##### 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, 2008
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-18279
 Tri-County
Financial
Corporation
  Maryland
    
    52-1652138(State of other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 
 
 
 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  March 31, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Income and Comprehensive Income  Three Months Ended March 31, 2008 and 2007
    
    
    4-5Consolidated Statements of Cash Flows  Three Months Ended March 31, 2008 and 2007
    
    
    6-7Notes to Consolidated Financial Statements
    
    
    8-12Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13-19Item 3  Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4  Controls and Procedures
    
    
    20PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    
    21Item 1A  Risk Factors
    
    
    21Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 3  Defaults Upon Senior Securities
    
    
    22Item 4  Submission of Matters to a Vote of Security Holders
    
    
    22Item 5  Other Information
    
    
    22Item 6  Exhibits
    
    
    22SIGNATURES
    
    
    23EX-31 SECTION 302, CERTIFICATION OF THE CEO AND CFOEX-32 SECTION 906, CERTIFICATION OF THE CEO AND CFO
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##### Table of Contents



PART I FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 
 TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS (UNAUDITED) MARCH 31, 2008 AND DECEMBER 31, 2007
 March 31, 2008
    
    
    December 31, 2007ASSETSCash and due from banks
    
    $
    4,030,326
    
    
    $
    3,267,920Federal Funds sold
    
    
    2,421,740
    
    
    
    885,056Interest-bearing deposits with banks
    
    
    17,535,442
    
    
    
    7,273,661Securities available for sale
    
    
    14,427,541
    
    
    
    9,144,069Securities held to maturity
    
    
    94,598,576
    
    
    
    92,687,603Federal Home Loan Bank and Federal Reserve Bank stock  at cost
    
    
    6,249,300
    
    
    
    5,354,500Loans receivable  net of allowance for loan losses
of $4,616,188 and $4,482,483, respectively
    
    
    468,272,655
    
    
    
    453,614,133Premises and equipment, net
    
    
    10,071,198
    
    
    
    9,423,302Accrued interest receivable
    
    
    2,971,878
    
    
    
    3,147,569Investment in bank owned life insurance
    
    
    10,221,507
    
    
    
    10,124,288Other assets
    
    
    2,856,085
    
    
    
    3,483,733Total Assets
    
    $
    633,656,248
    
    
    $
    598,405,834LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Deposits:Non-interest-bearing deposits
    
    $
    44,210,624
    
    
    $
    48,041,571Interest-bearing deposits
    
    
    416,560,151
    
    
    
    396,952,444Total deposits
    
    
    460,770,775
    
    
    
    444,994,015Short-term borrowings
    
    
    313,976
    
    
    
    1,555,323Long-term debt
    
    
    104,995,145
    
    
    
    86,005,508Guaranteed preferred beneficial interest in junior
subordinated debentures
    
    
    12,000,000
    
    
    
    12,000,000Accrued expenses and other liabilities
    
    
    5,416,360
    
    
    
    5,003,912Total liabilities
    
    
    583,496,256
    
    
    
    549,558,758STOCKHOLDERS EQUITY:Common stock
 par value $.01; authorized  15,000,000 shares;
issued 2,944,496 and 2,909,974 shares, respectively
    
    
    29,445
    
    
    
    29,100Additional paid in capital
    
    
    16,992,205
    
    
    
    16,914,373Retained earnings
    
    
    33,243,573
    
    
    
    32,303,353Accumulated other comprehensive income (loss)
    
    
    221,422
    
    
    
    (73,097
    )Unearned ESOP shares
    
    
    (326,653
    )
    
    
    (326,653
    )Total stockholders equity
    
    
    50,159,992
    
    
    
    48,847,076TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    633,656,248
    
    
    $
    598,405,834
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Three Months Ended March 31,2008
    
    
    2007INTEREST INCOME:Interest and fees on loans
    
    $
    8,077,166
    
    
    $
    8,059,141Taxable interest and dividends on investment securities
    
    
    1,394,524
    
    
    
    1,428,541Interest on deposits with banks
    
    
    36,093
    
    
    
    36,510Total interest income
    
    
    9,507,783
    
    
    
    9,524,192INTEREST EXPENSE:Interest on deposits
    
    
    3,330,240
    
    
    
    3,646,103Interest on short-term borrowings
    
    
    81,034
    
    
    
    28,280Interest on long-term debt
    
    
    1,240,215
    
    
    
    1,306,649Total interest expenses
    
    
    4,651,489
    
    
    
    4,981,032NET INTEREST INCOME
    
    
    4,856,294
    
    
    
    4,543,160PROVISION FOR LOAN LOSSES
    
    
    160,224
    
    
    
    256,526NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
    
    
    4,696,070
    
    
    
    4,286,634
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##### Table of Contents



Three Months Ended March 31,2008
    
    
    2007NONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    
    110,263
    
    
    
    63,588Gain on sale of asset
    
    
    2,041
    
    
    
    Net gain on the sale of foreclosed property
    
    
    
    
    
    
    66,428Income from bank owned life insurance
    
    
    97,218
    
    
    
    82,517Gain on sale of investment securities
    
    
    
    
    
    
    16,912Service charges
    
    
    377,929
    
    
    
    321,248Total non-interest income
    
    
    587,451
    
    
    
    550,693NONINTEREST EXPENSES:Salary and employee benefits
    
    
    2,010,210
    
    
    
    1,883,486Occupancy
    
    
    363,176
    
    
    
    311,430Advertising
    
    
    170,443
    
    
    
    161,123Data processing
    
    
    45,890
    
    
    
    187,591Legal and professional fees
    
    
    114,167
    
    
    
    116,605Depreciation of furniture, fixtures, and equipment
    
    
    132,402
    
    
    
    119,258Telephone communications
    
    
    23,631
    
    
    
    22,911ATM expenses
    
    
    83,765
    
    
    
    67,017Office supplies
    
    
    39,484
    
    
    
    46,461Office equipment
    
    
    25,213
    
    
    
    11,210Other
    
    
    343,162
    
    
    
    334,058Total noninterest expenses
    
    
    3,351,543
    
    
    
    3,261,150INCOME BEFORE INCOME TAXES
    
    
    1,931,978
    
    
    
    1,576,177Income tax expense
    
    
    615,737
    
    
    
    566,558NET INCOME
    
    
    1,316,241
    
    
    
    1,009,619OTHER COMPREHENSIVE INCOME NET OF TAXNet unrealized holding gains arising during period.
    
    
    294,520
    
    
    
    11,374COMPREHENSIVE INCOME
    
    $
    1,610,761
    
    
    $
    1,020,993INCOME PER COMMON SHAREBasic
    
    $
    0.45
    
    
    $
    0.38Diluted
    
    $
    0.42
    
    
    $
    0.36
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Three Months Ended March 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,316,241
    
    
    $
    1,009,619Adjustments to reconcile net income to net
cash provided (used) by operating activities:Provision for loan losses
    
    
    160,224
    
    
    
    256,526Gain on sales of investment securities
    
    
    
    
    
    
    (16,912
    )Gain on sale of asset
    
    
    (2,041
    )
    
    
    Depreciation and amortization
    
    
    254,522
    
    
    
    242,766Net (accretion) amortization of premium/discount on investment securities
    
    
    (16,934
    )
    
    
    6,758Increase in cash surrender of bank owned life insurance
    
    
    (97,218
    )
    
    
    (82,517
    )Deferred income tax benefit
    
    
    (275,965
    )
    
    
    (170,232
    )Decrease (increase) in accrued interest receivable
    
    
    175,691
    
    
    
    (28,732
    )(Decrease) increase in deferred loan fees
    
    
    (50,873
    )
    
    
    43,633Increase (decrease) in accounts payable, accrued expenses, other
liabilities
    
    
    97,601
    
    
    
    (706,825
    )Decrease in other assets
    
    
    751,890
    
    
    
    234,592Net cash provided by operating activities
    
    
    2,313,137
    
    
    
    788,676CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investment securities available for sale
    
    
    (4,845,569
    )
    
    
    (36,429
    )Proceeds from sale, redemption or principal payments
of investment securities available for sale
    
    
    8,896
    
    
    
    241,903Purchase of investment securities held to maturity
    
    
    (3,848,771
    )
    
    
    Proceeds from maturities or principal payments
of investment securities held to maturity
    
    
    1,954,175
    
    
    
    2,618,216Net (increase) decrease of FHLB and Federal Reserve stock
    
    
    (894,800
    )
    
    
    699,500Loans originated or acquired
    
    
    (43,559,605
    )
    
    
    (39,525,440
    )Principal collected on loans
    
    
    28,791,732
    
    
    
    25,373,129Proceeds from disposal of premises and equipment
    
    
    2,041
    
    
    
    Purchase of premises and equipment
    
    
    (902,418
    )
    
    
    (1,380,648
    )Proceeds from sale of foreclosed real estate
    
    
    
    
    
    
    66,428Net cash used in investing activities
    
    
    (23,294,319
    )
    
    
    (11,943,341
    )
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Three Months Ended March 31,2008
    
    
    2007CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    15,776,760
    
    
    
    23,515,156Proceeds from long-term borrowings
    
    
    24,000,000
    
    
    
    Payments of long-term borrowings
    
    
    (5,010,363
    )
    
    
    (10,009,956
    )Net decrease in short-term borrowings
    
    
    (1,241,347
    )
    
    
    (5,957,886
    )Exercise of stock options
    
    
    717,861
    
    
    
    38,183Excess tax benefits on stock-based compensation
    
    
    4,250
    
    
    
    Net change in unearned ESOP shares
    
    
    25,592
    
    
    
    Redemption of common stock
    
    
    (730,700
    )
    
    
    (13,896
    )Net cash provided by financing activities
    
    
    33,542,053
    
    
    
    7,571,601INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    $
    12,560,871
    
    
    $
    (3,583,064
    )CASH AND CASH EQUIVALENTS  JANUARY 1
    
    
    11,426,637
    
    
    
    18,190,506CASH AND CASH EQUIVALENTS  MARCH 31
    
    $
    23,987,508
    
    
    $
    14,607,442SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the three months for:Interest
    
    $
    4,738,834
    
    
    $
    5,018,941Income taxes
    
    $
    
    
    
    $
    332,600
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)  THREE MONTHS ENDED MARCH 31, 2008 AND 2007
 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, 2007 have been derived from audited financial statements. There have been no
significant changes to the Companys accounting policies as disclosed in the 2007 Annual
Report. The results of operations for the three months ended March 31, 2008 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 2008 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, 2007.2.
    
    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 the Statement of Financial Accounting
Standards (SFAS) No. 157 (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 whenever
other standards require (or permit) assets or liabilities to be measured at fair value but
does not expand the use of fair value in any new circumstances. In this standard, the
Financial Accounting Standards Board (FASB) clarifies the principle that fair value should
be based on the assumptions market participants would use when pricing the asset or
liability. In support of this principle, SFAS 157 establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. The fair value hierarchy is
as follows: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.Available-for-sale securities is the only balance sheet category the Company is required by
generally accepted accounting principles to account for at fair value. The following table
presents information about the Companys assets measured at fair value on a recurring basis
as of March 31, 2008, and indicates the fair value hierarchy of the valuation techniques
utilized by the Company to determine such fair value.
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Fair Value MeasurementsAt March 31, 2008, Using
    
    
    
    
    
    Total Changes InQuoted Prices in
    
    Other
    
    Significant
    
    Trading
    
    Fair ValuesActive Markets for
    
    Observable
    
    Unobservable
    
    Gains and
    
    Included In Period(dollars in thousands)
    
    Fair Value
    
    Identical Assets
    
    Inputs
    
    Inputs
    
    (Losses)
    
    EarningsDescription
    
    March 31,2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Available-for-Sale Securities
    
    $
    14,350,874
    
    
    $
    
    
    
    $
    14,350,874
    
    
    $
    
    
    
    $
    
    
    
    $
    Outstanding at March 31, 2008
    
    $
    14,350,874
    
    
    $
    
    
    
    $
    14,350,874
    
    
    $
    
    
    
    $
    
    
    
    $
    
 Securities Available for Sale. Securities classified as available for sale are reported at
fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value
measurements from an independent pricing service. The fair value measurements consider
observable data that may include dealer quotes, market spreads, cash flows, the U.S.
Treasury yield curve, live trading levels, trade execution data, market consensus prepayment
speeds, credit information and the bonds terms and conditions, among other things.In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets
and Financial Liabilities  Including an Amendment of FASB Statement No. 115.This
Statement permits entities to choose to measure many financial instruments and certain other
items at fair value. Unrealized gains and losses on items for which the fair value option
has been elected will be reported in earnings. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported
earnings caused by measuring related assets and liabilities differently without having to
apply complex hedge accounting provisions. This Statement is expected to expand the use of
fair value measurement, which is consistent with the FASBs long-term measurement objectives
for accounting for financial instruments. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company has not elected the fair value option for any
financial assets or liabilities at March 31, 2008.4.
    
    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. 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.5.
    
    EARNINGS PER SHAREEarnings per common share are computed by dividing net income by the weighted average number
of common shares outstanding during the period. Diluted net income per common share is
computed by dividing net income by the weighted average number of common shares outstanding
during the period, including any potential dilutive common shares outstanding, such as
options and warrants. As of March 31, 2008 and 2007, there were
21,811 and 0 shares excluded from the
diluted net income per share computation because inclusion of these options would be
anti-dilutive. Basic and diluted earnings per share, have been computed based on
weighted-average
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common and common equivalent shares outstanding as follows:
 Three Months EndedMarch 31,2008
    
    2007Basic
    
    
    2,932,699
    
    
    
    2,643,950Diluted
    
    
    3,082,493
    
    
    
    2,829,778
 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 12 to the
financial statements included in our Annual Report to Stockholders for the year ended
December 31, 2007. No compensation related expense related to stock options was recognized
in the quarters ended March 31, 2008 or during 2007.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, 2008, 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,
2007
    
    
    428,619
    
    
    $
    14.72Granted at fair value
    
    
    
    
    
    
    Exercised
    
    
    (63,807
    )
    
    
    11.25Expired
    
    
    
    
    
    
    Forfeited
    
    
    (2,472
    )
    
    
    19.52Outstanding at March 31, 2008
    
    
    362,340
    
    
    $
    15.30
    
    
    $
    3,231,724
    
    
    
    4.6Exercisable at March 31, 2008
    
    
    362,340
    
    
    $
    15.30
    
    
    $
    3,231,724
    
    
    
    4.6
 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 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
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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.
    
    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 $314,847.9.
    
    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 adoption of SFAS 157 on January 1, 2008 did not
significantly impact the Companys consolidated financial statements. The fair value option
was not elected for any financial instrument as of March 31, 2008.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. The adoption of SFAS 159 on January 1, 2008 did not significantly impact the
Corporations financial statements.SFAS 141(R), Business Combinations (Revised)SFAS 141R replaces SFAS 141, Business
Combinations,and applies to all transactions and other events in which one entity obtains
control over one or more other businesses. SFAS 141R requires an acquirer, upon initially
obtaining control of another entity, to recognize the assets, liabilities, and any
non-controlling interest in the acquiree at fair value as of the acquisition date.
Contingent consideration is required to be recognized and measured at fair value on the date
of acquisition rather than at a later date when the amount of that consideration may be
determinable beyond a reasonable doubt. This fair value approach replaces the
cost-allocation process required under SFAS 141 whereby the cost of an acquisition was
allocated to the individual assets acquired and liabilities assumed based on their estimated
fair value. SFAS 141R requires acquirers to expense acquisition related costs as incurred
rather than allocating
 11




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##### Table of Contents



such costs to the assets acquired and liabilities assumed, as was
previously the case under SFAS 12. Under SFAS 141R, the requirements of SFAS 146, accounting
for costs associated with exit or disposal contingencies are to be recognized at fair value
unless it is a non-contractual contingency that is likely to materialize, in which case,
nothing should be recognized in purchase accounting and, instead, that contingency would be
subject to the probable and estimable recognition criteria of SFAS 5, Accounting for
Contingencies. SFAS 141R will have a significant impact on the Companys accounting for any
future acquisitions closing on or after January 1, 2009.SFAS no. 160, Non-controlling Interest in Consolidated Financial Statements, an amendment
of ARB Statement No. 51.SFAS 160 amends Accounting Research Bulletin (ARB) No. 51,
Consolidated Financial Statements ,  to establish accounting and reporting standards for
the non-controlling interest in a subsidiary and for the deconsolidation of a subsidiary.
SFAS 160 clarifies that a non-controlling interest in a subsidiary, which is sometimes
referred to as minority interest, is an ownership interest in the consolidated entity that
should be reported as a component of equity in the consolidated financial statements. Among
other requirements, SFAS 160 requires consolidated net income to be reported at amounts that
include the amounts attributable to both parent and the non-controlling interest. SFAS 160
is effective for the Company on January 1, 2009 and is not expected to have a significant
impact on the Companys financial statements.SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB No. 133.This statement changes the disclosure requirements for
derivative instruments and hedging activities. SFAS No. 161 requires enhance disclosures
about (a) how and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. This statement is
effective for financial statements issued for fiscal years and interim periods beginning
after November 15, 2008 and is not expected to have a significant impact on the Companys
financial statements.Staff Accounting Bulletin (SAB) No. 109 of the Securities and Exchange Commission (SEC)
Written Loan Commitments Recorded at Fair Value Through Earnings.SAB No. 109 supersedes
SAB 105, Application of Accounting Principles to Loan Commitments,and indicates that the
expected net future cash flows related to the associated servicing of the loan should be
included in the measurement of all written loan commitments that are accounted for at fair
value through earnings. The guidance in SAB 109 is applied on a prospective basis to
derivative loan commitments issued or modified in fiscal quarters beginning after December
15, 2007. The adoption of SAB 109 on January 1, 2008 did not significantly impact the
Companys financial statements.
 12




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##### Table of Contents



ITEM
2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
        13




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##### Table of Contents



Three Months EndedMarch 31,2008
    
    2007Condensed Income Statement:Interest Income
    
    $
    9,507,783
    
    
    $
    9,524,192Interest Expense
    
    
    4,651,489
    
    
    
    4,981,032Net Interest Income
    
    
    4,856,294
    
    
    
    4,543,160Provision for Loan Loss
    
    
    160,224
    
    
    
    256,526Non-interest Income
    
    
    587,451
    
    
    
    550,693Non-interest Expense
    
    
    3,351,543
    
    
    
    3,261,150Income Before Income Taxes
    
    
    1,931,978
    
    
    
    1,576,177Income Taxes
    
    
    615,737
    
    
    
    566,558Net Income
    
    
    1,316,241
    
    
    
    1,009,619Per Common Share:Basic Earnings
    
    $
    0.45
    
    
    $
    0.38Diluted Earnings
    
    $
    0.42
    
    
    $
    0.36Book Value
    
    $
    17.04
    
    
    $
    14.65
     14




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##### Table of Contents



Three Months Ended2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeNONINTEREST INCOME:Loan appraisal, credit, and miscellaneous
charges
    
    $
    110,263
    
    
    $
    63,588
    
    
    $
    46,675
    
    
    
    73.40
    %Gain on sale of assets
    
    
    2,041
    
    
    
    
    
    
    
    2,041
    
    
    
    100.00
    %Net gain on the sale of foreclosed property
    
    
    
    
    
    
    66,428
    
    
    
    (66,428
    )
    
    
    (100.00
    %)Income from bank owned life insurance
    
    
    97,218
    
    
    
    82,517
    
    
    
    14,701
    
    
    
    17.82
    %Loss on sale of investment securities
    
    
    
    
    
    
    16,912
    
    
    
    (16,912
    )
    
    
    (100.00
    %)Service charges
    
    
    377,929
    
    
    
    321,248
    
    
    
    56,681
    
    
    
    17.64
    %Total noninterest income
    
    $
    587,451
    
    
    $
    550,693
    
    
    $
    36,758
    
    
    
    6.67
    %
  Three Months Ended March 31,2008
    
    
    2007
    
    
    $ Change
    
    
    % ChangeNON-INTEREST EXPENSE:Salary and employee benefits
    
    $
    2,010,210
    
    
    $
    1,883,486
    
    
    $
    126,724
    
    
    
    6.73
    %Occupancy
    
    
    363,176
    
    
    
    311,430
    
    
    
    51,746
    
    
    
    16.62
    %Advertising
    
    
    170,443
    
    
    
    161,123
    
    
    
    9,320
    
    
    
    5.78
    %Data processing
    
    
    45,890
    
    
    
    187,591
    
    
    
    (141,701
    )
    
    
    (75.54
    )%Legal and professional fees
    
    
    114,167
    
    
    
    116,605
    
    
    
    (2,438
    )
    
    
    (2.09
    )%Depreciation
    
    
    132,402
    
    
    
    119,258
    
    
    
    13,144
    
    
    
    11.02
    %Telephone communications
    
    
    23,631
    
    
    
    22,911
    
    
    
    720
    
    
    
    3.14
    %ATM expenses
    
    
    83,765
    
    
    
    67,017
    
    
    
    16,748
    
    
    
    24.99
    %Office supplies
    
    
    39,484
    
    
    
    46,461
    
    
    
    (6,977
    )
    
    
    (15.02
    )%Office equipment
    
    
    25,213
    
    
    
    11,210
    
    
    
    14,003
    
    
    
    124.92
    %Other
    
    
    343,162
    
    
    
    334,058
    
    
    
    9,104
    
    
    
    2.73
    %Total non-interest expenses
    
    $
    3,351,543
    
    
    $
    3,261,150
    
    
    $
    90,393
    
    
    
    2.77
    %
  15




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##### Table of Contents



March 31, 2008
    
    
    December 31, 2007
    
    
    $ Change
    
    
    % ChangeCash and due from banks
    
    $
    4,030,326
    
    
    $
    3,267,920
    
    
    $
    762,406
    
    
    
    23.33
    %Federal Funds sold
    
    
    2,421,740
    
    
    
    885,056
    
    
    
    1,536,684
    
    
    
    173.63
    %Interest-bearing deposits with banks
    
    
    17,535,442
    
    
    
    7,273,661
    
    
    
    10,261,781
    
    
    
    141.08
    %Securities available for sale
    
    
    14,427,541
    
    
    
    9,144,069
    
    
    
    5,283,472
    
    
    
    57.78
    %Securities held to maturity
    
    
    94,598,576
    
    
    
    92,687,603
    
    
    
    1,910,973
    
    
    
    2.06
    %Federal Home Loan Bank and Federal
Reserve Bank stock  at cost
    
    
    6,249,300
    
    
    
    5,354,500
    
    
    
    894,800
    
    
    
    16.71
    %Loans receivable  net of allowance for
loan losses
of $4,616,188 and $4,482,483 respectively
    
    
    468,272,655
    
    
    
    453,614,133
    
    
    
    14,658,522
    
    
    
    3.23
    %Premises and equipment, net
    
    
    10,071,198
    
    
    
    9,423,302
    
    
    
    647,896
    
    
    
    6.88
    %Accrued interest receivable
    
    
    2,971,878
    
    
    
    3,147,569
    
    
    
    (175,691
    )
    
    
    (5.58
    )%Investment in bank owned life insurance
    
    
    10,221,507
    
    
    
    10,124,288
    
    
    
    97,219
    
    
    
    0.96
    %Other assets
    
    
    2,856,085
    
    
    
    3,483,733
    
    
    
    (627,648
    )
    
    
    (18.02
    )%$
    633,656,248
    
    
    $
    598,405,834
    
    
    $
    35,250,414
    
    
    
    5.89
    %
   March 31 ,2008
    
    
    December 31, 2007Amount
    
    
    %
    
    
    Amount
    
    
    %Real Estate LoansCommercial
    
    $
    200,865,615
    
    
    
    42.45
    %
    
    $
    190,483,998
    
    
    
    41.55
    %Residential first mortgages
    
    
    92,383,291
    
    
    
    19.52
    %
    
    
    90,931,572
    
    
    
    19.83
    %Residential construction
    
    
    51,834,522
    
    
    
    10.95
    %
    
    
    50,577,491
    
    
    
    11.03
    %Second mortgage loans
    
    
    24,781,063
    
    
    
    5.24
    %
    
    
    24,649,581
    
    
    
    5.38
    %Commercial lines of credit
    
    
    77,466,551
    
    
    
    16.37
    %
    
    
    75,247,410
    
    
    
    16.41
    %Consumer loans
    
    
    2,278,655
    
    
    
    0.48
    %
    
    
    2,464,594
    
    
    
    0.54
    %Commercial equipment
    
    
    23,599,526
    
    
    
    4.99
    %
    
    
    24,113,223
    
    
    
    5.26
    %473,209,223
    
    
    
    100.00
    %
    
    
    458,467,869
    
    
    
    100.00
    %Less:Deferred loan fees
    
    
    320,380
    
    
    
    0.07
    %
    
    
    371,253
    
    
    
    0.08
    %Allowance for loan loss
    
    
    4,616,188
    
    
    
    0.98
    %
    
    
    4,482,483
    
    
    
    0.98
    %4,936,568
    
    
    
    
    
    
    
    4,853,736$
    468,272,655
    
    
    
    
    
    
    $
    453,614,133
 16




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##### Table of Contents



Three Months Ended
    
    
    Three Months EndedMarch 31, 2008
    
    
    March 31, 2007Beginning Balance
    
    $
    4,482,483
    
    
    $
    3,783,721Charge Offs
    
    
    26,519
    
    
    
    57,325Recoveries
    
    
    
    
    
    
    1,733Net Charge Offs
    
    
    26,519
    
    
    
    55,592Provision for Loan Losses
    
    
    160,224
    
    
    
    256,526Balance at the end of the Period
    
    $
    4,616,188
    
    
    $
    3,984,655
  Balances as of
    
    
    Balances as ofMarch 31, 2008
    
    
    December 31, 2007Restructured Loans
    
    $
    
    
    
    $
    Accruing loans which are contractually
past due 90 days or more:
    
    $
    
    
    
    $
    Loans accounted for on a nonaccrual basis
    
    $
    132,621
    
    
    $
    414,005Total non-performing loans
    
    $
    132,621
    
    
    $
    414,005Non-performing loans to total loans
    
    
    0.03
    %
    
    
    0.09
    %Allowance for loan losses to non- performing loans
    
    
    3480.74
    %
    
    
    1082.71
    %
   March 31, 2008
    
    
    December 31, 2007
    
    
    $ Change
    
    
    % ChangeDeposits:Non-interest-bearing deposits
    
    $
    44,210,624
    
    
    $
    48,041,571
    
    
    $
    (3,830,947
    )
    
    
    (7.97
    )%Interest-bearing deposits
    
    
    416,560,151
    
    
    
    396,952,444
    
    
    
    19,607,707
    
    
    
    4.94
    %Total deposits
    
    
    460,770,775
    
    
    
    444,994,015
    
    
    
    15,776,760
    
    
    
    3.55
    %Short-term borrowings
    
    
    313,976
    
    
    
    1,555,323
    
    
    
    (1,241,347
    )
    
    
    (79.81
    )%Long-term debt
    
    
    104,995,145
    
    
    
    86,005,508
    
    
    
    18,989,637
    
    
    
    22.08
    %Guaranteed preferred beneficial
interest in junior subordinated
debentures
    
    
    12,000,000
    
    
    
    12,000,000
    
    
    
    
    
    
    
    0.00
    %Accrued expenses and other
liabilities
    
    
    5,416,360
    
    
    
    5,003,912
    
    
    
    412,448
    
    
    
    8.24
    %Total liabilities
    
    $
    583,496,256
    
    
    $
    549,558,758
    
    
    $
    33,937,498
    
    
    
    6.18
    %
 17




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##### Table of Contents



March 31, 2008
    
    
    December 31, 2007
    
    
    $ Change
    
    
    % ChangeCommon stock
    
    $
    29,445
    
    
    $
    29,100
    
    
    $
    345
    
    
    
    1.19
    %Additional paid in capital
    
    
    16,992,205
    
    
    
    16,914,373
    
    
    
    77,832
    
    
    
    0.46
    %Retained earnings
    
    
    33,243,573
    
    
    
    32,303,353
    
    
    
    940,220
    
    
    
    2.91
    %Accumulated other comprehensive
income (loss)
    
    
    221,422
    
    
    
    (73,097
    )
    
    
    294,519
    
    
    
    (402.92
    )%Unearned ESOP shares
    
    
    (326,653
    )
    
    
    (326,653
    )
    
    
    
    
    
    
    0.00
    %Total stockholders equity
    
    $
    50,159,992
    
    
    $
    48,847,076
    
    
    $
    1,312,916
    
    
    
    2.69
    %
       18




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19




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  20




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PART II  OTHER INFORMATION
 
  
  
  (a)
    
    Not applicable(b)
    
    Not applicable(c)
    
    The following table sets forth information regarding the Companys
repurchases of its Common Stock during the quarter ended March 31, 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
    
    ProgramsJanuary 1-31, 2008
    
    
    28,072
    
    
    $
    24.99
    
    
    
    28,072
    
    
    
    31,981February 1-28, 2008
    
    
    400
    
    
    
    24.30
    
    
    
    400
    
    
    
    31,581March 1-31, 2008
    
    
    812
    
    
    
    24.00
    
    
    
    812
    
    
    
    30,769Total
    
    
    29,284
    
    
    $
    24.95
    
    
    
    29,284
    
    
    
    30,769
  21




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##### Table of Contents



SIGNATURES
  TRI-COUNTY FINANCIAL CORPORATIONDate: 5/15/08
    By:

/s/ Michael L. MiddletonMichael L. Middleton, President, ChiefExecutive Officer and Chairman of the
BoardDate: 5/15/08
    By:

/s/
William J. PasenelliWilliam J. Pasenelli, Executive VicePresident and Chief Financial Officer 23