,514,821
    
    
    
    1,545,376Income tax expense
    
    
    541,684
    
    
    
    521,015NET INCOME
    
    
    973,137
    
    
    
    1,024,361OTHER COMPREHENSIVE INCOME NET OF TAXNet unrealized holding losses arising during period
    
    
    (161,787
    )
    
    
    (299,666
    )COMPREHENSIVE INCOME
    
    $
    811,350
    
    
    $
    724,695INCOME PER COMMON SHAREBasic
    
    $
    0.55
    
    
    $
    0.59Diluted
    
    
    0.52
    
    
    
    0.56
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TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 Three Months EndedMarch 31,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    973,137
    
    
    $
    1,024,361Adjustments to reconcile net income to net
Cash (used) provided by operating activities:Stock-based compensation
    
    
    60,000
    
    
    
    Provision for loan losses
    
    
    86,485
    
    
    
    63,027Loss on sales of investment securities
    
    
    
    
    
    
    14,581Depreciation and amortization
    
    
    213,856
    
    
    
    170,100Net amortization of premium/discount on investment securities
    
    
    (10,502
    )
    
    
    58,139Increase in cash surrender of bank-owned life insurance
    
    
    (70,772
    )
    
    
    (61,129
    )Deferred income tax benefit
    
    
    75,883
    
    
    
    51,110Increase in accrued interest receivable
    
    
    (60,021
    )
    
    
    (216,065
    )Decrease in deferred loan fees
    
    
    (29,261
    )
    
    
    (121,043
    )Decrease in accounts payable, accrued expenses, other liabilities
    
    
    24,228
    
    
    
    (152,534
    )Decrease in other assets
    
    
    98,558
    
    
    
    306,902Net cash (used) provided by operating activities
    
    
    (638,409
    )
    
    
    1,137,449CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investment securities available for sale
    
    
    (11,694
    )
    
    
    (3,653
    )Proceeds from sale, redemption or principal payments
of investment securities available for sale
    
    
    163,379
    
    
    
    1,759,327Purchase of investment securities held to maturity
    
    
    (3,500,000
    )
    
    
    (25,049,248
    )Proceeds from maturities or principal payments
of investment securities held to maturity
    
    
    5,883,155
    
    
    
    16,200,076Net sale (purchase) of FHLB and Federal Reserve Bank stock
    
    
    121,100
    
    
    
    (1,317,200
    )Loans originated or acquired
    
    
    (36,968,947
    )
    
    
    (69,587,499
    )Principal collected on loans
    
    
    26,803,170
    
    
    
    42,023,167Purchase of bank owned life insurance
    
    
    (2,000,000
    )
    
    
    Purchase of premises and equipment
    
    
    (230,707
    )
    
    
    (693,305
    )Proceeds from foreclosed real estate
    
    
    
    
    
    
    36,000Net cash used in investing activities
    
    
    (7,740,544
    )
    
    
    (36,632,335
    )
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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2006 AND 2005
 Three Months EndedMarch 31,2006
    
    
    2005CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    $
    8,744,990
    
    
    $
    13,809,124Proceeds from long-term borrowings
    
    
    260,000
    
    
    
    10,000,000Payments of long-term borrowings
    
    
    (8,546
    )
    
    
    (82,215
    )Net (decrease) increase in short-term borrowings
    
    
    (4,569,387
    )
    
    
    9,760,702Exercise of stock options
    
    
    57,344
    
    
    
    155,168Net change in unearned ESOP shares
    
    
    
    
    
    
    60,395Redemption of common stock
    
    
    (144,710
    )
    
    
    (41,780
    )Net cash provided by financing activities
    
    
    4,339,691
    
    
    
    33,661,394DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (4,039,262
    )
    
    
    (1,833,492
    )CASH AND CASH EQUIVALENTS  JANUARY 1
    
    
    22,575,240
    
    
    
    17,715,779CASH AND CASH EQUIVALENTS  MARCH 31
    
    $
    18,535,978
    
    
    $
    15,882,287SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the three months for:Interest
    
    $
    4,068,462
    
    
    $
    2,763,742Income taxes
    
    $
    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, 2005 have been derived from audited financial statements. There have been no
significant changes to the Companys accounting policies as disclosed in the 2005 Annual
Report. The results of operations for the three months ended March 31, 2006 are not
necessarily indicative of the results of operations to be expected for the remainder of the
year or any other period. Certain previously reported amounts have been restated to conform
to the 2006 presentation.It is suggested that these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes included in the Companys Annual Report for the
year ended December 31, 2005.2.
    
    NATURE OF 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.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, 2006, there were 59,526 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 31,2006
    
    
    2005Basic
    
    
    1,759,975
    
    
    
    1,727,898Diluted
    
    
    1,874,549
    
    
    
    1,835,126
 Share and per share data have been adjusted to reflect the three for two common stock split
effected on December 12, 2005 as if it had occurred on January 1, 2005.
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5.
    
    STOCK-BASED COMPENSATIONThe Company has stock option and incentive plans to attract and retain key personnel to
promote the success of the business. These plans are described in note 12 to the financial
statements included in our Annual Report on Form 10-K for the year ended December 31, 2005.
Prior to 2006, the Company applied the intrinsic value method as outlined in Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB No. 25)
and related interpretations in accounting for stock options granted. Under the intrinsic
value method, no compensation expense was recognized if the exercise price of the Companys
employee stock options equaled the market price of the underlying stock on the date of the
grant. Accordingly, no compensation cost was recognized in the accompanying consolidated
statements of earnings prior to 2006 on stock options granted to employees or directors,
since all options granted under the Companys incentive programs had an exercise price equal
to the market value of the underlying common stock on the date of grant.Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment (SFAS
No. 123(R)). This statement replaced SFAS No. 123, Accounting for Stock-based
Compensation and superseded APB No. 25. SFAS No. 123(R) requires that all stock based
compensation be recognized as an expense in the financial statements and that such cost be
measured at the fair value of the award. This statement was adopted using the modified
prospective method of application, which requires the Company to recognize compensation
expense on a prospective basis. Therefore, prior period financial statements have not been
restated. Under this method, in addition to reflecting compensation expense for new share
based awards, expense is also recognized to reflect the remaining service period of
outstanding awards that had been included in pro forma disclosures in prior periods. As of
December 31, 2005, all outstanding options were fully vested, so no expense will be
recognized for options outstanding as of this date; however, the Company has accrued for
outstanding options relating to the current year. SFAS No. 123(R) also requires that
excess tax benefits related to stock option exercises be reflected as financing cash inflows
instead of operating cash inflows. The adoption of this pronouncement resulted in
compensation expense of $60,000 for the three months ended March 31, 2006.The following table illustrates the effect on the net earnings per common share as if the
fair value method had been applied to all outstanding awards for the three months ended
March 31, 2005:
 Three Months EndedMarch 31, 2005Net Income as reported
    
    $
    1,024,361Less pro-forma stock-based compensation expense
determined under the fair value method, net of tax
effects
    
    
    Pro-forma net income
    
    $
    1,024,361Net income per shareBasic  as reported
    
    $
    0.59Basic  pro-forma
    
    $
    0.59Diluted  as reported
    
    $
    0.56Diluted  pro-forma
    
    $
    0.56
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A summary of the Companys stock option plans as of March 31, 2006 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, 2005
    
    
    296,502
    
    
    $
    20.38Granted
    
    
    
    
    
    
    Exercised
    
    
    (4,850
    )
    
    
    11.82Expired
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at March 31, 2006
    
    
    291,652
    
    
    $
    20.53
    
    
    $
    3,928.552
    
    
    
    6.0Exercisable at March 31, 2006
    
    
    291,652
    
    
    $
    20.53
    
    
    $
    3,928,552
    
    
    
    6.0
 Share and per share data have been adjusted to reflect the three for two common stock split
effected on December 12, 2005 as if it had occurred on January 1, 2005.6. GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED 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 variable-rate
capital securities with an interest rate of 5.07% in a private pooled transaction. The
variable rate is based on the 90-day LIBOR rate plus 1.70%. 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 variable-rate capital
securities with an interest rate of 4.22% in a private pooled transaction. The variable
rate is based on the 90-day LIBOR rate plus 2.60%. 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.
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7.
    
    NEW ACCOUNTING STANDARDSIn December 2004, the Financial Accounting Standards Board (FASB) issued SAFS No. 153,
Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for
Non-monetary Transactions. This statement amends the principal that exchanges of
non-monetary assets should be measured based on the fair value of the assets exchanged and
more broadly provides for exceptions regarding exchanges of non-monetary assets that do not
have commercial substance. This Statement is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of this standard
has not had a material impact on the Companys financial condition, results of operations,
or liquidity.In March 2004, FASB Emerging Issues Task Force (EITF) released Issue 03-01, Meaning of
Other Than Temporary Impairment and Its Application to Certain Investments. EITF 03-1
provides guidance for determining whether impairment for certain debt and equity investments
is other-than-temporary and the measurement of the impaired loss. Certain disclosure
requirements of EITF 03-1 were adopted in 2003 and the Company complied with the new
disclosure requirements in its consolidated financial statements. The recognition and
measurement requirements of EITF 03-01 were initially effective for periods beginning after
June 15, 2004. In September 2004, however, the FASB staff issued FASB Staff Position
(FSP) EITF 03-1-1, which delayed the effective date for certain measurement and
recognition guidance contained in Issue 03-1. The FSP requires the application of
pre-existing other-than-temporary guidance during the period of delay until a final
consensus is reached. Management does not anticipate the issuance of the final consensus
will have a material impact on the Companys financial condition, results of operations, or
liquidity.In December 2003, the American Institute of Certified Public Accountants issued Statement of
Position (SOP) 03-3, Accounting for Certain Loans or Debt Securities Acquired in a
Transfer. SOP 03-3 requires acquired loans, including debt from the seller for
those-individually-evaluated loans that have evidence of deterioration in credit quality
since origination, and it is probable all contractual cash flows on the loan will be unable
to be collected. SOP 03-3 also requires the excess of all undiscounted cash flows expected
to be collected at acquisition over the purchases initial investment to be recognized as
interest income on a level-yield basis over the life of the loan. Subsequent increases in
cash flows expected to be collected are recognized as impairment. Loans carried at fair
value, loans held for sale, and loans to borrowers in good standing under revolving credit
agreements are excluded from the scope of SOP 03-3. The guidance is effective for loans
acquired in fiscal years beginning after December 15, 2004 and did not have a material
impact on the Companys financial condition, results of operations, or liquidity.
 
 ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    11




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Three Months EndedMarch 31,2006
    
    
    2005Condensed Income StatementInterest Income
    
    $
    8,299,959
    
    
    $
    6,564,868Interest Expense
    
    
    4,045,816
    
    
    
    2,809,080Net Interest Income
    
    
    4,254,143
    
    
    
    3,755,788Provision for Loan Loss
    
    
    86,485
    
    
    
    63,027Noninterest Income
    
    
    477,718
    
    
    
    401,329Noninterest Expense
    
    
    3,130,555
    
    
    
    2,548,714Income Before Income Taxes
    
    
    1,514,821
    
    
    
    1,545,376Income Taxes
    
    
    541,684
    
    
    
    521,015Net Income
    
    $
    973,137
    
    
    $
    1,024,361
 12




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##### Table of Contents



Three Months EndedMarch 31,2006
    
    
    2005Per Common ShareBasic Earnings
    
    $
    0.55
    
    
    $
    0.59Diluted Earnings
    
    $
    0.52
    
    
    $
    0.56
      Three Months Ended March 31,2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeNONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    $
    98,617
    
    
    $
    62,907
    
    
    $
    35,710
    
    
    
    56.77
    %Net gain on the sale of foreclosed property
    
    
    
    
    
    
    36,000
    
    
    
    (36,000
    )
    
    
    (100.00
    %)Income from bank-owned life insurance
    
    
    70,772
    
    
    
    61,129
    
    
    
    9,643
    
    
    
    15.77
    %Loss on sale of investment securities
    
    
    
    
    
    
    (14,581
    )
    
    
    14,581Service charges
    
    
    308,329
    
    
    
    255,874
    
    
    
    52,455
    
    
    
    20.50
    %Total noninterest income
    
    $
    477,718
    
    
    $
    401,329
    
    
    $
    76,389
    
    
    
    19.03
    %
  Three Months Ended March 31,2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeNONINTEREST EXPENSE:Salary and employee benefits
    
    $
    1,661,371
    
    
    $
    1,463,962
    
    
    $
    197,409
    
    
    
    13.48
    %Occupancy
    
    
    279,307
    
    
    
    231,873
    
    
    
    47,434
    
    
    
    20.46
    %Advertising
    
    
    145,208
    
    
    
    87,412
    
    
    
    57,796
    
    
    
    66.12
    %Data processing
    
    
    220,234
    
    
    
    160,824
    
    
    
    59,410
    
    
    
    36.94
    %Legal and professional fees
    
    
    239,014
    
    
    
    119,445
    
    
    
    119,569
    
    
    
    100.10
    %Depreciation of furniture,
fixtures, and equipment
    
    
    112,496
    
    
    
    87,100
    
    
    
    25,396
    
    
    
    29.16
    %Telephone communications
    
    
    22,721
    
    
    
    29,194
    
    
    
    (6,473
    )
    
    
    (22.17
    %)
 13




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##### Table of Contents



Three Months Ended March 31,2006
    
    
    2005
    
    
    $ Change
    
    
    % ChangeATM expenses
    
    
    57,322
    
    
    
    69,794
    
    
    
    (12,472
    )
    
    
    (17.87
    %)Office supplies
    
    
    35,711
    
    
    
    30,364
    
    
    
    5,347
    
    
    
    17.61
    %Office equipment
    
    
    12,793
    
    
    
    9,702
    
    
    
    3,091
    
    
    
    31.86
    %Other
    
    
    344,378
    
    
    
    259,044
    
    
    
    85,334
    
    
    
    32.94
    %Total noninterest expenses
    
    $
    3,130,555
    
    
    $
    2,548,714
    
    
    $
    581,841
    
    
    
    22.83
    %
   
 March 31, 2006
    
    
    December 31, 2005
    
    
    $ Change
    
    
    % ChangeCash and due from banks
    
    $
    6,242,760
    
    
    $
    7,262,547
    
    
    $
    (1,019,787
    )
    
    
    (14.04
    %)Federal Funds sold
    
    
    1,410,626
    
    
    
    640,818
    
    
    
    769,808
    
    
    
    120.13
    %Interest-bearing deposits with banks
    
    
    10,882,592
    
    
    
    14,671,875
    
    
    
    (3,789,283
    )
    
    
    (25.83
    %)Securities available for sale
    
    
    6,771,806
    
    
    
    7,178,894
    
    
    
    (407,088
    )
    
    
    (5.67
    %)Securities held to maturity  at amortized cost
    
    
    114,124,302
    
    
    
    116,486,685
    
    
    
    (2,362,383
    )
    
    
    (2.03
    %)Federal Home Loan Bank and Federal Reserve Bank
stock
    
    
    7,069,200
    
    
    
    7,190,300
    
    
    
    (121,100
    )
    
    
    (1.68
    %)Loans receivable  net of allowance for loan losses
of $3,463,183 and $3,383,334, respectively
    
    
    379,700,806
    
    
    
    369,592,253
    
    
    
    10,108,553
    
    
    
    2.74
    %Premises and equipment, net
    
    
    6,477,396
    
    
    
    6,460,545
    
    
    
    16,851
    
    
    
    0.26
    %Foreclosed real estate
    
    
    475,561
    
    
    
    475,561
    
    
    
    
    
    
    
    0.00
    %Accrued interest receivable
    
    
    2,466,563
    
    
    
    2,406,542
    
    
    
    60,021
    
    
    
    2.49
    %Investment in bank-owned life insurance
    
    
    8,504,947
    
    
    
    6,434,175
    
    
    
    2,070,772
    
    
    
    32.18
    %Other assets
    
    
    2,396,185
    
    
    
    2,487,280
    
    
    
    (91,095
    )
    
    
    (3.66
    %)$
    546,522,744
    
    
    $
    541,287,475
    
    
    $
    5,235,269
    
    
    
    0.97
    %
   March 31, 2006
    
    
    
    
    
    
    December 31, 2005Amount
    
    
    %
    
    
    Amount
    
    
    %Real Estate LoansCommercial
    
    $
    170,889,154
    
    
    
    44.53
    %
    
    $
    166,850,838
    
    
    
    44.66
    %Residential first mortgages
    
    
    75,601,277
    
    
    
    19.70
    %
    
    
    73,627,717
    
    
    
    19.71
    %Residential construction
    
    
    32,664,381
    
    
    
    8.51
    %
    
    
    32,608,002
    
    
    
    8.73
    %
 14




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##### Table of Contents



March 31, 2006
    
    
    
    
    
    
    December 31, 2005Amount
    
    
    %
    
    
    Amount
    
    
    %Second mortgage loans
    
    
    26,357,271
    
    
    
    6.87
    %
    
    
    25,884,406
    
    
    
    6.93
    %Commercial lines of credit
    
    
    57,355,352
    
    
    
    14.95
    %
    
    
    54,737,693
    
    
    
    14.65
    %Consumer loans
    
    
    3,062,181
    
    
    
    0.80
    %
    
    
    3,128,425
    
    
    
    0.84
    %Commercial equipment
    
    
    17,808,825
    
    
    
    4.64
    %
    
    
    16,742,220
    
    
    
    4.48
    %383,738,441
    
    
    
    100.00
    %
    
    
    373,579,301
    
    
    
    100.00
    %Less:Deferred loan fees
    
    
    574,452
    
    
    
    0.15
    %
    
    
    603,714
    
    
    
    0.16
    %Allowance for loan losses
    
    
    3,463,183
    
    
    
    0.90
    %
    
    
    3,383,334
    
    
    
    0.91
    %$
    379,700,806
    
    
    
    
    
    
    $
    369,592,253
   3 Months Ended
    
    
    3 Months EndedMarch 31, 2006
    
    
    March 31, 2005Beginning Balance
    
    $
    3,383,334
    
    
    $
    3,057,558Charge Offs
    
    
    6,636
    
    
    
    Recoveries
    
    
    
    
    
    
    Net Charge Offs
    
    
    6,636
    
    
    
    Provision for Loan Losses
    
    
    86,485
    
    
    
    63,027Balance at the end of the Period
    
    $
    3,463,183
    
    
    $
    3,120,585
  Balances as of
    
    
    Balances as ofMarch 31, 2006
    
    
    December 31, 2005Restructured loans
    
    $
    
    
    
    $
    Accruing loans which are contractually
past due 90 days or more:
    
    $
    
    
    
    $
    Loans accounted for on a non-accrual
basis
    
    $
    581,398
    
    
    $
    590,498Total non performing loans
    
    $
    581,398
    
    
    $
    590,498Non performing loans to total loans
    
    
    0.15
    %
    
    
    0.15
    %Allowance for loan losses to non-
performing loans
    
    
    596.66
    %
    
    
    572.96
    %
  March 31, 2006
    
    
    December 31, 2005
    
    
    $ Change
    
    
    % ChangeNoninterest-bearing deposits
    
    $
    42,935,031
    
    
    $
    44,325,083
    
    
    $
    (1,390,052
    )
    
    
    (3.14
    %)Interest-bearing deposits
    
    
    329,183,699
    
    
    
    319,048,657
    
    
    
    10,135,042
    
    
    
    3.18
    %
 15




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##### Table of Contents



March 31, 2006
    
    
    December 31, 2005
    
    
    $ Change
    
    
    % ChangeTotal deposits
    
    
    372,118,730
    
    
    
    363,373,740
    
    
    
    8,744,990
    
    
    
    2.41
    %Short-term borrowings
    
    
    15,505,588
    
    
    
    20,074,975
    
    
    
    (4,569,387
    )
    
    
    (22.76
    %)Long-term debt
    
    
    108,075,213
    
    
    
    107,823,759
    
    
    
    251,454
    
    
    
    0.23
    %Guaranteed preferred beneficial
interest in junior subordinated
debentures
    
    
    12,000,000
    
    
    
    12,000,000
    
    
    
    
    
    
    
    0.00
    %Accrued expenses and other liabilities
    
    
    3,521,073
    
    
    
    3,436,845
    
    
    
    84,228
    
    
    
    2.45
    %$
    511,220,604
    
    
    $
    506,709,319
    
    
    $
    4,511,285
    
    
    
    0.89
    %
   March 31, 2006
    
    
    December 31, 2005
    
    
    $ Change
    
    
    % ChangeCommon stock
    
    $
    17,615
    
    
    $
    17,610
    
    
    $
    5
    
    
    
    0.03
    %Additional paid in capital
    
    
    9,115,101
    
    
    
    9,057,805
    
    
    
    57,296
    
    
    
    0.63
    %Retained earnings
    
    
    26,409,104
    
    
    
    25,580,634
    
    
    
    828,470
    
    
    
    3.24
    %Accumulated other
comprehensive income
(loss)
    
    
    (112,425
    )
    
    
    49,362
    
    
    
    (161,787
    )
    
    
    (327.76
    %)Unearned ESOP shares
    
    
    (127,255
    )
    
    
    (127,255
    )
    
    
    
    
    
    
    0.00
    %$
    35,302,140
    
    
    $
    34,578,156
    
    
    $
    723,984
    
    
    
    2.09
    %
       16




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##### Table of Contents



17




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  18




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##### Table of Contents



PART II  OTHER INFORMATION
 
  
  
  (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, 2006.
 (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 2006
    
    
    600
    
    
    $
    33.00
    
    
    
    600
    
    
    
    61,487February 2006
    
    
    3,282
    
    
    
    33.50
    
    
    
    3,282
    
    
    
    58,205March 2006
    
    
    450
    
    
    
    33.25
    
    
    
    450
    
    
    
    57,755Total
    
    
    4,332
    
    
    
    33.40
    
    
    
    4,332
    
    
    
    57,755
  
  
  
  
     19




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##### Table of Contents



SIGNATURES
  TRI-COUNTY FINANCIAL CORPORATION:Date:
    
    May 12, 2006

    
    By:
    
    /s/ Michael L. MiddletonMichael L. Middleton, President, ChiefExecutive Officer and Chairman of theBoardDate:
    
    May 12, 2006

    

    By:
    
    /s/ William J. PasenelliWilliam J. Pasenelli, Executive VicePresident and Chief Financial Officer
 20