##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2008
 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 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 3035 Leonardtown Road, Waldorf, Maryland
(Address of principal executive offices)
    
    20601
(Zip Code)
 (301) 645-5601
 Not applicable
 þ o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company 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  September 30, 2008
and December 31, 2007
    
    3Consolidated Statements of Income and Comprehensive Income 
Three and Nine Months Ended September 30, 2008 and 2007
    
    4-5Consolidated Statements of Cash Flows  Nine Months
Ended September 30, 2008 and 2007
    
    6-7Notes to Consolidated Financial Statements
    
    8-14Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    15-25Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    25Item 4  Controls and Procedures
    
    25PART II  OTHER INFORMATIONItem 1   Legal Proceedings
    
    26Item 1A  Risk Factors
    
    26Item 2   Unregistered Sales of Equity Securities and Use of Proceeds
    
    26Item 3   Defaults Upon Senior Securities
    
    26Item 4   Submission of Matters to a Vote of Security Holders
    
    26Item 5   Other Information
    
    26Item 6   Exhibits
    
    27SIGNATURES
    
    28EX-31.1EX-31.2EX-32
  2




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##### Table of Contents



PART I FINANCIAL STATEMENTS
 
 ITEM I. FINANCIAL STATEMENTS
 TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2008 (UNAUDITED) AND DECEMBER 31, 2007
 September 30, 2008
    
    
    December 31, 2007ASSETSCash and due from banks
    
    $
    1,905,111
    
    
    $
    3,267,920Federal Funds sold
    
    
    1,055,967
    
    
    
    885,056Interest-bearing deposits with banks
    
    
    19,635,037
    
    
    
    7,273,661Securities available for sale, at fair value
    
    
    13,915,687
    
    
    
    9,144,069Securities held to maturity, at amortized cost
    
    
    91,053,022
    
    
    
    92,687,603Federal Home Loan Bank and Federal Reserve Bank stock  at cost
    
    
    6,248,300
    
    
    
    5,354,500Loans receivable  net of allowance for loan losses of $5,043,949
and $4,482,483, respectively
    
    
    513,955,660
    
    
    
    453,614,133Premises and equipment, net
    
    
    12,149,741
    
    
    
    9,423,302Accrued interest receivable
    
    
    3,091,366
    
    
    
    3,147,569Investment in bank owned life insurance
    
    
    10,423,633
    
    
    
    10,124,288Other assets
    
    
    4,014,398
    
    
    
    3,483,733Total Assets
    
    $
    677,447,922
    
    
    $
    598,405,834LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Non-interest-bearing deposits
    
    $
    43,514,650
    
    
    $
    48,041,571Interest-bearing deposits
    
    
    459,248,223
    
    
    
    396,952,444Total deposits
    
    
    502,762,873
    
    
    
    444,994,015Short-term borrowings
    
    
    816,241
    
    
    
    1,555,323Long-term debt
    
    
    104,974,107
    
    
    
    86,005,508Guaranteed preferred beneficial interest in junior subordinated
debentures
    
    
    12,000,000
    
    
    
    12,000,000Accrued expenses and other liabilities
    
    
    5,996,656
    
    
    
    5,003,912Total Liabilities
    
    
    626,549,877
    
    
    
    549,558,758STOCKHOLDERS EQUITY:Common stock  par value $.01; authorized  15,000,000 shares;
issued 2,948,705 and 2,909,974 shares, respectively
    
    
    29,487
    
    
    
    29,100Additional paid in capital
    
    
    17,254,950
    
    
    
    16,914,373Retained earnings
    
    
    33,911,068
    
    
    
    32,303,353Accumulated other comprehensive loss
    
    
    (37,185
    )
    
    
    (73,097
    )Unearned ESOP shares
    
    
    (260,275
    )
    
    
    (326,653
    )Total Stockholders Equity
    
    
    50,898,045
    
    
    
    48,847,076TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    677,447,922
    
    
    $
    598,405,834
  3




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TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 Three Months EndedSeptember 30,
    
    
    Nine Months EndedSeptember 30,2008
    
    
    2007
    
    
    2008
    
    
    2007INTEREST INCOME:Interest and fees on loans
    
    $
    7,990,645
    
    
    $
    8,425,082
    
    
    $
    23,894,892
    
    
    $
    24,814,284Taxable interest and
dividends on investment securities
    
    
    1,318,151
    
    
    
    1,383,242
    
    
    
    4,080,686
    
    
    
    4,184,487Interest on deposits with banks
    
    
    13,291
    
    
    
    133,514
    
    
    
    73,563
    
    
    
    205,146Total interest income
    
    
    9,322,087
    
    
    
    9,941,838
    
    
    
    28,049,141
    
    
    
    29,203,917INTEREST EXPENSE:Interest on deposits
    
    
    3,233,917
    
    
    
    3,890,082
    
    
    
    9,759,618
    
    
    
    11,244,818Interest on short-term borrowings
    
    
    19,917
    
    
    
    14,908
    
    
    
    134,344
    
    
    
    97,530Interest on long-term borrowings
    
    
    1,239,381
    
    
    
    1,213,114
    
    
    
    3,651,628
    
    
    
    3,695,835Total interest expenses
    
    
    4,493,215
    
    
    
    5,118,104
    
    
    
    13,545,590
    
    
    
    15,038,183NET INTEREST INCOME
    
    
    4,828,872
    
    
    
    4,823,734
    
    
    
    14,503,551
    
    
    
    14,165,734PROVISION FOR LOAN LOSSES
    
    
    462,622
    
    
    
    304,845
    
    
    
    617,367
    
    
    
    659,288NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES
    
    
    4,366,250
    
    
    
    4,518,889
    
    
    
    13,886,184
    
    
    
    13,506,446
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TRI-COUNTY FINANCIAL CORPORATION  CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)  THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007NONINTEREST INCOME:Loan appraisal, credit, and miscellaneous
charges
    
    $
    129,107
    
    
    $
    83,520
    
    
    $
    363,658
    
    
    $
    256,196Gain on asset sale
    
    
    
    
    
    
    
    
    
    
    2,041
    
    
    
    Net gain on the sale of foreclosed property
    
    
    
    
    
    
    1,205,733
    
    
    
    
    
    
    
    1,272,161Income from bank owned life insurance
    
    
    101,994
    
    
    
    97,430
    
    
    
    388,483
    
    
    
    263,126Gain on sale of investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,912Service charges
    
    
    401,204
    
    
    
    374,365
    
    
    
    1,224,162
    
    
    
    1,055,793Total noninterest income
    
    
    632,305
    
    
    
    1,761,048
    
    
    
    1,978,344
    
    
    
    2,864,188NONINTEREST EXPENSE:Salary and employee benefits
    
    
    2,052,810
    
    
    
    1,846,398
    
    
    
    6,174,825
    
    
    
    5,526,490Occupancy
    
    
    416,723
    
    
    
    320,712
    
    
    
    1,214,352
    
    
    
    977,637Advertising
    
    
    160,281
    
    
    
    83,573
    
    
    
    431,653
    
    
    
    311,342Data processing
    
    
    216,283
    
    
    
    148,006
    
    
    
    477,274
    
    
    
    498,854Legal and professional fees
    
    
    98,978
    
    
    
    185,267
    
    
    
    437,454
    
    
    
    462,489Depreciation of furniture, fixtures, and
equipment
    
    
    141,859
    
    
    
    190,076
    
    
    
    413,139
    
    
    
    474,373Telephone communications
    
    
    16,898
    
    
    
    26,422
    
    
    
    59,375
    
    
    
    71,005ATM expenses
    
    
    83,685
    
    
    
    81,598
    
    
    
    247,137
    
    
    
    225,366Office supplies
    
    
    32,140
    
    
    
    39,969
    
    
    
    106,615
    
    
    
    118,046Office equipment
    
    
    15,297
    
    
    
    12,209
    
    
    
    41,534
    
    
    
    37,910Other
    
    
    389,196
    
    
    
    294,177
    
    
    
    1,166,555
    
    
    
    928,958Total noninterest expenses
    
    
    3,624,150
    
    
    
    3,228,407
    
    
    
    10,769,913
    
    
    
    9,632,470INCOME BEFORE INCOME TAXES
    
    
    1,374,405
    
    
    
    3,051,530
    
    
    
    5,094,615
    
    
    
    6,738,164Income tax expense
    
    
    490,236
    
    
    
    1,165,891
    
    
    
    1,767,671
    
    
    
    2,500,790NET INCOME
    
    
    884,169
    
    
    
    1,885,639
    
    
    
    3,326,944
    
    
    
    4,237,374Other comprehensive income:Unrealized gain (losses) on securities
available for sale net of taxes
    
    
    109,500
    
    
    
    81,470
    
    
    
    35,912
    
    
    
    (38,282
    )Less: Reclassification adjustment for gain
net of taxes of $6,122 included in
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,790
    )COMPREHENSIVE INCOME
    
    $
    993,669
    
    
    $
    1,967,109
    
    
    $
    3,362,856
    
    
    $
    4,188,302EARNINGS PER COMMON SHAREBasic
    
    $
    0.30
    
    
    $
    0.71
    
    
    $
    1.13
    
    
    $
    1.60Diluted
    
    
    0.29
    
    
    
    0.67
    
    
    
    1.09
    
    
    
    1.49Dividends paid per common share
    
    
    
    
    
    
    
    
    
    
    0.40
    
    
    
    0.40
  5




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TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 Nine Months Ended September 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    3,326,944
    
    
    $
    4,237,374Adjustments to reconcile net income to net cash provided by operating
activities:Provision for loan losses
    
    
    617,367
    
    
    
    659,288Gain on foreclosed real estate
    
    
    
    
    
    
    (1,272,161
    )Gain on sale of assets
    
    
    (2,041
    )
    
    
    Gain on sales of investment securities
    
    
    
    
    
    
    (16,912
    )Depreciation and amortization
    
    
    789,628
    
    
    
    814,435Net (accretion) amortization of premium/discount on investment securities
    
    
    (41,014
    )
    
    
    33,886Increase in cash surrender of bank owned life insurance
    
    
    (299,345
    )
    
    
    (263,126
    )Deferred income tax benefit
    
    
    (627,033
    )
    
    
    (235,907
    )Excess tax benefits on stock based compensation
    
    
    (51,880
    )
    
    
    (28,192
    )Stock based compensation expense
    
    
    
    
    
    
    264,786Decrease (increase) in accrued interest receivable
    
    
    56,203
    
    
    
    (308,703
    )Increase in deferred loan fees
    
    
    (78,784
    )
    
    
    (63,783
    )Decrease in accounts payable, accrued expenses, other liabilities
    
    
    677,897
    
    
    
    103,014Increase in other assets
    
    
    129,745
    
    
    
    148,597Net cash provided by operating activities
    
    
    4,497,687
    
    
    
    4,072,596CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investment securities available for sale
    
    
    (4,973,823
    )
    
    
    (272,415
    )Proceeds from sale, redemption or principal payments of investment
securities
available for sale
    
    
    253,765
    
    
    
    327,965Purchase of investment securities held to maturity
    
    
    (5,644,733
    )
    
    
    (1,600,000
    )Proceeds from maturities or principal payments of investment securities held
to maturity
    
    
    7,323,180
    
    
    
    13,410,583Net (increase) decrease of FHLB and Federal Reserve stock
    
    
    (893,800
    )
    
    
    970,400Loans originated or acquired
    
    
    (174,963,324
    )
    
    
    (137,308,880
    )Principal collected on loans
    
    
    114,083,214
    
    
    
    118,447,387Purchase of bank owned life insurance
    
    
    
    
    
    
    (1,000,000
    )Proceeds from disposal of premises and equipment
    
    
    2,041
    
    
    
    Purchase of premises and equipment
    
    
    (3,516,067
    )
    
    
    (2,418,841
    )Proceeds from foreclosed real estate
    
    
    
    
    
    
    1,733,045Net cash used in investing activities
    
    
    (68,329,547
    )
    
    
    (7,710,756
    )
 6




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TRI-COUNTY FINANCIAL CORPORATION  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
 Nine Months Ended September 30,2008
    
    
    2007CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    57,768,858
    
    
    
    38,969,588Proceeds from long-term borrowings
    
    
    24,000,000
    
    
    
    Payments of long-term borrowings
    
    
    (5,031,401
    )
    
    
    (15,030,169
    )Net decrease in short-term borrowings
    
    
    (739,082
    )
    
    
    (5,017,126
    )Exercise of stock options
    
    
    868,684
    
    
    
    43,179Excess tax benefits on stock-based compensation
    
    
    51,880
    
    
    
    28,192Net change in unearned ESOP shares
    
    
    156,373
    
    
    
    (192,810
    )Dividends paid
    
    
    (1,184,324
    )
    
    
    (1,062,064
    )Redemption of common stock
    
    
    (889,650
    )
    
    
    (94,047
    )Net cash provided by financing activities
    
    
    75,001,338
    
    
    
    17,644,743INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    11,169,478
    
    
    
    14,006,583CASH AND CASH EQUIVALENTS  JANUARY 1
    
    
    11,426,637
    
    
    
    18,190,506CASH AND CASH EQUIVALENTS  SEPTEMBER 30
    
    $
    22,596,115
    
    
    $
    32,197,089SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the nine months for:Interest
    
    $
    13,069,941
    
    
    $
    14,680,664Income taxes
    
    $
    2,223,625
    
    
    $
    2,595,100SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING ACTIVITIES:Issuance of common stock for payment of compensation
    
    $
    140,088
    
    
    $
    
  7




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  NINE MONTHS ENDED SEPTEMBER 30,
2008
 1.
    
    BASIS OF PRESENTATION
 General
  2.
    
    NATURE OF BUSINESS
  3.
    
    FAIR VALUE MEASUREMENTS
     8




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9




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QuotedPrices inActive
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Description of AssetAvailable-for-sale securities
    
    $
    13,915,687
    
    
    $
    
    
    
    $
    13,915,687
    
    
    $
    
   QuotedPrices inActive
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Description of AssetImpaired loans
    
    $
    1,061,059
    
    
    $
    
    
    
    $
    1,061,059
    
    
    $
    
 4.
    
    INCOME TAXES
  5.
    
    EARNINGS PER SHARE
  10




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Basic
    
    
    2,948,727
    
    
    
    2,639,333
    
    
    
    2,942,129
    
    
    
    2,643,597Diluted
    
    
    3,061,223
    
    
    
    2,833,367
    
    
    
    3,066,034
    
    
    
    2,836,440
 6.
    
    STOCK-BASED COMPENSATION
    Weighted
    
    
    
    
    
    
    Weighted-AverageAverage
    
    
    Aggregate
    
    
    Contractual LifeExercise
    
    
    Intrinsic
    
    
    Remaining InShares
    
    
    Price
    
    
    Value
    
    
    YearsOutstanding at December 31, 2007
    
    
    428,619
    
    
    $
    14.72Granted
    
    
    
    
    
    
    Exercised
    
    
    (65,111
    )
    
    
    11.19
    
    
    
    884,230Expired
    
    
    
    
    
    
    Forfeited
    
    
    (2,809
    )
    
    
    20.04Outstanding at September 30, 2008
    
    
    360,699
    
    
    $
    15.32
    
    
    $
    1,484,697
    
    
    
    3.5Exercisable at September 30, 2008
    
    
    360,699
    
    
    $
    15.32
    
    
    $
    1,484,697
    
    
    
    3.5
  11




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##### Table of Contents



7.
    
    GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED
DEBENTURES
    8.
    
    CHANGE IN ACCOUNTING PRINCIPLE
 No. 06-4,
Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements. SFAS
No. 106, Employers Accounting for Postretirement Benefits Other Than Pensions.
 9.
    
    NEW ACCOUNTING STANDARDS
 Fair Value Measurements.
 12




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SFAS No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities-Including an Amendment of FASB Statement No. 115.
 SFAS 141(R), Business Combinations (Revised) , Business
Combinations, SFAS 5, Accounting for
Contingencies.
 SFAS No. 160, Non-Controlling Interest in Consolidated Financial Statements, an Amendment
of ARB Statement No. 51. Consolidated Financial Statements,
 SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB No. 133.
  13




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SFAS No.162 The Hierarchy of Generally Accepted Accounting
Principles.
 14




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ITEM 2  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
       15




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Condensed Income StatementInterest Income
    
    $
    9,322,087
    
    
    $
    9,941,838
    
    
    $
    28,049,141
    
    
    $
    29,203,917Interest Expense
    
    
    4,493,215
    
    
    
    5,118,104
    
    
    
    13,545,590
    
    
    
    15,038,183Net Interest Income
    
    
    4,828,872
    
    
    
    4,823,734
    
    
    
    14,503,551
    
    
    
    14,165,734Provision for Loan Loss
    
    
    462,622
    
    
    
    304,845
    
    
    
    617,367
    
    
    
    659,288Noninterest Income
    
    
    632,305
    
    
    
    1,761,048
    
    
    
    1,978,344
    
    
    
    2,864,188Noninterest Expense
    
    
    3,624,150
    
    
    
    3,228,407
    
    
    
    10,769,913
    
    
    
    9,632,470Income Before Income Taxes
    
    
    1,374,405
    
    
    
    3,051,530
    
    
    
    5,094,615
    
    
    
    6,738,164Income Taxes
    
    
    490,236
    
    
    
    1,165,891
    
    
    
    1,767,671
    
    
    
    2,500,790Net Income
    
    
    884,169
    
    
    
    1,885,639
    
    
    
    3,326,944
    
    
    
    4,237,374Per Common ShareBasic Earnings
    
    $
    0.30
    
    
    $
    0.71
    
    
    $
    1.13
    
    
    $
    1.60Diluted Earnings
    
    $
    0.29
    
    
    $
    0.67
    
    
    $
    1.09
    
    
    $
    1.49Book Value
    
    $
    17.26
    
    
    $
    15.50
    
    
    $
    17.26
    
    
    $
    15.50
  16




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##### Table of Contents



Nine Months EndedSeptember 30,2008
    
    
    2007
    
    
    $ Change
    
    
    %ChangeInterest income
    
    $
    28,049,141
    
    
    $
    29,203,917
    
    
    
    (1,154,776
    )
    
    
    (3.95
    )%Interest expense
    
    
    13,545,590
    
    
    
    15,038,183
    
    
    
    (1,492,593
    )
    
    
    (9.93
    )%Net interest income
    
    
    14,503,551
    
    
    
    14,165,734
    
    
    
    337,817
    
    
    
    2.38
    %Provision for loan losses
    
    
    617,367
    
    
    
    659,288
    
    
    
    (41,921
    )
    
    
    (6.36
    )%
    Nine Months EndedSeptember 30,2008
    
    
    2007
    
    
    $ Change
    
    
    %ChangeNONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    $
    363,658
    
    
    $
    256,196
    
    
    $
    107,462
    
    
    
    41.95
    %Gain on asset sale
    
    
    2,041
    
    
    
    
    
    
    
    2,041
    
    
    
    N/ANet gain on the sale of foreclosed property
    
    
    
    
    
    
    1,272,161
    
    
    
    (1,272,161
    )
    
    
    (100.00
    )%Income from bank owned life insurance
    
    
    388,483
    
    
    
    263,126
    
    
    
    125,357
    
    
    
    47.64
    %Gain on sale of investment securities
    
    
    
    
    
    
    16,912
    
    
    
    (16,912
    )
    
    
    (100.00
    )%Service charges
    
    
    1,224,162
    
    
    
    1,055,793
    
    
    
    168,369
    
    
    
    15.95
    %Total noninterest income
    
    $
    1,978,344
    
    
    $
    2,864,188
    
    
    $
    (885,844
    )
    
    
    (30.93
    )%
  17




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##### Table of Contents



Nine Months EndedSeptember 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeNONINTEREST EXPENSE:Salary and employee benefits
    
    $
    6,174,825
    
    
    $
    5,526,490
    
    
    $
    648,335
    
    
    
    11.73
    %Occupancy
    
    
    1,214,352
    
    
    
    977,637
    
    
    
    236,715
    
    
    
    24.21
    %Advertising
    
    
    431,653
    
    
    
    311,342
    
    
    
    120,311
    
    
    
    38.64
    %Data processing
    
    
    477,274
    
    
    
    498,854
    
    
    
    (21,580
    )
    
    
    (4.33
    )%Legal and professional fees
    
    
    437,454
    
    
    
    462,489
    
    
    
    (25,035
    )
    
    
    (5.41
    )%Depreciation of furniture,
fixtures, and equipment
    
    
    413,139
    
    
    
    474,373
    
    
    
    (61,234
    )
    
    
    (12.91
    )%Telephone communications
    
    
    59,375
    
    
    
    71,005
    
    
    
    (11,630
    )
    
    
    (16.38
    )%ATM expenses
    
    
    247,137
    
    
    
    225,366
    
    
    
    21,771
    
    
    
    9.66
    %Office supplies
    
    
    106,615
    
    
    
    118,046
    
    
    
    (11,431
    )
    
    
    (9.68
    )%Office equipment
    
    
    41,534
    
    
    
    37,910
    
    
    
    3,624
    
    
    
    9.56
    %Other
    
    
    1,166,555
    
    
    
    928,958
    
    
    
    237,597
    
    
    
    25.58
    %Total noninterest expenses
    
    $
    10,769,913
    
    
    $
    9,632,470
    
    
    $
    1,137,443
    
    
    
    11.81
    %
     18




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##### Table of Contents



Three Months EndedSeptember 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeInterest income
    
    $
    9,322,087
    
    
    $
    9,941,838
    
    
    
    (619,751
    )
    
    
    (6.23
    )%Interest expense
    
    
    4,493,215
    
    
    
    5,118,104
    
    
    
    (624,889
    )
    
    
    (12.21
    )%Net interest income
    
    
    4,828,872
    
    
    
    4,823,734
    
    
    
    5,138
    
    
    
    0.11
    %Provision for loan losses
    
    
    462,622
    
    
    
    304,845
    
    
    
    157,777
    
    
    
    51.76
    %
   Three Months EndedSeptember 30,2008
    
    
    2007
    
    
    $ Change
    
    
    %ChangeNONINTEREST INCOME:Loan appraisal, credit, and miscellaneous
charges
    
    $
    129,107
    
    
    $
    83,520
    
    
    $
    45,587
    
    
    
    54.58
    %Net gain on the sale of foreclosed property
    
    
    
    
    
    
    1,205,733
    
    
    
    (1,205,733
    )
    
    
    Income from bank owned life insurance
    
    
    101,994
    
    
    
    97,430
    
    
    
    4,564
    
    
    
    4.68
    %Service charges
    
    
    401,204
    
    
    
    374,365
    
    
    
    26,839
    
    
    
    7.17
    %Total noninterest income
    
    $
    632,305
    
    
    $
    1,761,048
    
    
    $
    (1,128,743
    )
    
    
    (64.09
    )%
   Three Months EndedSeptember 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeNONINTEREST EXPENSE:Salary and employee benefits
    
    $
    2,052,810
    
    
    $
    1,846,398
    
    
    $
    206,412
    
    
    
    11.18
    %Occupancy
    
    
    416,723
    
    
    
    320,712
    
    
    
    96,011
    
    
    
    29.94
    %Advertising
    
    
    160,281
    
    
    
    83,573
    
    
    
    76,708
    
    
    
    91.79
    %Data processing
    
    
    216,283
    
    
    
    148,006
    
    
    
    68,277
    
    
    
    46.13
    %Legal and professional fees
    
    
    98,978
    
    
    
    185,267
    
    
    
    (86,289
    )
    
    
    (46.58
    )%Depreciation of furniture,
fixtures, and equipment
    
    
    141,859
    
    
    
    190,076
    
    
    
    (48,217
    )
    
    
    (25.37
    )%Telephone communications
    
    
    16,898
    
    
    
    26,422
    
    
    
    (9,524
    )
    
    
    (36.05
    )%ATM expenses
    
    
    83,685
    
    
    
    81,598
    
    
    
    2,087
    
    
    
    2.56
    %
 19




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##### Table of Contents



Three Months EndedSeptember 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeOffice supplies
    
    
    32,140
    
    
    
    39,969
    
    
    
    (7,829
    )
    
    
    (19.59
    )%Office equipment
    
    
    15,297
    
    
    
    12,209
    
    
    
    3,088
    
    
    
    25.29
    %Other
    
    
    389,196
    
    
    
    294,177
    
    
    
    95,019
    
    
    
    32.30
    %Total noninterest expenses
    
    $
    3,624,150
    
    
    $
    3,228,407
    
    
    $
    395,743
    
    
    
    12.26
    %
    September 30,
    
    
    December 31,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeCash and due from banks
    
    $
    1,905,111
    
    
    $
    3,267,920
    
    
    $
    (1,362,809
    )
    
    
    (41.70
    )%Federal Funds sold
    
    
    1,055,967
    
    
    
    885,056
    
    
    
    170,911
    
    
    
    19.31
    %Interest-bearing deposits with banks
    
    
    19,635,037
    
    
    
    7,273,661
    
    
    
    12,361,376
    
    
    
    169.95
    %Securities available for sale
    
    
    13,915,687
    
    
    
    9,144,069
    
    
    
    4,771,618
    
    
    
    52.18
    %Securities held to maturity
    
    
    91,053,022
    
    
    
    92,687,603
    
    
    
    (1,634,581
    )
    
    
    (1.76
    )%Federal Home Loan Bank and Federal
Reserve Bank stock  at cost
    
    
    6,248,300
    
    
    
    5,354,500
    
    
    
    893,800
    
    
    
    16.69
    %Loans receivable  net of allowance
for loan losses of $5,043,949 and
$4,482,483,
respectively.
    
    
    513,955,660
    
    
    
    453,614,133
    
    
    
    60,341,527
    
    
    
    13.30
    %Premises and equipment, net
    
    
    12,149,741
    
    
    
    9,423,302
    
    
    
    2,726,439
    
    
    
    28.93
    %Accrued interest receivable
    
    
    3,091,366
    
    
    
    3,147,569
    
    
    
    (56,203
    )
    
    
    (1.79
    )%Investment in bank owned life insurance
    
    
    10,423,633
    
    
    
    10,124,288
    
    
    
    299,345
    
    
    
    2.96
    %Other assets
    
    
    4,014,398
    
    
    
    3,483,733
    
    
    
    530,665
    
    
    
    15.23
    %$
    677,447,922
    
    
    $
    598,405,834
    
    
    $
    79,042,088
    
    
    
    13.21
    %
  20




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##### Table of Contents



September 30, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %Real Estate LoansCommercial
    
    $
    224,249,179
    
    
    
    43.18
    %
    
    $
    190,483,998
    
    
    
    41.55
    %Residential first mortgages
    
    
    102,281,964
    
    
    
    19.70
    %
    
    
    90,931,572
    
    
    
    19.83
    %Residential construction
    
    
    55,079,926
    
    
    
    10.61
    %
    
    
    50,577,491
    
    
    
    11.03
    %Second mortgage loans
    
    
    25,273,277
    
    
    
    4.87
    %
    
    
    24,649,581
    
    
    
    5.38
    %Commercial lines of credit
    
    
    88,724,764
    
    
    
    17.09
    %
    
    
    75,247,410
    
    
    
    16.41
    %Consumer loans
    
    
    2,260,240
    
    
    
    0.44
    %
    
    
    2,464,594
    
    
    
    0.54
    %Commercial equipment
    
    
    21,422,729
    
    
    
    4.13
    %
    
    
    24,113,223
    
    
    
    5.26
    %519,292,079
    
    
    
    100.00
    %
    
    
    458,467,869
    
    
    
    100.00
    %Less:Deferred loan fees
    
    
    292,470
    
    
    
    0.06
    %
    
    
    371,253
    
    
    
    0.08
    %Allowance for loan losses
    
    
    5,043,949
    
    
    
    0.97
    %
    
    
    4,482,483
    
    
    
    0.98
    %5,336,419
    
    
    
    
    
    
    
    4,853,736$
    513,955,660
    
    
    
    
    
    
    $
    453,614,133
   Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2007Beginning Balance
    
    $
    4,482,483
    
    
    $
    3,783,721Charge Offs
    
    
    57,368
    
    
    
    149,821Recoveries
    
    
    1,467
    
    
    
    194Net Charge Offs
    
    
    55,901
    
    
    
    149,627Additions Charged to
operations
    
    
    617,367
    
    
    
    659,288Balance at the end of the
period
    
    $
    5,043,949
    
    
    $
    4,293,382
 21




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##### Table of Contents



Balances as of
    
    
    Balances as ofSeptember 30, 2008
    
    
    December 31, 2007Restructured Loans
    
    $
    
    
    
    $
    Accruing loans which are contractually
past due 90 days or more:
    
    $
    
    
    
    $
    Loans accounted for on a nonaccrual basis
    
    $
    84,070
    
    
    $
    414,005Total non-performing loans
    
    $
    84,070
    
    
    $
    414,005Non-performing loans to total loans
    
    
    0.02
    %
    
    
    0.09
    %Allowance for loan losses to non-
performing loans
    
    
    5,999.70
    %
    
    
    1,082.71
    %
  September 30, 2008
    
    
    December 31, 2007
    
    
    $ Change
    
    
    %ChangeLiabilitiesNoninterest-bearing deposits
    
    $
    43,514,650
    
    
    $
    48,041,571
    
    
    $
    (4,526,921
    )
    
    
    (9.42
    )%Interest-bearing deposits
    
    
    459,248,223
    
    
    
    396,952,444
    
    
    
    62,295,779
    
    
    
    15.69
    %Total deposits
    
    
    502,762,873
    
    
    
    444,994,015
    
    
    
    57,768,858
    
    
    
    12.98
    %Short-term borrowings
    
    
    816,241
    
    
    
    1,555,323
    
    
    
    (739,082
    )
    
    
    (47.52
    )%Long-term debt
    
    
    104,974,107
    
    
    
    86,005,508
    
    
    
    18,968,599
    
    
    
    22.06
    %Guaranteed preferred beneficial
interest in junior subordinated
debentures
    
    
    12,000,000
    
    
    
    12,000,000
    
    
    
    
    
    
    
    0.00
    %Accrued expenses and other
liabilities
    
    
    5,996,656
    
    
    
    5,003,912
    
    
    
    992,744
    
    
    
    19.84
    %Total liabilities
    
    $
    626,549,877
    
    
    $
    549,558,758
    
    
    $
    76,991,119
    
    
    
    14.01
    %
   September 30, 2008
    
    
    December 31, 2007
    
    
    $ Change
    
    
    % ChangeCommon stock
    
    $
    29,487
    
    
    $
    29,100
    
    
    $
    387
    
    
    
    1.33
    %Additional paid in capital
    
    
    17,254,950
    
    
    
    16,914,373
    
    
    
    340,577
    
    
    
    2.01
    %Retained earnings
    
    
    33,911,068
    
    
    
    32,303,353
    
    
    
    1,607,715
    
    
    
    4.98
    %Accumulated other comprehensive
loss
    
    
    (37,185
    )
    
    
    (73,097
    )
    
    
    35,912
    
    
    
    (49.13
    )%Unearned ESOP shares
    
    
    (260,275
    )
    
    
    (326,653
    )
    
    
    66,378
    
    
    
    (20.32
    )%Total stockholders equity
    
    $
    50,898,045
    
    
    $
    48,847,076
    
    
    $
    2,050,969
    
    
    
    4.20
    %
  22




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##### Table of Contents



23




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##### Table of Contents



Statement on Financial
Accounting Standards (SFAS) No. 5, Accounting for Contingencies, SFAS No. 114, Accounting by
Creditors for Impairment of a Loan,
   24




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##### Table of Contents



SFAS No. 5, Accounting for Contingencies SFAS No.
144 Accounting for the Impairment or Disposal of Long-Lived Assets.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   25




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##### Table of Contents



PART II OTHER INFORMATION
 
 ITEM 1  LEGAL PROCEEDINGS
  
 ITEM 1A  RISK FACTORS
  
 ITEM 2  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 (a)
    
    Not applicable(b)
    
    Not applicable(c)
    
    The following table sets forth information regarding the Companys repurchases
of its common stock during the quarter ended September 30, 2008.
 (d)(c)
    
    
    Maximum(a)
    
    
    
    
    
    
    Total Number of
    
    
    Number of SharesTotal
    
    
    (b)
    
    
    Shares Purchased
    
    
    that May Yet BeNumber of
    
    
    Average
    
    
    as Part of Publicly
    
    
    Purchased Under theShares
    
    
    Price Paid
    
    
    Announced Plan or
    
    
    Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    ProgramsJuly 1-31, 2008
    
    
    1,207
    
    
    $
    21.98
    
    
    
    1,207
    
    
    
    23,714August 1-31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    23,714September 1-30, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147,435Total
    
    
    1,207
    
    
    $
    21.98
    
    
    
    1,207
  
 ITEM 3  DEFAULT UPON SENIOR SECURITIES
  
 ITEM 4  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5  OTHER INFORMATION
  26




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##### Table of Contents



ITEM 6  EXHIBITS
   27




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##### Table of Contents



SIGNATURES
  TRI-COUNTY FINANCIAL CORPORATIONDate: November 12, 2008
    By:
    /s/  Michael L. MiddletonMichael L. Middleton, President, ChiefExecutive Officer and Chairman of the
BoardDate: November 12, 2008
    By:
    /s/  William J. PasenelliWilliam J. Pasenelli, Executive VicePresident and Chief Financial Officer 28