##### 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 March 31, 2009
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _______ to _______
 Commission File Number 0-18279
 Tri-County Financial Corporation
  Maryland
    
    52-1652138(State of other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 3035 Leonardtown Road, Waldorf, Maryland 20601
 (301)645-5601
 Not applicable
 þ o
 o 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  March 31, 2009 and December 31, 2008
    
    
    3Consolidated
Statements of Income and Comprehensive Income  Three Months Ended March 31, 2009 and 2008
    
    
    4-5Consolidated
Statements of Cash Flows  Three Months Ended March 31, 2009 and 2008
    
    
    6-7Notes to Consolidated Financial Statements
    
    
    8-14Item 2
 Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    15-23Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    23Item 4  Controls and Procedures
    
    
    23PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    24Item 1A  Risk Factors
    
    
    24Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3  Defaults Upon Senior Securities
    
    
    24Item 4  Submission of Matters to a Vote of Security Holders
    
    
    24Item 5  Other Information
    
    
    24Item 6  Exhibits
    
    
    24SIGNATURES
    
    
    25EX-31EX-32
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PART I FINANCIAL STATEMENTS
 
 ITEM I. FINANCIAL STATEMENTS
 
 TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS MARCH 31, 2009 AND DECEMBER 31, 2008 (UNAUDITED)
 March 31, 2009
    
    
    December 31, 2008AssetsCash and due from banks
    
    $
    10,645,837
    
    
    $
    5,071,614Federal Funds sold
    
    
    1,026,721
    
    
    
    989,754Interest-bearing deposits with banks
    
    
    5,279,627
    
    
    
    8,413,164Securities available for sale, at fair value
    
    
    17,219,424
    
    
    
    14,221,674Securities held to maturity, at amortized cost
    
    
    104,792,078
    
    
    
    108,712,281Federal Home Loan Bank and Federal Reserve Bank stock  at cost
    
    
    6,439,200
    
    
    
    6,453,000Loans held for sale
    
    
    16,624,790
    
    
    
    Loans receivable  net of allowance for loan losses of $5,667,203 and $5,145,673,
respectively
    
    
    548,168,828
    
    
    
    542,977,138Premises and equipment, net
    
    
    12,591,741
    
    
    
    12,235,999Accrued interest receivable
    
    
    2,867,907
    
    
    
    2,965,813Investment in bank owned life insurance
    
    
    10,627,543
    
    
    
    10,526,286Other assets
    
    
    3,858,877
    
    
    
    4,118,187Total Assets
    
    $
    740,142,573
    
    
    $
    716,684,910Liabilities and Stockholders EquityLiabilitiesDepositsNon-interest-bearing deposits
    
    $
    48,333,699
    
    
    $
    50,642,273Interest-bearing deposits
    
    
    505,934,792
    
    
    
    474,525,293Total deposits
    
    
    554,268,491
    
    
    
    525,167,566Short-term borrowings
    
    
    406,497
    
    
    
    1,522,367Long-term debt
    
    
    99,952,643
    
    
    
    104,963,428Guaranteed preferred beneficial interest in junior subordinated debentures
    
    
    12,000,000
    
    
    
    12,000,000Accrued expenses and other liabilities
    
    
    5,550,442
    
    
    
    5,917,130Total Liabilities
    
    
    672,178,073
    
    
    
    649,570,491Stockholders EquityFixed Rate Cumulative Perpetual Preferred Stock, Series A  par value $1,000;
authorized 15,540; issued 15,540
    
    
    15,540,000
    
    
    
    15,540,000Fixed Rate Cumulative Perpetual Preferred Stock, Series B  par value $1,000;
authorized 777; issued 777
    
    
    777,000
    
    
    
    777,000Common stock  par value $.01; authorized  15,000,000 shares; issued
2,956,180 and 2,947,759 shares, respectively
    
    
    29,562
    
    
    
    29,478Additional paid in capital
    
    
    16,580,883
    
    
    
    16,517,649Retained earnings
    
    
    34,918,814
    
    
    
    34,280,719Accumulated other comprehensive income
    
    
    442,835
    
    
    
    229,848Unearned ESOP shares
    
    
    (324,594
    )
    
    
    (260,275
    )Total Stockholders Equity
    
    
    67,964,500
    
    
    
    67,114,419Total Liabilities and Stockholders Equity
    
    $
    740,142,573
    
    
    $
    716,684,910
 See notes to consolidated financial statements
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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 Three Months Ended March 31,2009
    
    
    2008INTEREST INCOME:Interest and fees on loans
    
    $
    7,877,391
    
    
    $
    8,077,166Taxable interest and dividends on investment securities
    
    
    1,325,495
    
    
    
    1,394,524Interest on deposits with banks
    
    
    190
    
    
    
    36,093Total interest income
    
    
    9,203,076
    
    
    
    9,507,783INTEREST EXPENSE:Interest on deposits
    
    
    3,173,365
    
    
    
    3,330,240Interest on short-term borrowings
    
    
    23,866
    
    
    
    81,034Interest on long-term debt
    
    
    1,062,840
    
    
    
    1,240,215Total interest expenses
    
    
    4,260,071
    
    
    
    4,651,489NET INTEREST INCOME
    
    
    4,943,005
    
    
    
    4,856,294PROVISION FOR LOAN LOSSES
    
    
    532,885
    
    
    
    160,224NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    4,410,120
    
    
    
    4,696,070
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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED) (Continued)
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 Three Months Ended March 31,2009
    
    
    2008NONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    $
    115,678
    
    
    $
    110,263Gain on sale of asset
    
    
    
    
    
    
    2,041Income from bank owned life insurance
    
    
    101,257
    
    
    
    97,218Service charges
    
    
    369,522
    
    
    
    377,929Total noninterest income
    
    
    586,457
    
    
    
    587,451NONINTEREST EXPENSE:Salary and employee benefits
    
    
    2,150,776
    
    
    
    2,010,210Occupancy
    
    
    404,527
    
    
    
    363,176Advertising
    
    
    130,112
    
    
    
    170,443Data processing
    
    
    226,175
    
    
    
    45,890Legal and professional fees
    
    
    157,609
    
    
    
    114,167Depreciation of furniture, fixtures, and equipment
    
    
    148,142
    
    
    
    132,402Telephone communications
    
    
    33,275
    
    
    
    23,631ATM expenses
    
    
    86,713
    
    
    
    83,765Office supplies
    
    
    49,712
    
    
    
    39,484FDIC Insurance
    
    
    89,664
    
    
    
    53,485Other
    
    
    337,457
    
    
    
    314,890Total noninterest expenses
    
    
    3,814,162
    
    
    
    3,351,543INCOME BEFORE INCOME TAXES
    
    
    1,182,415
    
    
    
    1,931,978Income tax expense
    
    
    412,575
    
    
    
    615,737NET INCOME
    
    
    769,840
    
    
    
    1,316,241OTHER COMPREHENSIVE INCOME NET OF TAXNet unrealized holding gains arising during period
    
    
    212,987
    
    
    
    294,520COMPREHENSIVE INCOME
    
    $
    982,827
    
    
    $
    1,610,761INCOME PER COMMON SHAREBasic
    
    $
    0.19
    
    
    $
    0.45Diluted
    
    $
    0.19
    
    
    $
    0.42
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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 Three Months EndedMarch 31,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    769,840
    
    
    $
    1,316,241Adjustments to reconcile net income to net cash provided by operating
activities:Provision for loan losses
    
    
    532,885
    
    
    
    160,224Gain on sale of asset
    
    
    
    
    
    
    (2,041
    )Depreciation and amortization
    
    
    287,453
    
    
    
    254,522Loans originated for resale
    
    
    (16,624,790
    )
    
    
    Net amortization of premium/discount on investment securities
    
    
    (23,561
    )
    
    
    (16,934
    )Increase in cash surrender of bank owned life insurance
    
    
    (101,257
    )
    
    
    (97,218
    )Deferred income tax benefit
    
    
    (338,331
    )
    
    
    (275,965
    )Decrease in accrued interest receivable
    
    
    97,906
    
    
    
    175,691Increase in deferred loan fees
    
    
    (45,180
    )
    
    
    (50,873
    )(Decrease) increase in accounts payable, accrued expenses, other liabilities
    
    
    (366,688
    )
    
    
    97,601Decrease in other assets
    
    
    487,920
    
    
    
    751,889Net cash provided by operating activities
    
    
    15,323,803
    
    
    
    2,313,137CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investment securities available for sale
    
    
    (2,765,018
    )
    
    
    (4,845,569
    )Proceeds from sale, redemption or principal payments of investment securities
available for sale
    
    
    138,530
    
    
    
    8,896Purchase of investment securities held to maturity
    
    
    
    
    
    
    (3,848,771
    )Proceeds from maturities or principal payments of investment securities held to
maturity
    
    
    3,895,210
    
    
    
    1,954,175Net increase (decrease) of FHLB and Federal Reserve stock
    
    
    13,800
    
    
    
    (894,800
    )Loans originated or acquired
    
    
    (57,178,523
    )
    
    
    (43,559,605
    )Principal collected on loans
    
    
    51,499,129
    
    
    
    28,791,732Proceeds from disposal of premises and equipment
    
    
    
    
    
    
    2,041Purchase of premises and equipment
    
    
    (643,196
    )
    
    
    (902,418
    )Net cash used in investing activities
    
    
    (5,040,068
    )
    
    
    (23,294,319
    )
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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (continued)
THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 Three Months EndedMarch 31,2009
    
    
    2008CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    $
    29,100,925
    
    
    $
    15,776,760Proceeds from long-term borrowings
    
    
    
    
    
    
    24,000,000Payments of long-term borrowings
    
    
    (5,010,785
    )
    
    
    (5,010,363
    )Net decrease in short term borrowings
    
    
    (1,115,870
    )
    
    
    (1,241,347
    )Exercise of stock options
    
    
    60,775
    
    
    
    717,861Excess tax benefits on stock-based compensation
    
    
    2,543
    
    
    
    4,250Dividends paid
    
    
    (131,745
    )
    
    
    Net change in unearned ESOP shares
    
    
    (64,319
    )
    
    
    25,592Redemption of common stock
    
    
    
    
    
    
    (730,700
    )Net cash provided by financing activities
    
    
    22,841,524
    
    
    
    33,542,053DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    2,477,653
    
    
    
    12,560,871CASH AND CASH EQUIVALENTS  JANUARY 1
    
    
    14,474,532
    
    
    
    11,426,637CASH AND CASH EQUIVALENTS  MARCH 31
    
    $
    16,952,185
    
    
    $
    23,987,508SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:Cash paid during the three months for:Interest
    
    $
    4,648,905
    
    
    $
    4,738,834Income taxes
    
    $
    
    
    
    $
    
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  THREE MONTHS ENDED MARCH 31, 2009 AND 2008
 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, 2008 have been derived from audited financial statements. There have been no
significant changes to the Companys accounting policies as disclosed in the 2008 Annual
Report. The results of operations for the three months ended March 31, 2009 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 2009 presentation.It is suggested that these consolidated financial statements be read in conjunction with the
consolidated financial statements and notes included in the Companys Annual Report for the
year ended December 31, 2008.2.
    
    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.
    
    FAIR VALUE MEASUREMENTSEffective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements
(SFAS 157) which provides a framework for measuring and disclosing fair value under
generally accepted accounting principles. SFAS 157 requires disclosures about the fair value
of assets and liabilities recognized in the balance sheet in periods subsequent to initial
recognition, whether the measurements are made on a recurring basis (for example, available
for sale investment securities) or on a nonrecurring basis (for example, impaired loans).SFAS 157 defines fair value as the exchange price that would be received for an asset or
paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the
measurement date. SFAS 157 also establishes a fair value hierarchy, which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when
measuring fair value.The Company utilizes fair value measurements to record fair value adjustments to certain
assets and to determine fair value disclosures. Securities available for sale are recorded
at fair value on a recurring basis. Additionally, from time to time, the Company may be
required to record at fair value other assets on a nonrecurring basis, such as loans held
for sale, loans held for investment and certain other assets. These nonrecurring fair value
adjustments typically involve application of lower of cost or market accounting or
write-downs of individual assets.Under SFAS 157, the Company groups assets and liabilities at fair value in three levels,
based on the markets in which the assets and liabilities are traded and the reliability of
the assumptions used to determine the fair value. These hierarchy levels are:
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Level 1 inputs  Unadjusted quoted process in active markets for identical assets or
liabilities that the entity has the ability to access at the measurement date.Level 2 inputs  Inputs other than quoted prices included in Level 1 that are observable for
the asset or liability, either directly or indirectly. These might include quoted prices for
similar assets and liabilities in active markets, and inputs other than quoted prices that
are observable for the asset or liability, such as interest rates and yield curves that are
observable at commonly quoted intervals.Level 3 inputs  Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities.Following is a description of valuation methodologies used for assets and liabilities
recorded at fair value:Investment Securities Available for SaleInvestment securities available for sale are recorded at fair value on a recurring basis.
Fair value measurement is based upon quoted prices, if available. If quoted prices are not
available, fair values are measured using independent pricing models or other model-based
valuation techniques such as the present value of future cash flows, adjusted for the
securitys credit rating, prepayment assumptions and other factors such as credit loss
assumptions. Level 1 securities include those traded on an active exchange such as the New
York Stock Exchange, Treasury securities that are traded by dealers or brokers in active
over- the counter markets and money market funds. Level 2 securities include mortgage backed
securities issued by government sponsored entities, municipal bonds and corporate debt
securities. Securities classified as Level 3 include asset-backed securities in less liquid
markets.LoansThe Company does not record loans at fair value on a recurring basis, however, from time to
time, a loan is considered impaired and an allowance for loan loss is established. Loans for
which it is probable that payment of interest and principal will not be made in accordance
with the contractual terms of the loan are considered impaired. Once a loan is identified as
individually impaired, management measures impairment in accordance with SFAS 114,
Accounting by Creditors for Impairment of a Loan, (SFAS 114). The fair value of impaired
loans is estimated using one of several methods, including the collateral value, market
value of similar debt, enterprise value, liquidation value and discounted cash flows. Those
impaired loans not requiring a specific allowance represents loans for which the fair value
of expected repayments or collateral exceed the recorded investment in such loans. At
December 31, 2008, substantially all of the impaired loans were evaluated based upon the
fair value of the collateral. In accordance with SFAS 157, impaired loans where an allowance
is established based on the fair value of collateral require classification in the fair
value hierarchy. When the fair value of the collateral is based on an observable market
price or a current appraised value, the Company records the loan as nonrecurring Level 2.
When an appraised value is not available or management determines the fair value of the
collateral is further impaired below the appraised value and there is no observable market
price, the Company records the loan as nonrecurring Level 3.Foreclosed AssetsForeclosed assets are adjusted for fair value upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed assets are carried at the lower of carrying value and fair
value. Fair value is based upon independent market prices, appraised value of the collateral
or managements estimation of the value of the value of the collateral. When the fair value
of the collateral is based on an observable market price or a current appraised value, the
Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not
available or management determines the fair value of the collateral is further
impaired below the appraised value and there is no observable market price, the Company
records the foreclosed asset at nonrecurring Level 3.
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Assets and Liabilities Recorded At Fair Value on a Recurring Basis:The table below presents the recorded amount of assets and liabilities, as of March 31, 2009
measured at fair value on a recurring basis.
 Quoted Prices inActive Markets for
    
    Significant Other
    
    SignificantIdentical Assets
    
    Observable Inputs
    
    Unobservable InputsDescription of Asset
    
    Fair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Available-for-Sale Securities
    
    $
    17,219,424
    
    
    $
    
    
    
    $
    17,219,424
    
    
    $
    
 Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:The Company may be required from time to time, to measure certain assets at fair value on a
non-recurring basis in accordance with U.S. generally accepted accounting principles. These
include assets that are measured at the lower of cost or market that were recognized at fair
value below cost at the end of the period. Assets measured at fair value on a nonrecurring
basis as of March 31, 2009 are included in the table below:
 Quoted Prices inActive Markets for
    
    Significant Other
    
    SignificantIdentical Assets
    
    Observable Inputs
    
    Unobservable InputsDescription of Asset
    
    Fair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Impaired loans
    
    $
    2,693,451
    
    
    $
    
    
    
    $
    2,693,451
    
    
    $
    
 4.
    
    INCOME TAXESThe Company uses the liability method of accounting for income taxes as required by SFAS No.
109, Accounting for Income Taxes. Under the liability method, deferred-tax assets and
liabilities are determined based on differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities (i.e., temporary differences)
and are measured at the enacted rates that will be in effect when these differences reverse.
The Company also adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (FIN 48) on January 1, 2007.5.
    
    EARNINGS PER SHAREEarnings per common share are computed by dividing net income less
dividends on preferred shares, by the weighted average number of
common shares outstanding during the period. Diluted net income
available to common shareholders is divided by the weighted average
number of common shares outstanding during the period, including any
potential dilutive common shares outstanding, such as options and
warrants. As of March 31, 2009 and 2008, there were 190,479 and 21,811
shares excluded from the diluted net income per share computation
because inclusion of these options would be anti-dilutive,
respectively. 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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Quarter Ended March 31,2009
    
    
    2008Net Income
    
    $
    769,840
    
    
    $
    1,316,241Less: Dividends payable on preferred stock
    
    
    (211,733
    )
    
    
    Net income available to common shareholders
    
    $
    558,108
    
    
    $
    1,316,241Average number of common shares outstanding
    
    
    2,951,122
    
    
    
    2,932,699Effect of dilutive options
    
    
    38,982
    
    
    
    149,794Average number of shares used to calculate earnings per share
outstanding
    
    
    2,990,103
    
    
    
    3,082,493
 6.
    
    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 13 to the
financial statements included in our Annual Report to Stockholders for the year ended
December 31, 2008. No compensation related expense related to stock options was recognized
in the quarter ended March 31, 2009 or 2008.The Company and the Bank currently maintain incentive plans which provide for payments to be
made in either cash or stock options. The Company has accrued the full amounts due under
these plans, but currently it is not possible to identify the portion that will be paid out
in the form of stock options.A summary of the Companys stock option plans as of March 31, 2009, and changes during the
three-month period then ended is presented below:
 Weighted
    
    
    
    
    
    Weighted-AverageAverage
    
    Aggregate
    
    Contractual LifeExercise
    
    Intrinsic
    
    Remaining InShares
    
    Price
    
    Value (1)
    
    YearsOutstanding at December 31,
2008
    
    
    353,217
    
    
    $
    15.49Granted at fair value
    
    
    
    
    
    
    Exercised
    
    
    (10,557
    )
    
    
    7.88
    
    
    
    36,465Expired
    
    
    
    
    
    
    Forfeited
    
    
    (1
    )
    
    
    7.88Outstanding at March 31, 2009
    
    
    342,659
    
    
    $
    15.73
    
    
    $
    540,919
    
    
    
    2.6Exercisable at March 31, 2009
    
    
    342,659
    
    
    $
    15.73
    
    
    $
    540,919
    
    
    
    2.6
 7.
    
    GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURESOn June 15, 2005, Tri-County Capital Trust II (Capital Trust II), a Delaware business
trust formed, funded and wholly owned by the Company, issued $5,000,000 of capital
securities with an interest rate based on the 90-day LIBOR rate plus 1.70%. The Trust used
the proceeds from this issuance to purchase $5.2 million of the Companys junior
subordinated debentures. The interest rate on the debentures and
the trust preferred securities is variable and adjusts quarterly. The Company has, through
various contractual arrangements, fully and unconditionally guaranteed all of Capital Trust
IIs obligations with respect to the
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capital securities. These capital securities qualify as
Tier I capital and are presented in the Consolidated Balance Sheets as Guaranteed Preferred
Beneficial Interests in Junior Subordinated Debentures. Both the capital securities of
Capital Trust II and the junior subordinated debentures are scheduled to mature on June 15,
2035, unless called by the Company not earlier than June 15, 2010.
 On July 22, 2004, Tri-County Capital Trust I (Capital Trust I), a Delaware business trust
formed, funded and wholly owned by the Company, issued $7,000,000 of capital securities with
an interest rate based on the 90-day LIBOR rate plus 2.60%. The Trust used the proceeds from
this issuance to purchase $7.2 million of the Companys junior subordinated debentures. The
interest rate on the debentures and the trust preferred securities is variable and adjusts
quarterly. The Company has, through various contractual arrangements, fully and
unconditionally guaranteed all of Capital Trust Is obligations with respect to the capital
securities. These capital securities qualify as Tier I capital and are presented in the
Consolidated Balance Sheets as Guaranteed Preferred Beneficial Interests in Junior
Subordinated Debentures. Both the capital securities of Capital Trust I and the junior
subordinated debentures are scheduled to mature on July 22, 2034, unless called by the
Company not earlier than July 22, 2009.Costs associated with the issuance of the trust-preferred securities were less than $10,000
and were expensed as period costs.8.
    
    PREFERRED STOCKOn December 19, 2008, the United States Department of the Treasury (the Treasury), acting
under the authority granted to it by the Troubled Asset Relief Programs Capital Purchase
Program purchased $15,540,000 of Fixed Rate Cumulative Perpetual Preferred Stock, Series A
(Series A Preferred Stock) from the Company. The preferred stock has a perpetual life, has
liquidation priority over the Companys common shareholders, and is cumulative. The dividend
rate is 5% for the first five years, rising to 9% thereafter. The Series A Preferred Stock
may not be redeemed for three years unless the Company has sold an equal amount of common or
preferred shares for cash, has redeemed all Series B Preferred Stock, and has paid all
dividends accumulated. As condition to the issuance of the Series A Preferred Stock the
Company agreed to accept restrictions on the repurchase of its common stock, the payment of
dividends, and certain compensation practices.At the same time the Company issued its Series A Preferred Stock, it issued to the Treasury
warrants to purchase Fixed Rate Cumulative Perpetual Preferred Stock, Series B Preferred
Stock (Preferred B) in the amount of 5% of the Preferred A shares or 777 shares with a par
value of $777,000. The warrants had an exercise price of $.01 per share. These Preferred B
shares have the same rights, preferences, and privileges as the Series A Preferred Shares.
The Series B Preferred Shares have a dividend rate of 9%. These warrants were immediately
exercised. The Company believes that it is in compliance with all terms of the Preferred
Stock purchase agreement.9.
    
    CHANGE IN ACCOUNTING PRINCIPLEIn 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 cost and the related liability.
Entities should recognize the effects of applying this Issue through either, (a) a change
in accounting principle through a cumulative  effect 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. The effects of this
guidance have been applied as a change in accounting principle through a cumulative effect
adjustment to retained earnings of $314,847 during the first quarter of 2008.
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##### Table of Contents



10.
    
    SUBSEQUENT EVENTOn May 1, 2009, Silverton Bank, N.A., Atlanta, GA was closed by the Office of
the Comptroller of the Currency and the Federal Deposit Insurance Company was named
receiver. The FDIC created a bridge bank to take over the operations of Silverton
Bank, N.A. The newly created bank is Silverton Bridge Bank, N.A. The creation of the
bridge bank allows its client banks to transition their correspondent banking needs to
other providers with the least amount of disruptions. Silverton Bridge Bank N.A. will
continue to operate business as usual through July 29, 2009. As a result of this
announcement, it is highly unlikely that we will recover any portion of our investment
of $118,744 in the stock of Silverton Bank, N.A.s holding company, Silverton
Financial Services, Inc. Accordingly, the Bank will record an other-than-temporary
impairment charge in the second quarter of 2009. Because this is a capital loss, there
will be no tax benefit associated with this loss.11.
    
    NEW ACCOUNTING STANDARDSStatement of Financial Accounting Standards No. 141 (Revised 2007), Business Combinations
(SFAS 141(R)).During December 2007, the FASB issued SFAS 141(R). SFAS 141(R) recognizes
and measures the goodwill acquired in the business combination and defines a bargain
purchase, and requires the acquirer to recognize that excess as a gain attributable to the
acquirer. In contrast, Statement 141 required the negative goodwill amount to be
allocated as a pro rata reduction of the amounts assigned to assets acquired. SFAS 141(R)
applies prospectively to business combinations for which the acquisition date is on or
after December 15, 2008. The Company adopted SFAS No. 141R effective March 31, 2009, and
adoption did not have a material impact on the Companys consolidated financial statements.Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements  an amendment of ARB No. 51 (SFAS 160).During
December 2007, the FASB issued SFAS 160 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It
clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the
consolidated entity that should be reported as equity in the consolidated financial
statement, but separate from the parents equity. SFAS 160 is effective for fiscal years,
and interim periods within those fiscal years, beginning on or after December 15, 2008.
Management adopted this Statement effective March 31, 2009, and adoption did not have a
material impact on the Companys consolidated financial condition or results of operations.Statement of Financial Accounting Standards No. 161, Disclosures about Derivative
Instruments and Hedging Activities  an amendment of FASB Statement No. 133 (SFAS 161).
SFAS 161 requires qualitative disclosures about objectives and strategies for using
derivative, quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent features in
derivative agreements. SFAS 161 is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. Adoption of SFAS No. 141R did
not have a material impact on the consolidated financial statements.Statement of Financial Accounting Standards, The Hierarchy of Generally Accepted Accounting
Principles (SFAS 162).During May 2008, the FASB issued SFAS 162. This Statement
identifies the sources of account principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in the United
States. Adoption of SFAS 162 was not a change in
the Companys current accounting practices; therefore, it did not have a material impact on
the Companys consolidated financial condition or results of operations.FASB Staff Position EITF 03-6-1, Determining Whether Instruments Granted in
Share-Based Payment
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##### Table of Contents



Transactions are Participating Securities (FSP EITF 03-6-1) .FSP
EITF 03-6-1 requires companies to treat unvested share-based payment awards that have
non-forfeitable rights to dividend or dividend equivalents as a separate class of
securities in calculating earnings per share. FSP EITF 03-6-1 is effective for financial
statements issued for fiscal years and interim periods beginning after December 15, 2008,
and requires a company to retrospectively adjust its earning per share data. The Company
adopted FSP EITF 03-6-1 effective March 31, 2009, and adoption did not have a material
effect on consolidated results of operations or earnings per share.FASB Staff Positions FAS 107-1 and APB 28-1, FAS 157-4, FAS 115-2 and FAS 124-2, Other Than
Temporary Impairment.FASB has issued FSPs to address concerns regarding (1) determining
whether a market is not active and a transaction is not orderly, (2) recognition and
presentation of other-than-temporary impairments and (3) interim disclosures of fair values
of financial instruments. The FSPs will be effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.
The Company will adopt the FSPs effective for the period ending June 30, 2009, but does not
anticipate that adoption will result in a material effect on consolidated results of
operations.
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##### Table of Contents



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




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##### Table of Contents



Three Months EndedMarch 31,2009
    
    2008Condensed Income Statement:Interest Income
    
    $
    9,203,076
    
    
    $
    9,507,783Interest Expense
    
    
    4,260,071
    
    
    
    4,651,489Net Interest Income
    
    
    4,943,005
    
    
    
    4,856,294Provision for Loan Loss
    
    
    532,885
    
    
    
    160,224Non-interest Income
    
    
    586,457
    
    
    
    587,451Non-interest Expense
    
    
    3,814,162
    
    
    
    3,351,543Income Before Income Taxes
    
    
    1,182,415
    
    
    
    1,931,978Income Taxes
    
    
    412,575
    
    
    
    615,737Net Income
    
    
    769,840
    
    
    
    1,316,241Per Common Share:Basic Earnings
    
    $
    0.19
    
    
    $
    0.45Diluted Earnings
    
    $
    0.19
    
    
    $
    0.42Book Value
    
    $
    17.47
    
    
    $
    17.04
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##### Table of Contents



Three Months Ended2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeNONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    $
    115,678
    
    
    $
    110,263
    
    
    $
    5,415
    
    
    
    4.91
    %Gain on sale of assets
    
    
    
    
    
    
    2,041
    
    
    
    (2,041
    )
    
    
    (100.00
    )%Income from bank owned life insurance
    
    
    101,257
    
    
    
    97,218
    
    
    
    4,039
    
    
    
    4.15
    %Service charges
    
    
    369,522
    
    
    
    377,929
    
    
    
    (8,407
    )
    
    
    (2.22
    )%Total noninterest income
    
    $
    586,457
    
    
    $
    587,451
    
    
    $
    (994
    )
    
    
    (0.17
    )%
  Three Months Ended March 31,2009
    
    
    2008
    
    
    $ Change
    
    
    % ChangeNON-INTEREST EXPENSE:Salary and employee benefits
    
    $
    2,150,776
    
    
    $
    2,010,210
    
    
    $
    140,566
    
    
    
    6.99
    %Occupancy
    
    
    404,527
    
    
    
    363,176
    
    
    
    41,351
    
    
    
    11.39
    %Advertising
    
    
    130,112
    
    
    
    170,443
    
    
    
    (40,331
    )
    
    
    (23.66
    )%Data processing
    
    
    226,175
    
    
    
    45,890
    
    
    
    180,285
    
    
    
    392.86
    %Legal and professional fees
    
    
    157,609
    
    
    
    114,167
    
    
    
    43,442
    
    
    
    38.05
    %Depreciation
    
    
    148,142
    
    
    
    132,402
    
    
    
    15,740
    
    
    
    11.89
    %Telephone communications
    
    
    33,275
    
    
    
    23,631
    
    
    
    9,644
    
    
    
    40.81
    %ATM expenses
    
    
    86,713
    
    
    
    83,765
    
    
    
    2,948
    
    
    
    3.52
    %Office supplies
    
    
    49,712
    
    
    
    39,484
    
    
    
    10,228
    
    
    
    25.90
    %Office equipment
    
    
    89,664
    
    
    
    53,485
    
    
    
    36,179
    
    
    
    67.64
    %Other
    
    
    337,457
    
    
    
    314,890
    
    
    
    22,567
    
    
    
    7.17
    %Total non-interest expenses
    
    $
    3,814,162
    
    
    $
    3,351,543
    
    
    $
    462,619
    
    
    
    13.80
    %
  17




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March 31, 2009
    
    
    December 31, 2008
    
    
    $ change
    
    
    % ChangeCash and due from banks
    
    $
    10,645,837
    
    
    $
    5,071,614
    
    
    $
    5,574,223
    
    
    
    109.91
    %Federal Funds sold
    
    
    1,026,721
    
    
    
    989,754
    
    
    
    36,967
    
    
    
    3.73
    %Interest-bearing deposits with banks
    
    
    5,279,627
    
    
    
    8,413,164
    
    
    
    (3,133,537
    )
    
    
    (37.25
    )%Securities available for sale, at fair value
    
    
    17,219,424
    
    
    
    14,221,674
    
    
    
    2,997,750
    
    
    
    21.08
    %Securities held to maturity, at amortized cost
    
    
    104,792,078
    
    
    
    108,712,281
    
    
    
    (3,920,203
    )
    
    
    (3.61
    )%Federal Home Loan Bank and Federal Reserve Bank
stock
    
    
    6,439,200
    
    
    
    6,453,000
    
    
    
    (13,800
    )
    
    
    (0.21
    )%Loans held for sale
    
    
    16,624,790
    
    
    
    
    
    
    
    16,624,790
    
    
    
    100
    %Loans receivable  net of allowance for loan losses
    
    
    548,168,828
    
    
    
    542,977,138
    
    
    
    5,191,690
    
    
    
    0.96
    %Premises and equipment, net
    
    
    12,591,741
    
    
    
    12,235,999
    
    
    
    355,742
    
    
    
    2.91
    %Accrued interest receivable
    
    
    2,867,907
    
    
    
    2,965,813
    
    
    
    (97,906
    )
    
    
    (3.30
    )%Investment in bank owned life insurance
    
    
    10,627,543
    
    
    
    10,526,286
    
    
    
    101,257
    
    
    
    0.96
    %Other assets
    
    
    3,858,877
    
    
    
    4,118,187
    
    
    
    (259,310
    )
    
    
    (6.30
    )%$
    740,142,573
    
    
    $
    716,684,910
    
    
    $
    23,457,663
    
    
    
    3.27
    %
  18




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March 31, 2009
    
    
    December 31, 2008Amount
    
    
    %
    
    
    Amount
    
    
    %Real Estate Loans:Commercial
    
    $
    245,549,749
    
    
    
    44.31
    %
    
    $
    236,409,990
    
    
    
    43.11
    %Residential first mortgages
    
    
    101,165,369
    
    
    
    18.26
    %
    
    
    104,607,136
    
    
    
    19.07
    %Residential construction
    
    
    58,763,453
    
    
    
    10.61
    %
    
    
    57,564,710
    
    
    
    10.50
    %Second mortgage loans
    
    
    25,126,379
    
    
    
    4.53
    %
    
    
    25,412,415
    
    
    
    4.63
    %Commercial lines of credit
    
    
    100,167,867
    
    
    
    18.08
    %
    
    
    101,935,520
    
    
    
    18.59
    %Consumer loans
    
    
    1,821,722
    
    
    
    0.33
    %
    
    
    2,045,838
    
    
    
    0.37
    %Commercial equipment
    
    
    21,507,200
    
    
    
    3.88
    %
    
    
    20,458,092
    
    
    
    3.73
    %554,101,739
    
    
    
    100.00
    %
    
    
    548,433,701
    
    
    
    100.00
    %Less:Deferred loan fees
    
    
    265,708
    
    
    
    0.05
    %
    
    
    310,890
    
    
    
    0.06
    %Allowance for loan loss
    
    
    5,667,203
    
    
    
    1.02
    %
    
    
    5,145,673
    
    
    
    0.94
    %5,932,911
    
    
    
    
    
    
    
    5,456,563Loans receivable, net
    
    $
    548,168,828
    
    
    
    
    
    
    $
    542,977,138
   Three Months Ended
    
    
    Three Months EndedMarch 31, 2008
    
    
    March 31, 2008Beginning Balance
    
    $
    5,145,673
    
    
    $
    4,482,483Charge Offs
    
    
    11,355
    
    
    
    26,519Recoveries
    
    
    
    
    
    
    Net Charge Offs
    
    
    11,355
    
    
    
    26,519Provision for Loan Losses
    
    
    532,885
    
    
    
    160,224Balance at the end of the Period
    
    $
    5,667,203
    
    
    $
    4,616,188
  Balances as of
    
    
    Balances as ofMarch 31, 2009
    
    
    December 31, 2008Restructured Loans
    
    $
    
    
    
    $
    Accruing loans which are contractually
past due 90 days or more:
    
    $
    
    
    
    $
    Loans accounted for on a nonaccrual basis
    
    $
    7,671,052
    
    
    $
    4,936,000Total non-performing loans
    
    $
    7,671,052
    
    
    $
    4,936,000Non-performing loans to total loans
    
    
    1.38
    %
    
    
    0.90
    %Allowance for loan losses to non- performing loans
    
    
    73.88
    %
    
    
    104.25
    %
 19




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##### Table of Contents



March 31, 2009
    
    
    December 31, 2008
    
    
    $ change
    
    
    % ChangeDepositsNon-interest-bearing deposits
    
    $
    48,333,699
    
    
    $
    50,642,273
    
    
    $
    (2,308,574
    )
    
    
    (4.56
    )%Interest-bearing deposits
    
    
    505,934,792
    
    
    
    474,525,293
    
    
    
    31,409,499
    
    
    
    6.62
    %Total deposits
    
    
    554,268,491
    
    
    
    525,167,566
    
    
    
    29,100,925
    
    
    
    5.54
    %Short-term borrowings
    
    
    406,497
    
    
    
    1,522,367
    
    
    
    (1,115,870
    )
    
    
    (73.30
    )%Long-term debt
    
    
    99,952,643
    
    
    
    104,963,428
    
    
    
    (5,010,785
    )
    
    
    (4.77
    )%Guaranteed preferred beneficial interest
in junior subordinated debentures
    
    
    12,000,000
    
    
    
    12,000,000
    
    
    
    
    
    
    
    0.00
    %Accrued expenses and other liabilities
    
    
    5,550,442
    
    
    
    5,917,130
    
    
    
    (366,688
    )
    
    
    (6.20
    )%Total liabilities
    
    $
    672,178,073
    
    
    $
    649,570,491
    
    
    $
    22,607,582
    
    
    
    3.48
    %
   March 31, 2009
    
    
    December 31, 2008
    
    
    $ change
    
    
    % ChangeFixed Rate Cumulative Perpetual Preferred
Stock, Series A  par value $1,000;
authorized 15,540; issued 15,540
    
    $
    15,540,000
    
    
    $
    15,540,000
    
    
    $
    
    
    
    
    Fixed Rate Cumulative Perpetual Preferred
Series B  par value $1,000;
authorized 777; issued 777
    
    
    777,000
    
    
    
    777,000
    
    
    
    
    
    
    
    Common stock  par value $.01;
authorized  15,000,000 shares; issued
2,956,180 and 2,947,759 shares, respectively
    
    
    29,562
    
    
    
    29,478
    
    
    
    84
    
    
    
    0.28
    %Additional paid in capital
    
    
    16,580,883
    
    
    
    16,517,649
    
    
    
    63,234
    
    
    
    0.38
    %Retained earnings
    
    
    34,918,814
    
    
    
    34,280,719
    
    
    
    638,095
    
    
    
    1.86
    %Accumulated other comprehensive income
    
    
    442,835
    
    
    
    229,848
    
    
    
    212,987
    
    
    
    92.66
    %Unearned ESOP shares
    
    
    (324,594
    )
    
    
    (260,275
    )
    
    
    (64,319
    )
    
    
    24.71
    %Total Stockholders Equity
    
    $
    67,964,500
    
    
    $
    67,114,419
    
    
    $
    850,081
    
    
    
    1.27
    %
  20




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21




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
   23




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PART II  OTHER INFORMATION
 
  
  
  (a)
    
    Not applicable(b)
    
    Not applicable(c)
    
    The Company did not repurchase any shares of common stock in the quarter ended
March 31, 2009. On September 25, 2008, Tri-County Financial Corporation announced a
repurchase program under which it would repurchase up to 5% of its outstanding common
stock or approximately 147,435 shares. However, as part of the Companys participation
in the Capital Repurchase Program of the U.S. Department of Treasurys Troubled Asset
Repurchase Program, prior to the earlier of (a) December 19, 2018 or (b) the date on
which the Series A preferred stock and the Series B preferred stock has been redeemed
in full or the Treasury has transferred all of the Series A preferred stock and the
Series B preferred stock to non-affiliates, the Company, without the consent of the
Treasury, cannot repurchase any shares of its common stock or other capital stock or
equity securities or trust preferred securities. These repurchase restrictions do not
apply in certain limited circumstances, including the repurchase of common stock in
connection with the administration of any employee benefit plan in the ordinary course
of business and consistent with past practice. In addition, during the period beginning
on December 19, 2018 and ending on the date on which the Series A preferred stock and
the Series B preferred stock have been redeemed in full or the Treasury has transferred
all of the Series A preferred stock and the
Series B preferred stock to non-affiliates, the Company cannot repurchase any shares
of its common stock or other capital stock or equity securities or trust preferred
securities without the consent of the Treasury.
 
  
  
  
  Exhibit 31
    
    Rule 13a-14(a) CertificationsExhibit 32
    
    Section 1350 Certifications
 24




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##### Table of Contents



SIGNATURES
  TRI-COUNTY FINANCIAL CORPORATIONDate:

May 12,
2009
    
    By:

/s/  Michael L. MiddletonMichael L. Middleton, President, ChiefExecutive Officer and Chairman of the
BoardDate:
    May 12,
2009
    
    By:

/s/  William J. PasenelliWilliam J. Pasenelli, Executive VicePresident and Chief Financial Officer 25