##### 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 June 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
(State of other jurisdiction of 
incorporation or organization)
    
    52-1652138
(I.R.S. Employer
Identification No.)3035 Leonardtown Road, Waldorf, Maryland
(Address of principal executive offices)
    
    20601
(Zip Code)
 
 
  þ o
 
 Large Accelerated Filer o
    
    Accelerated Filer oNon-accelerated Filer o
    
    Smaller Reporting Company þ(Do not check if a smaller reporting company)
 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  June 30, 2008
and December 31, 2007
    
    3Consolidated Statements of Income and Comprehensive
Income  Three and Six Months Ended June 30, 2008 and 2007
    
    4-5Consolidated Statements of Cash Flows  Six Months
Ended June 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
    
    15-24Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    24Item 4  Controls and Procedures
    
    24PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    25Item 1A  Risk Factors
    
    25Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    25Item 3  Defaults Upon Senior Securities
    
    26Item 4  Submission of Matters to a Vote of Security Holders
    
    26Item 5  Other Information
    
    26Item 6  Exhibits
    
    26SIGNATURES
    
    27EX-31 SECTION 302 CERTIFICATIONSEX-32 SECTION 906 CERTIFICATIONS
  2




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PART I FINANCIAL STATEMENTS
 
 ITEM I  FINANCIAL STATEMENTS
 
 TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED) JUNE 30, 2008 AND DECEMBER 31, 2007
 June 30, 2008
    
    
    December 31, 2007ASSETSCash and due from banks
    
    $
    2,880,382
    
    
    $
    3,267,920Federal Funds sold
    
    
    1,322,494
    
    
    
    885,056Interest-bearing deposits with banks
    
    
    4,485,163
    
    
    
    7,273,661Securities available for sale, at fair value
    
    
    13,820,157
    
    
    
    9,144,069Securities held to maturity, at amortized cost
    
    
    92,325,851
    
    
    
    92,687,603Federal Home Loan Bank and Federal Reserve Bank stock  at cost
    
    
    6,608,700
    
    
    
    5,354,500Loans receivable  net of allowance for loan losses of $4,602,295
and $4,482,483, respectively
    
    
    495,037,292
    
    
    
    453,614,133Premises and equipment, net
    
    
    11,020,436
    
    
    
    9,423,302Accrued interest receivable
    
    
    3,016,068
    
    
    
    3,147,569Investment in bank owned life insurance
    
    
    10,321,639
    
    
    
    10,124,288Other assets
    
    
    4,065,460
    
    
    
    3,483,733TOTAL ASSETS
    
    $
    644,903,642
    
    
    $
    598,405,834LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Non-interest-bearing deposits
    
    $
    44,510,740
    
    
    $
    48,041,571Interest-bearing deposits
    
    
    419,869,915
    
    
    
    396,952,444Total deposits
    
    
    464,380,655
    
    
    
    444,994,015Short-term borrowings
    
    
    8,937,172
    
    
    
    1,555,323Long-term debt
    
    
    104,984,679
    
    
    
    86,005,508Guaranteed preferred beneficial interest in junior subordinated debentures
    
    
    12,000,000
    
    
    
    12,000,000Accrued expenses and other liabilities
    
    
    4,861,186
    
    
    
    5,003,912Total liabilities
    
    
    595,163,692
    
    
    
    549,558,758STOCKHOLDERS EQUITY:Common stock  par value $.01; authorized - 15,000,000 shares; issued
2,943,699 and 2,909,974 shares, respectively
    
    
    29,437
    
    
    
    29,100Additional paid in capital
    
    
    17,064,603
    
    
    
    16,914,373Retained earnings
    
    
    33,052,870
    
    
    
    32,303,353Accumulated other comprehensive loss
    
    
    (146,685
    )
    
    
    (73,097
    )Unearned ESOP shares
    
    
    (260,275
    )
    
    
    (326,653
    )Total stockholders equity
    
    
    49,739,950
    
    
    
    48,847,076TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    644,903,642
    
    
    $
    598,405,834
 See notes to consolidated financial statements
 3




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TRI-COUNTY FINANCIAL CORPORATION  CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)  THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007INTEREST INCOME:Interest and fees on loans
    
    $
    7,827,081
    
    
    $
    8,330,061
    
    
    $
    15,904,247
    
    
    $
    16,389,202Taxable interest and dividends on investment
securities
    
    
    1,368,011
    
    
    
    1,372,704
    
    
    
    2,762,535
    
    
    
    2,801,245Interest on deposits with banks
    
    
    24,179
    
    
    
    35,122
    
    
    
    60,272
    
    
    
    71,632Total interest income
    
    
    9,219,271
    
    
    
    9,737,887
    
    
    
    18,727,054
    
    
    
    19,262,079INTEREST EXPENSE:Interest on deposits
    
    
    3,195,461
    
    
    
    3,708,633
    
    
    
    6,525,701
    
    
    
    7,354,736Interest on short-term borrowings
    
    
    33,393
    
    
    
    54,342
    
    
    
    114,427
    
    
    
    82,622Interest on long-term borrowings
    
    
    1,172,032
    
    
    
    1,176,072
    
    
    
    2,412,247
    
    
    
    2,482,721Total interest expenses
    
    
    4,400,886
    
    
    
    4,939,047
    
    
    
    9,052,375
    
    
    
    9,920,079NET INTEREST INCOME
    
    
    4,818,385
    
    
    
    4,798,840
    
    
    
    9,674,679
    
    
    
    9,342,000PROVISION (REVERSAL) FOR LOAN LOSSES
    
    
    (5,479
    )
    
    
    97,917
    
    
    
    154,745
    
    
    
    354,443NET INTEREST INCOME AFTER PROVISION
(REVERSAL) FOR LOAN LOSSES
    
    
    4,823,864
    
    
    
    4,700,923
    
    
    
    9,519,934
    
    
    
    8,987,557
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TRI-COUNTY FINANCIAL CORPORATION  CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)  THREE AND SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007NONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    
    124,288
    
    
    
    109,088
    
    
    
    234,551
    
    
    
    172,676Gain on asset sale
    
    
    
    
    
    
    
    
    
    
    2,041
    
    
    
    Net gain on the sale of foreclosed property
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,428Income from bank owned life insurance
    
    
    189,271
    
    
    
    83,179
    
    
    
    286,489
    
    
    
    165,696Gain on sale of investment securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    16,912Service charges
    
    
    445,029
    
    
    
    360,180
    
    
    
    822,958
    
    
    
    681,428Total noninterest income
    
    
    758,588
    
    
    
    552,447
    
    
    
    1,346,039
    
    
    
    1,103,140NONINTEREST EXPENSE:Salary and employee benefits
    
    
    2,111,805
    
    
    
    1,796,606
    
    
    
    4,122,015
    
    
    
    3,680,092Occupancy
    
    
    434,453
    
    
    
    345,495
    
    
    
    797,629
    
    
    
    656,925Advertising
    
    
    100,929
    
    
    
    66,646
    
    
    
    271,372
    
    
    
    227,769Data processing
    
    
    215,101
    
    
    
    163,257
    
    
    
    260,991
    
    
    
    350,848Legal and professional fees
    
    
    224,309
    
    
    
    160,617
    
    
    
    338,476
    
    
    
    277,222Depreciation of furniture, fixtures, and
equipment
    
    
    138,878
    
    
    
    165,039
    
    
    
    271,280
    
    
    
    284,297Telephone communications
    
    
    18,846
    
    
    
    21,672
    
    
    
    42,477
    
    
    
    44,583ATM expenses
    
    
    79,687
    
    
    
    76,751
    
    
    
    163,452
    
    
    
    143,768Office supplies
    
    
    34,991
    
    
    
    31,616
    
    
    
    74,475
    
    
    
    78,077Office equipment
    
    
    1,024
    
    
    
    14,491
    
    
    
    26,237
    
    
    
    25,701Other
    
    
    434,197
    
    
    
    300,723
    
    
    
    777,359
    
    
    
    634,781Total noninterest expenses
    
    
    3,794,220
    
    
    
    3,142,913
    
    
    
    7,145,763
    
    
    
    6,404,063INCOME BEFORE INCOME TAXES
    
    
    1,788,232
    
    
    
    2,110,457
    
    
    
    3,720,210
    
    
    
    3,686,634Income tax expense
    
    
    661,698
    
    
    
    768,341
    
    
    
    1,277,435
    
    
    
    1,334,899NET INCOME
    
    
    1,126,534
    
    
    
    1,342,116
    
    
    
    2,442,775
    
    
    
    2,351,735Other comprehensive income:Unrealized losses on securities
available for sale net of taxes
    
    
    (368,108
    )
    
    
    (141,916
    )
    
    
    (73,588
    )
    
    
    (119,752
    )Less: Reclassification adjustment for gain net
of taxes of $6,122 included in income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,790
    )COMPREHENSIVE INCOME
    
    $
    758,426
    
    
    $
    1,200,200
    
    
    $
    2,369,187
    
    
    $
    2,221,193EARNINGS PER COMMON SHAREBasic
    
    $
    0.38
    
    
    $
    0.51
    
    
    $
    0.83
    
    
    $
    0.89Diluted
    
    $
    0.37
    
    
    $
    0.47
    
    
    $
    0.79
    
    
    $
    0.83DIVIDENDS PER COMMON SHARE
    
    $
    0.40
    
    
    $
    0.40
    
    
    $
    0.40
    
    
    $
    0.40
 See notes to consolidated financial statements
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TRI-COUNTY FINANCIAL CORPORATION  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 Six Months Ended June 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,442,775
    
    
    $
    2,351,735Adjustments to reconcile net income to
net cash provided by operating activities:Provision for loan losses
    
    
    154,745
    
    
    
    354,443Gain on foreclosed real estate
    
    
    
    
    
    
    (66,428
    )Gain on sale of assets
    
    
    (2,041
    )
    
    
    Gain on sales of investment securities
    
    
    
    
    
    
    (16,912
    )Depreciation and amortization
    
    
    516,762
    
    
    
    511,130Net (accretion) amortization of
premium/discount on investment securities
    
    
    (33,123
    )
    
    
    23,461Increase in cash surrender of bank owned life insurance
    
    
    (197,351
    )
    
    
    (165,696
    )Deferred income tax benefit
    
    
    (408,351
    )
    
    
    (269,500
    )Excess tax benefits on stock-based compensation
    
    
    (4,250
    )Decrease (increase) in accrued interest receivable
    
    
    131,501
    
    
    
    (227,049
    )(Increase) decrease in deferred loan fees
    
    
    (82,219
    )
    
    
    13,516Decrease in accounts payable,
accrued expenses and other liabilities
    
    
    (457,573
    )
    
    
    (225,944
    )Increase in other assets
    
    
    (131,220
    )
    
    
    (227,939
    )Net cash provided by operating activities
    
    
    1,929,655
    
    
    
    2,054,817CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investment securities available for sale
    
    
    (4,931,155
    )
    
    
    (72,835
    )Proceeds from sale, redemption or principal payments
of investment securities available for sale
    
    
    139,483
    
    
    
    322,913Purchase of investment securities held to maturity
    
    
    (4,048,450
    )
    
    
    (800,000
    )Proceeds from maturities or principal payments
of investment securities held to maturity
    
    
    4,447,413
    
    
    
    8,273,048Net (increase) decrease of FHLB and Federal Reserve stock
    
    
    (1,254,200
    )
    
    
    520,000Loans originated
    
    
    (116,109,162
    )
    
    
    (98,872,942
    )Principal collected on loans
    
    
    74,613,477
    
    
    
    80,013,448Purchase of bank owned life insurance
    
    
    
    
    
    
    (1,000,000
    )Proceeds from disposal of premises and equipment
    
    
    2,041
    
    
    
    Purchase of premises and equipment
    
    
    (2,113,896
    )
    
    
    (1,834,231
    )Proceeds from foreclosed real estate
    
    
    
    
    
    
    66,428Net cash used in investing activities
    
    
    (49,254,449
    )
    
    
    (13,384,171
    )
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TRI-COUNTY FINANCIAL CORPORATION  CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  SIX MONTHS ENDED JUNE 30, 2008 AND 2007
 Six Months Ended June 30,2008
    
    
    2007CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    19,386,640
    
    
    
    15,432,767Proceeds from long-term borrowings
    
    
    24,000,000
    
    
    
    Payments of long-term borrowings
    
    
    (5,020,829
    )
    
    
    (10,020,012
    )Net increase (decrease) in short-term borrowings
    
    
    7,381,849
    
    
    
    (1,013,081
    )Proceeds from exercise of stock options
    
    
    725,905
    
    
    
    38,183Excess tax benefits on stock-based compensation
    
    
    4,250
    
    
    
    Net change in unearned ESOP shares
    
    
    156,373
    
    
    
    66,068Dividends paid
    
    
    (1,184,324
    )
    
    
    (1,062,064
    )Redemption of common stock
    
    
    (863,668
    )
    
    
    (76,221
    )Net cash provided by financing activities
    
    
    44,586,196
    
    
    
    3,365,640DECREASE IN CASH AND CASH EQUIVALENTS
    
    $
    (2,738,598
    )
    
    $
    (7,963,714
    )CASH AND CASH EQUIVALENTS  JANUARY 1
    
    
    11,426,637
    
    
    
    18,190,506CASH AND CASH EQUIVALENTS  JUNE 30
    
    $
    8,688,039
    
    
    $
    10,226,792SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the six months for:Interest
    
    $
    9,068,586
    
    
    $
    9,632,110Income taxes
    
    $
    1,676,000
    
    
    $
    1,782,600
 See notes to consolidated financial statements
 7




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) SIX MONTHS ENDED JUNE 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
    
    UnobservableFair Value
    
    Assets
    
    Inputs
    
    InputsDescription of Asset
    
    June 30,2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Available-for-sale securities
    
    $
    13,820,157
    
    
    $
    
    
    
    $
    13,820,157
    
    
    $
    
   QuotedPrices inActive
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableFair Value
    
    Assets
    
    Inputs
    
    InputsDescription
    
    June 30, 2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Impaired loans
    
    $
    1,062,524
    
    
    $
    
    
    
    $
    1,062,524
    
    
    $
    
 4.
    
    INCOME TAXES
  10




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5.
    
    EARNINGS PER SHARE
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Basic
    
    
    2,944,890
    
    
    
    2,647,558
    
    
    
    2,938,794
    
    
    
    2,645,764Diluted
    
    
    3,082,697
    
    
    
    2,843,404
    
    
    
    3,078,227
    
    
    
    2,836,748
 6.
    
    STOCK-BASED COMPENSATION
    Weighted
    
    
    
    
    
    
    Weighted-AverageAverage
    
    
    Aggregate
    
    
    Contractual LifeExercise
    
    
    Intrinsic
    
    
    Remaining InShares
    
    
    Price
    
    
    Value
    
    
    YearsOutstanding at December 31, 2007
    
    
    428,619
    
    
    $
    14.72Granted at fair value
    
    
    
    
    
    
    Exercised
    
    
    (64,761
    )
    
    
    11.21Expired
    
    
    
    
    
    
    Forfeited
    
    
    (2,709
    )
    
    
    19.76Outstanding at June 30, 2008
    
    
    361,149
    
    
    $
    15.32
    
    
    $
    3,216,462
    
    
    
    4.4Exercisable at June 30, 2008
    
    
    361,149
    
    
    $
    15.32
    
    
    $
    3,216,462
    
    
    
    4.4
  11




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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
 SFAS 157, 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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Staff Accounting Bulletin (SAB) No. 109 of the Securities and Exchange Commission (SEC),
Written Loan Commitments Recorded at Fair Value Through Earnings. SAB 105, Application of Accounting Principles to Loan Commitments,
 Accounting for Financial Guarantee Insurance Contracts  An interpretation of FASB
Statement No. 60 
 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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Condensed income statementInterest income
    
    $
    9,219,271
    
    
    $
    9,737,887
    
    
    $
    18,727,054
    
    
    $
    19,262,079Interest expense
    
    
    4,400,886
    
    
    
    4,939,047
    
    
    
    9,052,375
    
    
    
    9,920,079Net interest income
    
    
    4,818,385
    
    
    
    4,798,840
    
    
    
    9,674,679
    
    
    
    9,342,000Provision (reversal) for loan losses
    
    
    (5,479
    )
    
    
    97,917
    
    
    
    154,745
    
    
    
    354,443Noninterest income
    
    
    758,588
    
    
    
    552,447
    
    
    
    1,346,039
    
    
    
    1,103,140Noninterest expense
    
    
    3,794,220
    
    
    
    3,142,913
    
    
    
    7,145,763
    
    
    
    6,404,063Income before income taxes
    
    
    1,788,232
    
    
    
    2,110,457
    
    
    
    3,720,210
    
    
    
    3,686,634Income taxes
    
    
    661,698
    
    
    
    768,341
    
    
    
    1,277,435
    
    
    
    1,334,899Net income
    
    $
    1,126,534
    
    
    $
    1,342,116
    
    
    $
    2,442,775
    
    
    $
    2,351,735Per common shareBasic earnings
    
    $
    0.38
    
    
    $
    0.51
    
    
    $
    0.83
    
    
    $
    0.89Diluted earnings
    
    $
    0.37
    
    
    $
    0.47
    
    
    $
    0.79
    
    
    $
    0.83Book value
    
    $
    16.90
    
    
    $
    14.70
    
    
    $
    16.90
    
    
    $
    14.70
    16




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##### Table of Contents



Six Months Ended June 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeNONINTEREST INCOME:Loan appraisal, credit, and miscellaneous
charges
    
    $
    234,551
    
    
    $
    172,676
    
    
    $
    61,875
    
    
    
    35.83
    %Gain on asset sale
    
    
    2,041
    
    
    
    
    
    
    
    2,041
    
    
    
    Net gain on the sale of foreclosed property
    
    
    
    
    
    
    66,428
    
    
    
    (66,428
    )
    
    
    (100.00
    )%Income from bank owned life insurance
    
    
    286,489
    
    
    
    165,696
    
    
    
    120,793
    
    
    
    72.90
    %Gain on sale of investment securities
    
    
    
    
    
    
    16,912
    
    
    
    (16,912
    )
    
    
    (100.00
    )%Service charges
    
    
    822,958
    
    
    
    681,428
    
    
    
    141,530
    
    
    
    20.77
    %Total noninterest income
    
    $
    1,346,039
    
    
    $
    1,103,140
    
    
    $
    242,899
    
    
    
    22.02
    %
   Six Months EndedJune 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeNONINTEREST EXPENSE:Salary and employee benefits
    
    $
    4,122,015
    
    
    $
    3,680,092
    
    
    $
    441,923
    
    
    
    12.01
    %Occupancy
    
    
    797,629
    
    
    
    656,925
    
    
    
    140,704
    
    
    
    21.42
    %Advertising
    
    
    271,372
    
    
    
    227,769
    
    
    
    43,603
    
    
    
    19.14
    %Data processing
    
    
    260,991
    
    
    
    350,848
    
    
    
    (89,857
    )
    
    
    (25.61
    )%Legal and professional fees
    
    
    338,476
    
    
    
    277,222
    
    
    
    61,254
    
    
    
    22.10
    %Depreciation of furniture, fixtures, and
equipment
    
    
    271,280
    
    
    
    284,297
    
    
    
    (13,017
    )
    
    
    (4.58
    )%Telephone communications
    
    
    42,477
    
    
    
    44,583
    
    
    
    (2,106
    )
    
    
    (4.72
    )%ATM expenses
    
    
    163,452
    
    
    
    143,768
    
    
    
    19,684
    
    
    
    13.69
    %Office supplies
    
    
    74,475
    
    
    
    78,077
    
    
    
    (3,602
    )
    
    
    (4.61
    )%Office equipment
    
    
    26,237
    
    
    
    25,701
    
    
    
    536
    
    
    
    2.09
    %Other
    
    
    777,359
    
    
    
    634,781
    
    
    
    142,578
    
    
    
    22.46
    %Total noninterest expenses
    
    $
    7,145,763
    
    
    $
    6,404,063
    
    
    $
    741,700
    
    
    
    11.58
    %
 17




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##### Table of Contents



Three Months EndedJune 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeInterest income
    
    $
    9,219,271
    
    
    $
    9,737,887
    
    
    
    (518,616
    )
    
    
    (5.33
    )%Interest expense
    
    
    4,400,886
    
    
    
    4,939,047
    
    
    
    (538,161
    )
    
    
    (10.90
    )%Net interest income
    
    
    4,818,385
    
    
    
    4,798,840
    
    
    
    19,545
    
    
    
    0.41
    %Provision (reversal) for loan losses
    
    
    (5,479
    )
    
    
    97,917
    
    
    
    (103,396
    )
    
    
    (105.60
    )%
   Three Months EndedJune 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeLoan appraisal, credit, and
miscellaneous charges
    
    $
    124,288
    
    
    $
    109,088
    
    
    
    15,200
    
    
    
    13.93
    %Income from bank owned life insurance
    
    
    189,271
    
    
    
    83,179
    
    
    
    106,092
    
    
    
    127.55
    %Service charges
    
    
    445,029
    
    
    
    360,180
    
    
    
    84,849
    
    
    
    23.56
    %Total noninterest income
    
    
    758,588
    
    
    
    552,447
    
    
    
    206,141
    
    
    
    37.31
    %
 18




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##### Table of Contents



Three Months EndedJune 30,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeNONINTEREST EXPENSE:Salary and employee benefits
    
    $
    2,111,805
    
    
    $
    1,796,606
    
    
    $
    315,199
    
    
    
    17.54
    %Occupancy
    
    
    434,453
    
    
    
    345,495
    
    
    
    88,958
    
    
    
    25.75
    %Advertising
    
    
    100,929
    
    
    
    66,646
    
    
    
    34,283
    
    
    
    51.44
    %Data processing
    
    
    215,101
    
    
    
    163,257
    
    
    
    51,844
    
    
    
    31.76
    %Legal and professional fees
    
    
    224,309
    
    
    
    160,617
    
    
    
    63,692
    
    
    
    39.65
    %Depreciation of furniture,
fixtures, and equipment
    
    
    138,878
    
    
    
    165,039
    
    
    
    (26,161
    )
    
    
    (15.85
    )%Telephone communications
    
    
    18,846
    
    
    
    21,672
    
    
    
    (2,826
    )
    
    
    (13.04
    )%ATM expenses
    
    
    79,687
    
    
    
    76,751
    
    
    
    2,936
    
    
    
    3.83
    %Office supplies
    
    
    34,991
    
    
    
    31,616
    
    
    
    3,375
    
    
    
    10.67
    %Office equipment
    
    
    1,024
    
    
    
    14,491
    
    
    
    (13,467
    )
    
    
    (92.93
    )%Other
    
    
    434,197
    
    
    
    300,723
    
    
    
    133,474
    
    
    
    44.38
    %$
    3,794,220
    
    
    $
    3,142,913
    
    
    $
    651,307
    
    
    
    20.72
    %
     June 30, 2008
    
    
    December 31, 2007
    
    
    $ Change
    
    
    % ChangeCash and due from banks
    
    $
    2,880,382
    
    
    $
    3,267,920
    
    
    $
    (387,538
    )
    
    
    (11.86
    )%Federal Funds sold
    
    
    1,322,494
    
    
    
    885,056
    
    
    
    437,438
    
    
    
    49.42
    %Interest-bearing deposits with banks
    
    
    4,485,163
    
    
    
    7,273,661
    
    
    
    (2,788,498
    )
    
    
    (38.34
    )%Securities available for sale
    
    
    13,820,157
    
    
    
    9,144,069
    
    
    
    4,676,088
    
    
    
    51.14
    %Securities held to maturity  at amortized cost
    
    
    92,325,851
    
    
    
    92,687,603
    
    
    
    (361,752
    )
    
    
    (0.39
    )%Federal Home
Loan Bank and Federal Reserve Bank stock  at cost
    
    
    6,608,700
    
    
    
    5,354,500
    
    
    
    1,254,200
    
    
    
    23.42
    %Loans receivable  net of allowance for loan
losses of $4,602,295 and $4,482,483, respectively
    
    
    495,037,292
    
    
    
    453,614,133
    
    
    
    41,423,159
    
    
    
    9.13
    %Premises and equipment, net
    
    
    11,020,436
    
    
    
    9,423,302
    
    
    
    1,597,134
    
    
    
    16.95
    %Accrued interest receivable
    
    
    3,016,068
    
    
    
    3,147,569
    
    
    
    (131,501
    )
    
    
    (4.18
    )%Investment in bank-owned life insurance
    
    
    10,321,639
    
    
    
    10,124,288
    
    
    
    197,351
    
    
    
    1.95
    %Other assets
    
    
    4,065,460
    
    
    
    3,483,733
    
    
    
    581,727
    
    
    
    16.70
    %$
    644,903,642
    
    
    $
    598,405,834
    
    
    $
    46,497,808
    
    
    
    7.77
    %
 19




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##### Table of Contents



June 30, 2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %Real Estate LoansCommercial
    
    $
    214,943,870
    
    
    
    42.99
    %
    
    $
    190,483,998
    
    
    
    41.55
    %Residential first
mortgages
    
    
    99,429,313
    
    
    
    19.89
    %
    
    
    90,931,572
    
    
    
    19.83
    %Residential construction
    
    
    52,520,483
    
    
    
    10.51
    %
    
    
    50,577,491
    
    
    
    11.03
    %Second mortgage loans
    
    
    24,415,060
    
    
    
    4.88
    %
    
    
    24,649,581
    
    
    
    5.38
    %Commercial lines of credit
    
    
    84,012,404
    
    
    
    16.80
    %
    
    
    75,247,410
    
    
    
    16.41
    %Consumer loans
    
    
    2,303,386
    
    
    
    0.46
    %
    
    
    2,464,594
    
    
    
    0.54
    %Commercial equipment
    
    
    22,304,104
    
    
    
    4.46
    %
    
    
    24,113,223
    
    
    
    5.26
    %499,928,620
    
    
    
    100.00
    %
    
    
    458,467,869
    
    
    
    100.00
    %Less:Deferred loan fees
    
    
    289,033
    
    
    
    0.06
    %
    
    
    371,253
    
    
    
    0.08
    %Allowance for loan loss
    
    
    4,602,295
    
    
    
    0.92
    %
    
    
    4,482,483
    
    
    
    0.98
    %4,891,328
    
    
    
    
    
    
    
    4,853,736$
    495,037,292
    
    
    
    
    
    
    $
    453,614,133
   Six Months Ended
    
    
    Six Months EndedJune 30, 2008
    
    
    June 30, 2007Beginning balance
    
    $
    4,482,483
    
    
    $
    3,783,721Charge-offs
    
    
    36,400
    
    
    
    91,825Recoveries
    
    
    1,467
    
    
    
    194Net charge-offs
    
    
    34,933
    
    
    
    91,631Additions charged to operations
    
    
    154,745
    
    
    
    354,444Balance at the end of the period
    
    $
    4,602,295
    
    
    $
    4,046,534
 20




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##### Table of Contents



Balances as of
    
    
    Balances as ofJune 30, 2008
    
    
    December 31, 2007Restructured loans
    
    $
    
    
    
    $
    Accruing loans which are contractually
past due 90 days or more:
    
    $
    
    
    
    $
    Loans accounted for on a nonaccrual basis
    
    $
    146,251
    
    
    $
    414,005Total nonperforming loans
    
    $
    146,251
    
    
    $
    414,005Nonperforming loans to total loans
    
    
    0.03
    %
    
    
    0.09
    %Allowance for loan losses to
non performing loans
    
    
    3,146.85
    %
    
    
    1,082.71
    %
   June 30, 2008
    
    
    December 31, 2007
    
    
    $ Change
    
    
    % ChangeNoninterest-bearing deposits
    
    $
    44,510,740
    
    
    $
    48,041,571
    
    
    $
    (3,530,831
    )
    
    
    (7.35
    )%Interest-bearing deposits
    
    
    419,869,915
    
    
    
    396,952,444
    
    
    
    22,917,471
    
    
    
    5.77
    %Total deposits
    
    
    464,380,655
    
    
    
    444,994,015
    
    
    
    19,386,640
    
    
    
    4.36
    %Short-term borrowings
    
    
    8,937,172
    
    
    
    1,555,323
    
    
    
    7,381,849
    
    
    
    474.62
    %Long-term debt
    
    
    104,984,679
    
    
    
    86,005,508
    
    
    
    18,979,171
    
    
    
    22.07
    %Guaranteed preferred beneficial
interest in junior subordinated
debentures
    
    
    12,000,000
    
    
    
    12,000,000
    
    
    
    
    
    
    
    0.00
    %Accrued expenses and other liabilities
    
    
    4,861,186
    
    
    
    5,003,912
    
    
    
    (142,726
    )
    
    
    (2.85
    )%Total liabilities
    
    $
    595,163,692
    
    
    $
    549,558,758
    
    
    $
    45,604,934
    
    
    
    8.30
    %
   June 30, 2008
    
    
    December 31, 2007
    
    
    $ Change
    
    
    % ChangeCommon stock
    
    $
    29,437
    
    
    $
    29,100
    
    
    $
    337
    
    
    
    1.16
    %Additional paid in capital
    
    
    17,064,603
    
    
    
    16,914,373
    
    
    
    150,230
    
    
    
    0.89
    %Retained earnings
    
    
    33,052,870
    
    
    
    32,303,353
    
    
    
    749,517
    
    
    
    2.32
    %Accumulated other comprehensiveloss
    
    
    (146,685
    )
    
    
    (73,097
    )
    
    
    (73,588
    )
    
    
    100.67
    %Unearned ESOP shares
    
    
    (260,275
    )
    
    
    (326,653
    )
    
    
    66,378
    
    
    
    (20.32
    )%Total stockholders equity
    
    $
    49,739,950
    
    
    $
    48,847,076
    
    
    $
    892,874
    
    
    
    1.83
    %
  21




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##### Table of Contents



22




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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"
   23




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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
   24




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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 June 30, 2008.
 (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
    
    
    ProgramsApril 1-30,2008
    
    
    2,162
    
    
    $
    23.00
    
    
    
    2,162
    
    
    
    28,607May 1-31,2008
    
    
    1,720
    
    
    
    23.25
    
    
    
    1,720
    
    
    
    26,887June 1-30,2008
    
    
    1,966
    
    
    
    22.00
    
    
    
    1,966
    
    
    
    24,921Total
    
    
    5,848
    
    
    
    22.74
    
    
    
    5,848
  25




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##### Table of Contents



ITEM 3 
    
    DEFAULT UPON SENIOR SECURITIES
  
 ITEM 4 
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   VOTES FOR
    
    
    VOTES WITHHELDPhilip T. Goldstein
    
    
    1,993,695
    
    
    
    4,473James R. Shepherd
    
    
    1,994,639
    
    
    
    3,529H. Beaman Smith
    
    
    1,990,237
    
    
    
    7,931
  FOR
    
    AGAINST
    
    ABSTAIN1,991,391
    
    0
    
    6,777
 
 ITEM 5  OTHER INFORMATION
  
 ITEM 6    EXHIBITS
   26




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##### Table of Contents



SIGNATURES
  TRI-COUNTY FINANCIAL CORPORATIONDate:
August 14, 2008

    By:
    /s/ Michael L. MiddletonMichael L. Middleton, President, ChiefExecutive Officer and Chairman of the
BoardDate:
August 14, 2008

    By:
    /s/ William J. PasenelliWilliam J. Pasenelli, Executive VicePresident and Chief Financial Officer 27