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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 September 30, 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
    
    (IRS Employerincorporation or organization)
    
    Identification No.)
 3035 Leonardtown Road, Waldorf, Maryland
    
    20601(Address of principal executive offices)
    
    (Zip Code)
 (301) 645-5601  (Registrants telephone number, including area code)
 Not applicable  (Former name, former address and former fiscal year, if changed since last report)
 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  September 30, 2007
and December 31, 2006
    
    
    3Consolidated Statements of Income and Comprehensive Income -
Three and Nine Months Ended September 30, 2007 and 2006
    
    
    4-5Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2007 and 2006
    
    
    6-7Notes to Consolidated Financial Statements
    
    
    8-10Item 2 - Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    11-20Item 3 - Quantitative and Qualitative Disclosures about Market Risk
    
    
    20-21Item 4  Controls and Procedures
    
    
    21PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    22Item 1.A  Risk Factors
    
    
    22Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 3  Defaults Upon Senior Securities
    
    
    23Item 4  Submission of Matters to a Vote of Security Holders
    
    
    23Item 5  Other Information
    
    
    23Item 6  Exhibits
    
    
    23SIGNATURESEX-10 AMENDMENT TO 2005 EQUITY COMPENSATION PLANEX-31 SECTION 302 CERTIFICATIONS OF THE CEO AND CFOEX-32 SECTION 906 CERTIFICATIONS OF THE CEO AND CFO
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PART I FINANCIAL STATEMENTS
 
 ITEM I. FINANCIAL STATEMENTS
 TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2007 (UNAUDITED) AND DECEMBER 31, 2006
 September 30, 2007
    
    
    December 31, 2006ASSETSCash and due from banks
    
    $
    5,410,952
    
    
    $
    3,157,595Federal Funds sold
    
    
    4,210,158
    
    
    
    772,351Interest-bearing deposits with banks
    
    
    22,575,979
    
    
    
    14,260,560Securities available for sale
    
    
    9,187,177
    
    
    
    9,301,676Securities held to maturity  at amortized cost
    
    
    85,961,892
    
    
    
    97,804,849Federal Home Loan Bank and Federal Reserve Bank stock  at cost
    
    
    5,130,000
    
    
    
    6,100,400Loans receivable  net of allowance for loan losses
of $4,293,382 and $3,783,721, respectively
    
    
    440,745,786
    
    
    
    422,479,799Premises and equipment, net
    
    
    8,426,868
    
    
    
    6,822,461Foreclosed real estate
    
    
    
    
    
    
    460,884Accrued interest receivable
    
    
    3,146,116
    
    
    
    2,837,413Investment in bank owned life insurance
    
    
    10,025,888
    
    
    
    8,762,761Other assets
    
    
    2,847,851
    
    
    
    2,735,265TOTAL ASSETS
    
    $
    597,668,667
    
    
    $
    575,496,014LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Noninterest-bearing deposits
    
    $
    46,669,115
    
    
    $
    43,723,436Interest-bearing deposits
    
    
    410,313,875
    
    
    
    374,289,966Total deposits
    
    
    456,982,990
    
    
    
    418,013,402Short-term borrowings
    
    
    1,550,576
    
    
    
    6,567,702Long-term debt
    
    
    81,015,767
    
    
    
    96,045,936Guaranteed preferred beneficial interest in junior
subordinated debentures
    
    
    12,000,000
    
    
    
    12,000,000Accrued expenses and other liabilities
    
    
    5,242,651
    
    
    
    5,139,637Total liabilities
    
    
    556,791,984
    
    
    
    537,766,677STOCKHOLDERS EQUITY:Common stock  par value $.01; authorized - 15,000,000 shares;
issued 2,637,465 and 2,642,288 shares, respectively
    
    
    26,375
    
    
    
    26,423Additional paid in capital
    
    
    9,844,763
    
    
    
    9,499,946Retained earnings
    
    
    31,435,092
    
    
    
    28,353,792Accumulated other comprehensive loss
    
    
    (102,894
    )
    
    
    (53,822
    )Unearned ESOP shares
    
    
    (326,653
    )
    
    
    (97,002
    )Total stockholders equity
    
    
    40,876,683
    
    
    
    37,729,337TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    597,668,667
    
    
    $
    575,496,014
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TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
 FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006INTEREST INCOME:Interest and fees on loans
    
    $
    8,425,082
    
    
    $
    7,620,780
    
    
    $
    24,814,284
    
    
    $
    21,459,656Taxable interest and dividends on investment securities
    
    
    1,383,242
    
    
    
    1,529,140
    
    
    
    4,184,487
    
    
    
    4,710,343Interest on deposits with banks
    
    
    133,514
    
    
    
    36,882
    
    
    
    205,146
    
    
    
    144,672Total interest income
    
    
    9,941,838
    
    
    
    9,186,802
    
    
    
    29,203,917
    
    
    
    26,314,671INTEREST EXPENSE:Interest on deposits
    
    
    3,890,082
    
    
    
    3,273,112
    
    
    
    11,244,818
    
    
    
    8,501,892Interest on short-term borrowings
    
    
    14,908
    
    
    
    276,858
    
    
    
    97,530
    
    
    
    828,026Interest on long-term debt
    
    
    1,213,114
    
    
    
    1,294,107
    
    
    
    3,695,835
    
    
    
    4,033,898Total interest expenses
    
    
    5,118,104
    
    
    
    4,844,077
    
    
    
    15,038,183
    
    
    
    13,363,816NET INTEREST INCOME
    
    
    4,823,734
    
    
    
    4,342,725
    
    
    
    14,165,734
    
    
    
    12,950,855PROVISION FOR LOAN LOSSES
    
    
    304,845
    
    
    
    116,563
    
    
    
    659,288
    
    
    
    289,135NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    4,518,889
    
    
    
    4,226,162
    
    
    
    13,506,446
    
    
    
    12,661,720
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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006NONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    $
    83,520
    
    
    $
    72,850
    
    
    $
    256,196
    
    
    $
    306,639Net gain on the sale of foreclosed property
    
    
    1,205,733
    
    
    
    
    
    
    
    1,272,161
    
    
    
    Income from bank owned life insurance
    
    
    97,430
    
    
    
    84,037
    
    
    
    263,126
    
    
    
    243,845Gain on sale of investment securities
    
    
    
    
    
    
    
    
    
    
    16,912
    
    
    
    Service charges
    
    
    374,365
    
    
    
    362,565
    
    
    
    1,055,793
    
    
    
    952,298Total noninterest income
    
    
    1,761,048
    
    
    
    519,452
    
    
    
    2,864,188
    
    
    
    1,502,782NONINTEREST EXPENSE:Salary and employee benefits
    
    
    1,846,398
    
    
    
    1,764,419
    
    
    
    5,526,490
    
    
    
    5,179,316Occupancy
    
    
    320,712
    
    
    
    329,805
    
    
    
    977,637
    
    
    
    934,093Advertising
    
    
    83,573
    
    
    
    170,553
    
    
    
    311,342
    
    
    
    416,744Data processing
    
    
    148,006
    
    
    
    202,546
    
    
    
    498,854
    
    
    
    633,119Legal and professional fees
    
    
    185,267
    
    
    
    (50,041
    )
    
    
    462,489
    
    
    
    498,126Depreciation of furniture, fixtures, and
equipment
    
    
    190,076
    
    
    
    141,931
    
    
    
    474,373
    
    
    
    383,358Telephone communications
    
    
    26,422
    
    
    
    25,049
    
    
    
    71,005
    
    
    
    66,992ATM expenses
    
    
    81,598
    
    
    
    64,413
    
    
    
    225,366
    
    
    
    180,590Office supplies
    
    
    39,969
    
    
    
    32,671
    
    
    
    118,046
    
    
    
    101,621Office equipment
    
    
    12,209
    
    
    
    10,786
    
    
    
    37,910
    
    
    
    35,037Other
    
    
    294,177
    
    
    
    379,534
    
    
    
    928,958
    
    
    
    970,838Total noninterest expenses
    
    
    3,228,407
    
    
    
    3,071,666
    
    
    
    9,632,470
    
    
    
    9,399,834INCOME BEFORE INCOME TAXES
    
    
    3,051,530
    
    
    
    1,673,948
    
    
    
    6,738,164
    
    
    
    4,764,668Income tax expense
    
    
    1,165,891
    
    
    
    570,895
    
    
    
    2,500,790
    
    
    
    1,629,543NET INCOME
    
    
    1,885,639
    
    
    
    1,103,053
    
    
    
    4,237,374
    
    
    
    3,135,125OTHER COMPREHENSIVE INCOME NET OF TAXUnrealized gain (losses) on securities available
for sale net of taxes
    
    
    81,470
    
    
    
    170,439
    
    
    
    (38,282
    )
    
    
    (38,262
    )Less: Reclassification adjustment for gain net of
taxes of $6,122 included in income
    
    
    
    
    
    
    
    
    
    
    (10,790
    )
    
    
    COMPREHENSIVE INCOME
    
    $
    1,967,109
    
    
    $
    1,273,492
    
    
    $
    4,188,302
    
    
    $
    3,096,863INCOME PER COMMON SHAREBasic
    
    $
    0.71
    
    
    $
    0.42
    
    
    $
    1.60
    
    
    $
    1.19Diluted
    
    
    0.67
    
    
    
    0.39
    
    
    
    1.49
    
    
    
    1.11Dividends paid
    
    
    0.00
    
    
    
    0.00
    
    
    
    0.40
    
    
    
    0.40
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TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 Nine Months EndedSEPTEMBER 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    4,237,374
    
    
    $
    3,135,125Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan losses
    
    
    659,288
    
    
    
    289,135Gain on foreclosed real estate
    
    
    (1,272,161
    )
    
    
    Gain on sales of investment securities
    
    
    (16,912
    )
    
    
    Depreciation and amortization
    
    
    814,435
    
    
    
    741,179Net amortization of premium/discount on investment securities
    
    
    33,886
    
    
    
    16,587Excess tax benefits on stock based compensation
    
    
    (28,192
    )
    
    
    Stock based compensation expense
    
    
    264,786
    
    
    
    Increase in cash surrender of bank owned life insurance
    
    
    (263,126
    )
    
    
    (243,845
    )Deferred income tax expense
    
    
    (235,907
    )
    
    
    (270,486
    )Increase in accrued interest receivable
    
    
    (308,703
    )
    
    
    (374,091
    )Decrease in deferred loan fees
    
    
    (63,783
    )
    
    
    (146,349
    )Increase in accounts payable, accrued expenses, other liabilities
    
    
    103,014
    
    
    
    989,413Decrease in other assets
    
    
    148,597
    
    
    
    361,802Net cash provided by operating activities
    
    
    4,072,596
    
    
    
    4,498,470CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investment securities available for sale
    
    
    (272,415
    )
    
    
    (3,092,176
    )Proceeds from sale, redemption or principal payments
of investment securities available for sale
    
    
    327,965
    
    
    
    498,736Purchase of investment securities held to maturity
    
    
    (1,600,000
    )
    
    
    (4,300,000
    )Proceeds from maturities or principal payments
of investment securities held to maturity
    
    
    13,410,583
    
    
    
    19,398,924Net decrease in FHLB and Federal Reserve stock
    
    
    970,400
    
    
    
    616,900Loans originated or acquired
    
    
    (137,308,880
    )
    
    
    (129,829,352
    )Principal collected on loans
    
    
    118,447,387
    
    
    
    87,407,839Purchase of Bank Owned Life Insurance
    
    
    (1,000,000
    )
    
    
    (2,000,000
    )Purchase of premises and equipment
    
    
    (2,418,841
    )
    
    
    (748,082
    )Proceeds from sale of foreclosed real estate
    
    
    1,733,045
    
    
    
    14,677Net cash used in investing activities
    
    
    (7,710,756
    )
    
    
    (32,032,534
    )
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TRI-COUNTY FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 Nine Months EndedSEPTEMBER 30,2007
    
    
    2006CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    $
    38,969,588
    
    
    $
    37,002,149Proceeds from long-term debt
    
    
    
    
    
    
    10,260,000Payments of long-term debt
    
    
    (15,030,169
    )
    
    
    (20,027,966
    )Net decrease in short term borrowings
    
    
    (5,017,126
    )
    
    
    (5,146,260
    )Excess tax benefits on stock based compensation
    
    
    28,192
    
    
    
    Proceeds from private placement
    
    
    
    
    
    
    74,550Exercise of stock options
    
    
    43,179
    
    
    
    83,741Net change in unearned ESOP shares
    
    
    (192,810
    )
    
    
    73,554Dividends paid
    
    
    (1,062,064
    )
    
    
    (972,966
    )Redemption of common stock
    
    
    (94,047
    )
    
    
    (419,356
    )Net cash provided by financing activities
    
    
    17,644,743
    
    
    
    20,927,446DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    14,006,583
    
    
    
    (6,606,618
    )CASH AND CASH EQUIVALENTS  JANUARY 1
    
    
    18,190,506
    
    
    
    22,575,240CASH AND CASH EQUIVALENTS  SEPTEMBER 30
    
    $
    32,197,089
    
    
    $
    15,968,622SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the nine months for:Interest
    
    $
    14,680,664
    
    
    $
    13,101,351Income taxes
    
    $
    2,595,100
    
    
    $
    1,272,400
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TRI-COUNTY FINANCIAL CORPORATION
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
 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 to stockholders. The results of operations for the three and nine months ended
September 30, 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 2006 Annual Report to
stockholders.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
Statement of Financial Accounting Standards (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 Financial
Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in
Income Taxes (FIN 48) 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 the three and nine months ended September 30, 2007, there were
21,811 shares excluded from the diluted net income per share computation because inclusion
of these options would be anti-dilutive. No shares were excluded in the three months and
nine months ended September 30, 2006. Basic and diluted earnings per share have been
computed based on weighted-average common and common equivalent shares outstanding as
follows:
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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Basic
    
    
    2,639,333
    
    
    
    2,639,868
    
    
    
    2,643,597
    
    
    
    2,640,477Diluted
    
    
    2,833,367
    
    
    
    2,824,308
    
    
    
    2,836,440
    
    
    
    2,819,123
 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. $264,786 of compensation expense related to stock options has been
recognized in the nine months ended September 30, 2007. No expense was recognized in the
nine months ended September 30, 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. On July 17, 2007, the Company issued 21,811 in options to purchase shares with a weighted average exercise price per share of $27.70 and a 10-year term expiring July 17, 2017.
 These options vest immediately and had an estimated fair value of $12.14 per share. Stock-based compensation expense related to this grant was $264,786.A summary of the Companys stock option plans as of September 30, 2007 and changes during
the nine-month period then ended is presented below:
 Weighted
    
    
    
    
    
    
    Weighted-AverageAverage
    
    
    Aggregate
    
    
    Contractual LifeExercise
    
    
    Intrinsic
    
    
    Remaining InShares
    
    
    Price
    
    
    Value (1)
    
    
    YearsOutstanding at
December 31, 2006
    
    
    417,097
    
    
    $
    13.86Granted
    
    
    21,811
    
    
    
    27.70Exercised
    
    
    (6,035
    )
    
    
    7.15Expired
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at
September 30, 2007
    
    
    432,873
    
    
    $
    14.65
    
    
    $
    5,360,939
    
    
    
    5.0Exercisable at
September 30, 2007
    
    
    432,873
    
    
    $
    14.65
    
    
    $
    5,360,939
    
    
    
    5.0
 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, 2006.6.
    
    FORECLOSED REAL ESTATEAs of September 30, 2007, the Bank has no foreclosed real estate. The Bank previously sold
property with a carrying value of $460,884, with net proceeds to the Bank of approximately
$1,733,045. Total pretax profit on these sales was approximately $1,272,161.
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7.
    
    NEW ACCOUNTING STANDARDSIn September 2006, the FASB issued 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 standard will have on
its financial condition and results of operations.In February 2007, FASB issued 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 Company on January 1, 2008 and is not expected to
have a significant impact on the Company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 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.
 10




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  GENERAL
     11




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##### Table of Contents



SELECTED FINANCIAL DATA
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2007
    
    2006
    
    2007
    
    2006Condensed income statementInterest income
    
    $
    9,941,838
    
    
    $
    9,186,802
    
    
    $
    29,203,917
    
    
    $
    26,314,671Interest expense
    
    
    5,118,104
    
    
    
    4,844,077
    
    
    
    15,038,183
    
    
    
    13,363,816Net interest income
    
    
    4,823,734
    
    
    
    4,342,725
    
    
    
    14,165,734
    
    
    
    12,950,855Provision for loan loss
    
    
    304,845
    
    
    
    116,563
    
    
    
    659,288
    
    
    
    289,135Noninterest income
    
    
    1,761,048
    
    
    
    519,452
    
    
    
    2,864,188
    
    
    
    1,502,782Noninterest expense
    
    
    3,228,407
    
    
    
    3,071,666
    
    
    
    9,632,470
    
    
    
    9,399,834Income before income taxes
    
    
    3,051,530
    
    
    
    1,673,948
    
    
    
    6,738,164
    
    
    
    4,764,668Income taxes
    
    
    1,165,891
    
    
    
    570,895
    
    
    
    2,500,790
    
    
    
    1,629,543Net income
    
    
    1,885,639
    
    
    
    1,103,053
    
    
    
    4,237,374
    
    
    
    3,135,125Per Common ShareBasic Earnings
    
    $
    0.71
    
    
    $
    0.42
    
    
    $
    1.60
    
    
    $
    1.19Diluted Earnings
    
    $
    0.67
    
    
    $
    0.39
    
    
    $
    1.49
    
    
    $
    1.11Book Value
    
    $
    15.50
    
    
    $
    13.83
    
    
    $
    15.50
    
    
    $
    13.83
  RESULTS OF OPERATIONS  NINE MONTHS ENDED SEPTEMBER 30, 2007
  Nine Months Ended September 30,2007
    
    2006
    
    $ Change
    
    % ChangeInterest income
    
    $
    29,203,917
    
    
    $
    26,314,671
    
    
    $
    2,889,246
    
    
    
    10.98
    %Interest expense
    
    
    15,038,183
    
    
    
    13,363,816
    
    
    
    1,674,367
    
    
    
    12.53
    %Net interest income
    
    
    14,165,734
    
    
    
    12,950,855
    
    
    
    1,214,879
    
    
    
    9.38
    %Provision for loan losses
    
    
    659,288
    
    
    
    289,135
    
    
    
    370,153
    
    
    
    128.02
    %
 12




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##### Table of Contents



Nine Months EndedSeptember 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeNONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    $
    256,196
    
    
    $
    306,639
    
    
    $
    (50,443
    )
    
    
    (16.45
    )%Net gain on the sale of foreclosed property
    
    
    1,272,161
    
    
    
    
    
    
    
    1,272,161
    
    
    NAIncome from bank owned life insurance
    
    
    263,126
    
    
    
    243,845
    
    
    
    19,281
    
    
    
    7.91
    %Gain on sale of investment securities
    
    
    16,912
    
    
    
    
    
    
    
    16,912
    
    
    NAService charges
    
    
    1,055,793
    
    
    
    952,298
    
    
    
    103,495
    
    
    
    10.87
    %Total noninterest income
    
    $
    2,864,188
    
    
    $
    1,502,782
    
    
    $
    1,361,406
    
    
    
    90.59
    %
  Nine Months EndedSeptember 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeNONINTEREST EXPENSE:Salary and employee benefits
    
    $
    5,526,490
    
    
    $
    5,179,316
    
    
    $
    347,174
    
    
    
    6.70
    %Occupancy
    
    
    977,637
    
    
    
    934,093
    
    
    
    43,544
    
    
    
    4.66
    %Advertising
    
    
    311,342
    
    
    
    416,744
    
    
    
    (105,402
    )
    
    
    (25.29
    )%Data processing
    
    
    498,854
    
    
    
    633,119
    
    
    
    (134,265
    )
    
    
    (21.21
    )%Legal and professional fees
    
    
    462,489
    
    
    
    498,126
    
    
    
    (35,637
    )
    
    
    (7.15
    )%Depreciation of furniture, fixtures, and
equipment
    
    
    474,373
    
    
    
    383,358
    
    
    
    91,015
    
    
    
    23.74
    %Telephone communications
    
    
    71,005
    
    
    
    66,992
    
    
    
    4,013
    
    
    
    5.99
    %ATM expenses
    
    
    225,366
    
    
    
    180,590
    
    
    
    44,776
    
    
    
    24.79
    %Office supplies
    
    
    118,046
    
    
    
    101,621
    
    
    
    16,425
    
    
    
    16.16
    %Office equipment
    
    
    37,910
    
    
    
    35,037
    
    
    
    2,873
    
    
    
    8.20
    %Other
    
    
    928,958
    
    
    
    970,838
    
    
    
    (41,880
    )
    
    
    (4.31
    )%Total noninterest expense
    
    $
    9,632,470
    
    
    $
    9,399,834
    
    
    $
    232,636
    
    
    
    2.47
    %
 13




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##### Table of Contents



RESULTS OF OPERATIONS  THREE MONTHS ENDED SEPTEMBER 30, 2007
  Three Months EndedSeptember 30,2007
    
    2006
    
    $ Change
    
    % ChangeInterest income
    
    $
    9,941,838
    
    
    $
    9,186,802
    
    
    $
    755,036
    
    
    
    8.22
    %Interest expense
    
    
    5,118,104
    
    
    
    4,844,077
    
    
    
    274,027
    
    
    
    5.66
    %Net interest income
    
    
    4,823,734
    
    
    
    4,342,725
    
    
    
    481,009
    
    
    
    11.08
    %Provision for loan losses
    
    
    304,845
    
    
    
    116,563
    
    
    
    188,282
    
    
    
    161.53
    %
  Three Months EndedSeptember 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeNON-INTEREST INCOME:Loan appraisal, credit, and
miscellaneous charges
    
    $
    83,520
    
    
    $
    72,850
    
    
    $
    10,670
    
    
    
    14.65
    %Net gain on sale of foreclosed property
    
    
    1,205,733
    
    
    
    
    
    
    
    1,205,733
    
    
    
    N/AIncome from bank owned life insurance
    
    
    97,430
    
    
    
    84,037
    
    
    
    13,393
    
    
    
    15.94
    %Service charges
    
    
    374,365
    
    
    
    362,565
    
    
    
    11,800
    
    
    
    3.25
    %Total non-interest income
    
    $
    1,761,048
    
    
    $
    519,452
    
    
    $
    1,241,596
    
    
    
    239.02
    %
 14




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##### Table of Contents



Three Months EndedSeptember 30,2007
    
    
    2006
    
    
    $ Change
    
    
    % ChangeNON-INTEREST EXPENSES:Salary and employee benefits
    
    $
    1,846,398
    
    
    $
    1,764,419
    
    
    $
    81,979
    
    
    
    4.65
    %Occupancy
    
    
    320,712
    
    
    
    329,805
    
    
    
    (9,093
    )
    
    
    (2.76
    )%Advertising
    
    
    83,573
    
    
    
    170,553
    
    
    
    (86,980
    )
    
    
    (51.00
    )%Data processing
    
    
    148,006
    
    
    
    202,546
    
    
    
    (54,540
    )
    
    
    (26.93
    )%Legal and professional fees
    
    
    185,267
    
    
    
    (50,041
    )
    
    
    235,308
    
    
    
    (470.23
    )%Depreciation of furniture,
fixtures, and equipment
    
    
    190,076
    
    
    
    141,931
    
    
    
    48,145
    
    
    
    33.92
    %Telephone communications
    
    
    26,422
    
    
    
    25,049
    
    
    
    1,373
    
    
    
    5.48
    %ATM expenses
    
    
    81,598
    
    
    
    64,413
    
    
    
    17,185
    
    
    
    26.68
    %Office supplies
    
    
    39,969
    
    
    
    32,671
    
    
    
    7,298
    
    
    
    22.34
    %Office equipment
    
    
    12,209
    
    
    
    10,786
    
    
    
    1,423
    
    
    
    13.19
    %Other
    
    
    294,177
    
    
    
    379,534
    
    
    
    (85,357
    )
    
    
    (22.49
    )%Total non-interest expenses
    
    $
    3,228,407
    
    
    $
    3,071,666
    
    
    $
    156,741
    
    
    
    5.10
    %Income tax expense
    
    
    1,165,891
    
    
    
    570,895
    
    
    
    594,996
    
    
    
    104.22
    %
   FINANCIAL CONDITION
  September 30, 2007
    
    
    December 31, 2006
    
    
    $ Change
    
    
    % ChangeCash and due from banks
    
    $
    5,410,952
    
    
    $
    3,157,595
    
    
    $
    2,253,357
    
    
    
    71.36
    %Federal Funds sold
    
    
    4,210,158
    
    
    
    772,351
    
    
    
    3,437,807
    
    
    
    445.11
    %Interest-bearing deposits with banks
    
    
    22,575,979
    
    
    
    14,260,560
    
    
    
    8,315,419
    
    
    
    58.31
    %Securities available for sale
    
    
    9,187,177
    
    
    
    9,301,676
    
    
    
    (114,499
    )
    
    
    (1.23
    )%Securities held to maturity  at amortized cost
    
    
    85,961,892
    
    
    
    97,804,849
    
    
    
    (11,842,957
    )
    
    
    (12.11
    )%Federal Home Loan Bank and Federal Reserve
Bank stock  at cost
    
    
    5,130,000
    
    
    
    6,100,400
    
    
    
    (970,400
    )
    
    
    (15.91
    )%Loans receivable  net of allowance for loan
losses of $4,293,382 and $3,783,721,
respectively
    
    
    440,745,786
    
    
    
    422,479,799
    
    
    
    18,265,987
    
    
    
    4.32
    %
 15




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##### Table of Contents



September 30, 2007
    
    
    December 31, 2006
    
    
    $ Change
    
    
    % ChangePremises and equipment, net
    
    
    8,426,868
    
    
    
    6,822,461
    
    
    
    1,604,407
    
    
    
    23.52
    %Foreclosed real estate
    
    
    
    
    
    
    460,884
    
    
    
    (460,884
    )
    
    
    (100.00
    )%Accrued interest receivable
    
    
    3,146,116
    
    
    
    2,837,413
    
    
    
    308,703
    
    
    
    10.88
    %Investment in bank owned life insurance
    
    
    10,025,888
    
    
    
    8,762,761
    
    
    
    1,263,127
    
    
    
    14.41
    %Other assets
    
    
    2,847,851
    
    
    
    2,735,265
    
    
    
    112,586
    
    
    
    4.12
    %TOTAL ASSETS
    
    $
    597,668,667
    
    
    $
    575,496,014
    
    
    $
    22,172,653
    
    
    
    3.85
    %
   September 30, 2007
    
    
    
    
    
    
    December 31, 2006Amount
    
    
    %
    
    
    Amount
    
    
    %Real Estate Loans:Commercial
    
    $
    172,796,548
    
    
    
    38.79
    %
    
    $
    177,923,349
    
    
    
    41.69
    %Residential first mortgages
    
    
    86,393,588
    
    
    
    19.39
    %
    
    
    80,781,271
    
    
    
    18.93
    %Residential construction
    
    
    61,848,898
    
    
    
    13.88
    %
    
    
    42,746,306
    
    
    
    10.02
    %Second mortgage loans
    
    
    24,468,769
    
    
    
    5.49
    %
    
    
    24,572,235
    
    
    
    5.76
    %Commercial lines of credit
    
    
    73,902,423
    
    
    
    16.59
    %
    
    
    79,629,910
    
    
    
    18.66
    %Consumer loans
    
    
    2,583,423
    
    
    
    0.58
    %
    
    
    2,812,945
    
    
    
    0.66
    %Commercial equipment
    
    
    23,472,071
    
    
    
    5.28
    %
    
    
    18,287,839
    
    
    
    4.29
    %445,465,720
    
    
    
    100.00
    %
    
    
    426,753,855
    
    
    
    100.00
    %Less:Deferred loan fees
    
    
    426,552
    
    
    
    0.10
    %
    
    
    490,335
    
    
    
    0.11
    %Allowance for loan loss
    
    
    4,293,382
    
    
    
    0.96
    %
    
    
    3,783,721
    
    
    
    0.89
    %4,719,934
    
    
    
    
    
    
    
    4,274,056$
    440,745,786
    
    
    
    
    
    
    $
    422,479,799
  16




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##### Table of Contents



Nine Months Ended
    
    
    Nine Months EndedSeptember 30, 2007
    
    
    September 30, 2006Beginning balance
    
    $
    3,783,721
    
    
    $
    3,383,334Charge offs
    
    
    149,821
    
    
    
    8,181Recoveries
    
    
    194
    
    
    
    2,759Net charge offs
    
    
    149,627
    
    
    
    5,422Additions charged to operations
    
    
    659,288
    
    
    
    289,135Balance at the end of the period
    
    $
    4,293,382
    
    
    $
    3,667,047
  September 30, 2007
    
    
    December 31, 2006Accruing loans contractually past due
90 days or more
    
    $
    
    
    
    $
    Loans accounted for on a non-accrual
basis
    
    $
    552,726
    
    
    $
    1,046,423Total non-performing loans
    
    $
    552,726
    
    
    $
    1,046,423Non-performing loans to total loans
    
    
    0.12
    %
    
    
    0.25
    %Allowance for loan losses to non-performing loans
    
    
    776.76
    %
    
    
    361.59
    %
  Liabilities
 September 30, 2007
    
    
    December 31, 2006
    
    
    $ Change
    
    
    % ChangeNoninterest-bearing deposits
    
    $
    46,669,115
    
    
    $
    43,723,436
    
    
    $
    2,945,679
    
    
    
    6.74
    %Interest-bearing deposits
    
    
    410,313,875
    
    
    
    374,289,966
    
    
    
    36,023,909
    
    
    
    9.62
    %Total deposits
    
    
    456,982,990
    
    
    
    418,013,402
    
    
    
    38,969,588
    
    
    
    9.32
    %Short-term borrowings
    
    
    1,550,576
    
    
    
    6,567,702
    
    
    
    (5,017,126
    )
    
    
    (76.39
    )%Long-term debt
    
    
    81,015,767
    
    
    
    96,045,936
    
    
    
    (15,030,169
    )
    
    
    (15.65
    )%Guaranteed preferred beneficial
interest in junior subordinated
debentures
    
    
    12,000,000
    
    
    
    12,000,000
    
    
    
    
    
    
    
    0.00
    %Accrued expenses and other liabilities
    
    
    5,242,651
    
    
    
    5,139,637
    
    
    
    103,014
    
    
    
    2.00
    %Total liabilities
    
    $
    556,791,984
    
    
    $
    537,766,677
    
    
    $
    19,025,307
    
    
    
    3.54
    %
 17




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##### Table of Contents



Stockholders Equity
 September 30, 2007
    
    
    December 31, 2006
    
    
    $ Change
    
    
    % ChangeCommon stock
    
    $
    26,375
    
    
    $
    26,423
    
    
    $
    (48
    )
    
    
    (0.18
    )%Additional paid in capital
    
    
    9,844,763
    
    
    
    9,499,946
    
    
    
    344,817
    
    
    
    3.63
    %Retained earnings
    
    
    31,435,092
    
    
    
    28,353,792
    
    
    
    3,081,300
    
    
    
    10.87
    %Accumulated other comprehensive loss
    
    
    (102,894
    )
    
    
    (53,822
    )
    
    
    (49,072
    )
    
    
    91.17
    %Unearned ESOP shares
    
    
    (326,653
    )
    
    
    (97,002
    )
    
    
    (229,651
    )
    
    
    (236.75
    )%Total stockholders equity
    
    $
    40,876,683
    
    
    $
    37,729,337
    
    
    $
    3,147,346
    
    
    
    8.34
    %
  LIQUIDITY AND CAPITAL RESOURCES
     18




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##### Table of Contents



REGULATORY MATTERS
  CRITICAL
ACCOUNTING POLICIES
    19




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
 Asset/Liability Risk Management
   20




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##### Table of Contents



Projected Percentage Change in Net Interest Income at September 30, 2007
 +200
    
    +100
    
    
    
    -100
    
    -200Basis points
    
    Basis points
    
    No Change
    
    Basis points
    
    Basis points(0.15)%
    
    0.84%
    
    0.00%
    
    0.50%
    
    (3.11)%
   
 ITEM 4. CONTROLS AND PROCEDURES
   21




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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, 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
    
    
    ProgramsJuly 2007
    
    
    481
    
    
    $
    26.25
    
    
    
    481
    
    
    
    60,253August 2007
    
    
    200
    
    
    
    26.00
    
    
    
    200
    
    
    
    60,053September 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    60,053Total
    
    
    681
    
    
    $
    26.18
    
    
    
    681
    
    
    
    60,053
  22




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##### Table of Contents



ITEM 3. DEFAULT UPON SENIOR SECURITIES
 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 ITEM 5. OTHER INFORMATION
 
 ITEM 6. EXHIBITS
    23




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##### Table of Contents



SIGNATURES
  TRI-COUNTY FINANCIAL CORPORATIONDate: November 13, 2007
    By:
    /s/ Michael L. MiddletonMichael L. MiddletonPresident and Chief Executive OfficerDate: November 13, 2007
    By:
    /s/ William J. PasenelliWilliam J. PasenelliExecutive Vice President and Chief Financial Officer