UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q


(Mark
One)


x           QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d)


OF
THE SECURITIES EXCHANGE ACT OF 1934





For the
Quarterly Period Ended June 30, 2010





OR





 ̈           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


(Exact
name of registrant as specified in its charter)





Maryland
                52-1652138(State
      of other jurisdiction of
                (I.R.S.
      Employerincorporation
      or organization)
                Identification
      No.)





3035
      Leonardtown Road, Waldorf, Maryland
                20601(Address
      of principal executive offices)
                (Zip
      Code)





(301)
645-5601


(Registrant's
telephone number, including area code)





Not
applicable


(Former
name, former address and former fiscal year, if changed since last
report)





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.


Yes  x      
No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).


 ̈
Yes      ̈ No





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large
      Accelerated Filer   ̈
              Accelerated
      Filer   ̈Non-accelerated
      Filer   ̈
              Smaller
      Reporting Company  x


(Do not
check if a smaller reporting company)





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).


Yes  ̈         No
x





As of
July 28, 2010, the registrant had 2,990,520 shares of common stock
outstanding.





TRI-COUNTY
FINANCIAL CORPORATION





FORM
10-Q





INDEX





PagePART
      I - FINANCIAL INFORMATIONItem
      1 – Financial Statements (Unaudited)Consolidated
      Balance Sheets – June 30, 2010and
      December 31, 2009
                          
                          3Consolidated
      Statements of Income -Three
      and Six Months Ended June 30, 2010 and 2009
                          
                          4Consolidated
      Statements of Cash Flows -Six
      Months Ended June 30, 2010 and 2009
                          
                          6Notes
      to Consolidated Financial Statements
                          
                          8Item 2 –
      Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
                          
                          21Item
      3 – Quantitative and Qualitative Disclosures about Market
    Risk
                          
                          34Item
      4 – Controls and Procedures
                          
                          34PART
      II - OTHER INFORMATIONItem
      1 – Legal Proceedings
                          
                          35Item
      1A – Risk Factors
                          
                          35Item
      2 – Unregistered Sales of Equity Securities and Use of
      Proceeds
                          
                          35Item
      3 – Defaults Upon Senior Securities
                          
                          35Item
      4 – [Removed and Reserved]
                          
                          36Item
      5 – Other Information
                          
                          36Item
      6 – Exhibits
                          
                          36SIGNATURES
                          
                          37


2


PART
I FINANCIAL STATEMENTS


ITEM
I. FINANCIAL STATEMENTS


TRI-COUNTY
FINANCIAL CORPORATION


CONSOLIDATED
BALANCE SHEETS JUNE 30, 2010 AND DECEMBER 31, 2009 (UNAUDITED)





June 30, 2010
                
                
                December 31, 2009AssetsCash
      and due from banks
                
                $
                8,155,908
                
                
                $
                9,960,787Federal
      funds sold
                
                
                7,815,000
                
                
                
                695,000Interest-bearing
      deposits with banks
                
                
                961,616
                
                
                
                592,180Securities
      available for sale, at fair value
                
                
                44,432,692
                
                
                
                53,926,109Securities
      held to maturity, at amortized cost
                
                
                101,637,068
                
                
                
                90,287,803Federal
      Home Loan Bank and Federal Reserve Bank stock - at cost
                
                
                6,935,500
                
                
                
                6,935,500Loans
      held for sale
                
                
                512,000
                
                
                
                -Loans
      receivable - net of allowance for loan losses of $7,896,967
      and$7,471,314, respectively
                
                
                623,980,878
                
                
                
                616,592,976Premises
      and equipment, net
                
                
                11,932,394
                
                
                
                11,987,690Foreclosed
      real estate
                
                
                10,876,740
                
                
                
                922,934Accrued
      interest receivable
                
                
                2,881,928
                
                
                
                2,925,271Investment
      in bank owned life insurance
                
                
                11,154,310
                
                
                
                10,943,396Other
      assets
                
                
                10,275,564
                
                
                
                9,272,888Total
      Assets
                
                $
                841,551,598
                
                
                $
                815,042,534Liabilities
      and Stockholders' EquityLiabilitiesDepositsNon-interest-bearing
      deposits
                
                $
                72,957,088
                
                
                $
                70,001,444Interest-bearing
      deposits
                
                
                610,721,620
                
                
                
                570,417,345Total
      deposits
                
                
                683,678,708
                
                
                
                640,418,789Short-term
      borrowings
                
                
                141,317
                
                
                
                13,080,530Long-term
      debt
                
                
                70,647,065
                
                
                
                75,669,630Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
                
                
                12,000,000
                
                
                
                12,000,000Accrued
      expenses and other liabilities
                
                
                5,811,189
                
                
                
                5,683,736Total
      Liabilities
                
                
                772,278,279
                
                
                
                746,852,685Stockholders'
      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
      2,986,279 and 2,976,046 shares, respectively
                
                
                29,863
                
                
                
                29,760Additional
      paid in capital
                
                
                16,786,426
                
                
                
                16,754,627Retained
      earnings
                
                
                35,974,812
                
                
                
                35,193,958Accumulated
      other comprehensive income
                
                
                491,091
                
                
                
                284,474Unearned
      ESOP shares
                
                
                (325,873
                )
                
                
                (389,970
                )Total
      Stockholders' Equity
                
                
                69,273,319
                
                
                
                68,189,849Total
      Liabilities and Stockholders' Equity
                
                $
                841,551,598
                
                
                $
                815,042,534See
      notes to consolidated financial statements




3





TRI-COUNTY
FINANCIAL CORPORATION


CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)


THREE
AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009


Three Months Ended June 30,
                
                
                Six Months Ended June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009INTEREST
      AND DIVIDEND INCOME:Loans,
      including fees
                
                $
                8,728,673
                
                
                $
                8,041,071
                
                
                $
                17,487,459
                
                
                $
                15,918,462Taxable
      interest and dividends on investment securities
                
                
                1,160,439
                
                
                
                1,302,456
                
                
                
                2,363,013
                
                
                
                2,627,951Interest
      on deposits with banks
                
                
                3,970
                
                
                
                6,838
                
                
                
                6,147
                
                
                
                7,028Total
      interest and dividend income
                
                
                9,893,082
                
                
                
                9,350,365
                
                
                
                19,856,619
                
                
                
                18,553,441INTEREST
      EXPENSES:Deposits
                
                
                2,691,842
                
                
                
                3,125,476
                
                
                
                5,511,123
                
                
                
                6,298,841Short-term
      borrowings
                
                
                6,025
                
                
                
                5,934
                
                
                
                16,879
                
                
                
                29,800Long-term
      debt
                
                
                631,989
                
                
                
                1,048,621
                
                
                
                1,280,755
                
                
                
                2,111,461Total
      interest expenses
                
                
                3,329,856
                
                
                
                4,180,031
                
                
                
                6,808,757
                
                
                
                8,440,102NET
      INTEREST INCOME
                
                
                6,563,226
                
                
                
                5,170,334
                
                
                
                13,047,862
                
                
                
                10,113,339PROVISION
      FOR LOAN LOSSES
                
                
                804,430
                
                
                
                929,488
                
                
                
                1,662,804
                
                
                
                1,462,373NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                
                
                5,758,796
                
                
                
                4,240,846
                
                
                
                11,385,058
                
                
                
                8,650,966




4





TRI-COUNTY FINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009(continued)
                                                                            
                                                                            Three Months Ended June 30,
                                                                            
                                                                            
                                                                            Six Months Ended June 30,2010
                                                                            
                                                                            
                                                                            2009
                                                                            
                                                                            
                                                                            2010
                                                                            
                                                                            
                                                                            2009NONINTEREST
      INCOME:Recognition
      of other than temporary declinein
      value of investment securities
                                                                            
                                                                            $
                                                                            -
                                                                            
                                                                            
                                                                            $
                                                                            (118,744
                                                                            )
                                                                            
                                                                            $
                                                                            -
                                                                            
                                                                            
                                                                            $
                                                                            (118,744
                                                                            )Less:
      Portion recorded as comprehensive income
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -Impairment
      loss on investment securities, net
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            (118,744
                                                                            )
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            (118,744
                                                                            )Loan
      appraisal, credit, and miscellaneous charges
                                                                            
                                                                            
                                                                            83,388
                                                                            
                                                                            
                                                                            
                                                                            245,214
                                                                            
                                                                            
                                                                            
                                                                            253,800
                                                                            
                                                                            
                                                                            
                                                                            360,892Gain
      on sale of asset
                                                                            
                                                                            
                                                                            22,500
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            22,500
                                                                            
                                                                            
                                                                            
                                                                            -Loss
      on sale of investment securities
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            (12,863
                                                                            )
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            (12,863
                                                                            )Income
      from bank owned life insurance
                                                                            
                                                                            
                                                                            106,168
                                                                            
                                                                            
                                                                            
                                                                            100,216
                                                                            
                                                                            
                                                                            
                                                                            210,914
                                                                            
                                                                            
                                                                            
                                                                            201,473Service
      charges
                                                                            
                                                                            
                                                                            442,611
                                                                            
                                                                            
                                                                            
                                                                            399,574
                                                                            
                                                                            
                                                                            
                                                                            846,655
                                                                            
                                                                            
                                                                            
                                                                            769,096Gain
      on sale of loans held for sale
                                                                            
                                                                            
                                                                            89,677
                                                                            
                                                                            
                                                                            
                                                                            168,374
                                                                            
                                                                            
                                                                            
                                                                            171,700
                                                                            
                                                                            
                                                                            
                                                                            168,374Total
      noninterest income
                                                                            
                                                                            
                                                                            744,344
                                                                            
                                                                            
                                                                            
                                                                            781,771
                                                                            
                                                                            
                                                                            
                                                                            1,505,569
                                                                            
                                                                            
                                                                            
                                                                            1,368,228NONINTEREST
      EXPENSE:Salary
      and employee benefits
                                                                            
                                                                            
                                                                            2,398,821
                                                                            
                                                                            
                                                                            
                                                                            2,101,058
                                                                            
                                                                            
                                                                            
                                                                            4,761,355
                                                                            
                                                                            
                                                                            
                                                                            4,251,834Occupancy
      expense
                                                                            
                                                                            
                                                                            466,398
                                                                            
                                                                            
                                                                            
                                                                            466,221
                                                                            
                                                                            
                                                                            
                                                                            894,042
                                                                            
                                                                            
                                                                            
                                                                            870,748Advertising
                                                                            
                                                                            
                                                                            101,853
                                                                            
                                                                            
                                                                            
                                                                            99,850
                                                                            
                                                                            
                                                                            
                                                                            178,602
                                                                            
                                                                            
                                                                            
                                                                            229,962Data
      processing
                                                                            
                                                                            
                                                                            248,677
                                                                            
                                                                            
                                                                            
                                                                            210,445
                                                                            
                                                                            
                                                                            
                                                                            494,817
                                                                            
                                                                            
                                                                            
                                                                            436,620Professional
      fees
                                                                            
                                                                            
                                                                            285,394
                                                                            
                                                                            
                                                                            
                                                                            202,299
                                                                            
                                                                            
                                                                            
                                                                            444,233
                                                                            
                                                                            
                                                                            
                                                                            359,908Depreciation
      of furniture, fixtures, and equipment
                                                                            
                                                                            
                                                                            134,345
                                                                            
                                                                            
                                                                            
                                                                            150,963
                                                                            
                                                                            
                                                                            
                                                                            261,943
                                                                            
                                                                            
                                                                            
                                                                            299,105Telephone
      communications
                                                                            
                                                                            
                                                                            42,109
                                                                            
                                                                            
                                                                            
                                                                            34,898
                                                                            
                                                                            
                                                                            
                                                                            82,228
                                                                            
                                                                            
                                                                            
                                                                            68,173Office
      supplies
                                                                            
                                                                            
                                                                            33,690
                                                                            
                                                                            
                                                                            
                                                                            37,673
                                                                            
                                                                            
                                                                            
                                                                            79,436
                                                                            
                                                                            
                                                                            
                                                                            87,385FDIC
      Insurance
                                                                            
                                                                            
                                                                            394,659
                                                                            
                                                                            
                                                                            
                                                                            543,947
                                                                            
                                                                            
                                                                            
                                                                            746,765
                                                                            
                                                                            
                                                                            
                                                                            633,611Valuation
      allowance on foreclosed real estate
                                                                            
                                                                            
                                                                            287,934
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            287,934
                                                                            
                                                                            
                                                                            
                                                                            -Other
                                                                            
                                                                            
                                                                            505,753
                                                                            
                                                                            
                                                                            
                                                                            431,319
                                                                            
                                                                            
                                                                            
                                                                            906,687
                                                                            
                                                                            
                                                                            
                                                                            855,489Total
      noninterest expense
                                                                            
                                                                            
                                                                            4,899,633
                                                                            
                                                                            
                                                                            
                                                                            4,278,673
                                                                            
                                                                            
                                                                            
                                                                            9,138,042
                                                                            
                                                                            
                                                                            
                                                                            8,092,835INCOME
      BEFORE INCOME TAXES
                                                                            
                                                                            
                                                                            1,603,507
                                                                            
                                                                            
                                                                            
                                                                            743,944
                                                                            
                                                                            
                                                                            
                                                                            3,752,585
                                                                            
                                                                            
                                                                            
                                                                            1,926,359Income
      tax expense
                                                                            
                                                                            
                                                                            567,423
                                                                            
                                                                            
                                                                            
                                                                            221,730
                                                                            
                                                                            
                                                                            
                                                                            1,352,077
                                                                            
                                                                            
                                                                            
                                                                            634,305NET
      INCOME
                                                                            
                                                                            
                                                                            1,036,084
                                                                            
                                                                            
                                                                            
                                                                            522,214
                                                                            
                                                                            
                                                                            
                                                                            2,400,508
                                                                            
                                                                            
                                                                            
                                                                            1,292,054Preferred
      stock dividends
                                                                            
                                                                            
                                                                            211,732
                                                                            
                                                                            
                                                                            
                                                                            211,732
                                                                            
                                                                            
                                                                            
                                                                            423,465
                                                                            
                                                                            
                                                                            
                                                                            423,465NET
      INCOME AVAILABLE TO COMMON SHAREHOLDERS
                                                                            
                                                                            $
                                                                            824,352
                                                                            
                                                                            
                                                                            $
                                                                            310,482
                                                                            
                                                                            
                                                                            $
                                                                            1,977,043
                                                                            
                                                                            
                                                                            $
                                                                            868,589INCOME
      PER COMMON SHAREBasic
                                                                            
                                                                            $
                                                                            0.28
                                                                            
                                                                            
                                                                            $
                                                                            0.10
                                                                            
                                                                            
                                                                            $
                                                                            0.66
                                                                            
                                                                            
                                                                            $
                                                                            0.29Diluted
                                                                            
                                                                            $
                                                                            0.27
                                                                            
                                                                            
                                                                            $
                                                                            0.10
                                                                            
                                                                            
                                                                            $
                                                                            0.66
                                                                            
                                                                            
                                                                            $
                                                                            0.29Dividends
      paid per common share
                                                                            
                                                                            $
                                                                            0.40
                                                                            
                                                                            
                                                                            $
                                                                            0.40
                                                                            
                                                                            
                                                                            $
                                                                            0.40
                                                                            
                                                                            
                                                                            $
                                                                            0.40





See notes
to consolidated financial statements


5





TRI-COUNTY FINANCIAL CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)


SIX
MONTHS ENDED JUNE 30, 2010 AND 2009





Six Months Ended June 30,2010
                    
                    
                    2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                    
                    $
                    2,400,508
                    
                    
                    $
                    1,292,054Adjustments
      to reconcile net income to net cash provided by operating
      activities:Provision
      for loan losses
                    
                    
                    1,662,804
                    
                    
                    
                    1,462,373Depreciation
      and amortization
                    
                    
                    511,453
                    
                    
                    
                    579,649Loans
      originated for resale
                    
                    
                    (5,038,460
                    )
                    
                    
                    (16,624,790
                    )Proceeds
      from sale of loans originated for sale
                    
                    
                    4,891,118
                    
                    
                    
                    14,671,153Gain
      on sale of loans held for sale
                    
                    
                    (171,700
                    )
                    
                    
                    (168,374
                    )Gain
      on sale of asset
                    
                    
                    (22,500
                    )
                    
                    
                    -Loss
      on sales of investment securities
                    
                    
                    -
                    
                    
                    
                    12,863Other
      than temporary decline in market value of investment
      securities
                    
                    
                    -
                    
                    
                    
                    118,744Net
      amortization of premium/discount on investment securities
                    
                    
                    (188,148
                    )
                    
                    
                    (53,673
                    )Increase
      in foreclosed real estate valuation allowance
                    
                    
                    287,934
                    
                    
                    
                    -Increase
      in cash surrender of bank owned life insurance
                    
                    
                    (210,914
                    )
                    
                    
                    (201,473
                    )Deferred
      income tax benefit
                    
                    
                    (574,839
                    )
                    
                    
                    (866,138
                    )Decrease
      in accrued interest receivable
                    
                    
                    43,343
                    
                    
                    
                    77,948Increase
      in deferred loan fees
                    
                    
                    (43,245
                    )
                    
                    
                    (10,755
                    )Increase
      (decrease) in accounts payable, accrued expenses, other
      liabilities
                    
                    
                    127,453
                    
                    
                    
                    (642,996
                    )(Increase)
      decrease in other assets
                    
                    
                    (822,209
                    )
                    
                    
                    675,065Net
      cash provided by operating activities
                    
                    
                    2,852,598
                    
                    
                    
                    321,650CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of investment securities available for sale
                    
                    
                    (66,099
                    )
                    
                    
                    (10,231,042
                    )Proceeds
      from redemption or principal payments of investment securities available
      for sale
                    
                    
                    10,015,172
                    
                    
                    
                    500,624Purchase
      of investment securities held to maturity
                    
                    
                    (26,526,103
                    )
                    
                    
                    (8,377,442
                    )Proceeds
      from maturities or principal payments of investment securities held to
      maturity
                    
                    
                    15,222,385
                    
                    
                    
                    12,509,315Net
      increase of FHLB and Federal Reserve stock
                    
                    
                    -
                    
                    
                    
                    (19,300
                    )Loans
      originated or acquired
                    
                    
                    (125,936,531
                    )
                    
                    
                    (139,205,203
                    )Principal
      collected on loans
                    
                    
                    106,782,306
                    
                    
                    
                    97,122,352Purchase
      of premises and equipment
                    
                    
                    (456,157
                    )
                    
                    
                    (777,063
                    )Proceeds
      from sale of assets
                    
                    
                    22,500
                    
                    
                    
                    -Net
      cash used in investing activities
                    
                    
                    (20,942,527
                    )
                    
                    
                    (48,477,759
                    )




6





TRI-COUNTY FINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)SIX MONTHS ENDED JUNE 30, 2010 AND 2009(continued)Six Months Ended June 30,2010
                  
                  
                  2009CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      increase in deposits
                  
                  $
                  43,259,919
                  
                  
                  $
                  67,696,654Proceeds
      from long-term borrowings
                  
                  
                  -
                  
                  
                  
                  750,000Payments
      of long-term borrowings
                  
                  
                  (5,022,565
                  )
                  
                  
                  (5,021,679
                  )Net
      decrease in short-term borrowings
                  
                  
                  (12,939,213
                  )
                  
                  
                  (880,377
                  )Exercise
      of stock options
                  
                  
                  31,858
                  
                  
                  
                  66,943Excess
      tax benefits on stock-based compensation
                  
                  
                  -
                  
                  
                  
                  4,168Dividends
      Paid
                  
                  
                  (1,619,654
                  )
                  
                  
                  (1,530,389
                  )Net
      change in unearned ESOP shares
                  
                  
                  64,141
                  
                  
                  
                  (27,903
                  )Net
      cash provided by financing activities
                  
                  
                  23,774,486
                  
                  
                  
                  61,057,417INCREASE
      IN CASH AND CASH EQUIVALENTS
                  
                  $
                  5,684,557
                  
                  
                  $
                  12,901,308CASH
      AND CASH EQUIVALENTS - JANUARY 1
                  
                  
                  11,247,967
                  
                  
                  
                  14,474,532CASH
      AND CASH EQUIVALENTS - JUNE 30
                  
                  $
                  16,932,524
                  
                  
                  $
                  27,375,840SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the six months for:Interest
                  
                  $
                  7,034,142
                  
                  
                  $
                  9,124,850Income
      taxes
                  
                  $
                  2,699,000
                  
                  
                  $
                  925,000Transfer
      from loans to foreclosed real estate
                  
                  $
                  10,241,740
                  
                  
                  $
                  922,934See
      notes to consolidated financial statements




7


NOTES TO CONSOLIDATED
      FINANCIAL STATEMENTS
(UNAUDITED)


SIX MONTHS ENDED JUNE
      30, 2010 AND 2009





1.
            BASIS
      OF PRESENTATION


General- 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, 2009 have been derived
from audited financial statements.  There have been no significant
changes to the Company’s accounting policies as disclosed in the 2009 Annual
Report.  The results of operations for the three and six months ended
June 30, 2010 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 2010
presentation.





These
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes included in the Company’s Annual
Report for the year ended December 31, 2009.





2.
            NATURE
      OF BUSINESS


The
Company provides a variety of financial services to individuals and small
businesses through its offices in Southern Maryland. Its primary deposit
products are demand, savings, and time deposits, and its primary lending
products are consumer and commercial mortgage loans, construction and land
development loans, and commercial loans.





3.
            FAIR
      VALUE MEASUREMENTS


Effective
January 1, 2008, the Company adopted the Financial Accounting Standards Board’s
(“FASB”) Accounting Standard’s Codification (“ASC”) Topic 820, “Fair Value
Measurements” and FASB ASC Topic 825, “The Fair Value Option for Financial
Assets and Financial Liabilities” which provides a framework for measuring and
disclosing fair value under generally accepted accounting principles. FASB ASC
Topic 820 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).




FASB ASC
Topic 820 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 at the measurement date. FASB ASC Topic 820 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.




8




Under
FASB ASC Topic 820, 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:




Level 1
inputs - Unadjusted quoted prices 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.




Transfers
between levels of the fair value hierarchy are recognized on the actual date of
the event or circumstances that caused the transfer, which generally coincides
with the Company’s monthly or      quarterly
valuation process.




There
were no transfers between levels of the fair value hierarchy and the Company had
no Level 3 fair value assets or liabilities for the six months ended June 30,
2010 and 2009, respectively.




Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value:




Securities
Available for Sale


Investment
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.





Loans
Receivable


The
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. Management estimates the fair value of impaired loans
using one of several methods, including the collateral value, market value of
similar debt, enterprise value, liquidation value and discounted cash flows.
Impaired loans not requiring a specific allowance represent loans for which the
fair value of expected repayments or collateral exceed the recorded investment
in such loans. At June 30, 2010, substantially all of the impaired loans were
evaluated based upon the fair value of the collateral. In accordance with FASB
ASC 820, 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.


9


Loans
Held for Sale


Loans
originated and intended for sale in the secondary market are carried at the
lower of cost or estimated fair value, in the aggregate. Fair value is derived
from secondary market quotations for similar instruments. Net unrealized losses,
if any, are recognized through a valuation allowance by charges to
income.




Mortgage
loans held for sale are generally sold with the mortgage servicing rights
retained by the Company. The carrying value of mortgage loans sold is reduced by
the cost allocated to the associated servicing rights. Gains or losses on sales
of mortgage loans are recognized based on the difference between the selling
price and the carrying value of the related mortgage loans sold, using the
specific identification method.




Foreclosed
Real Estate


Foreclosed
real estate is adjusted for fair value upon transfer of the loans to foreclosed
real estate. Subsequently, foreclosed real estate is carried at the lower of
carrying value or fair value. Fair value is based upon independent market
prices, appraised value of the collateral or management’s estimation 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 as nonrecurring Level 3.





Assets
and Liabilities Recorded at Fair Value on a Recurring Basis:


The table
below presents the recorded amount of assets and liabilities, as of June 30,
2010 measured at fair value on a recurring basis.





Fair Value MeasurementsAt June 30, 2010Using:Estimated Fair Value
                  
                  
                  Quoted Prices in
                    Active Markets
                    for Identical
                    Assets
                    (Level 1)
                  
                  
                  Significant Other
                    Observable
                    Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level 3)Description
      of AssetSecurities
      available for sale:Asset-backed
      securities issued by GSEsCMOs
                  
                  $
                  36,391,212
                  
                  
                  $
                  -
                  
                  
                  $
                  36,391,212
                  
                  
                  $
                  -MBS
                  
                  
                  4,187,903
                  
                  
                  
                  -
                  
                  
                  
                  4,187,903
                  
                  
                  
                  -Corporate
      equity securities
                  
                  
                  37,452
                  
                  
                  
                  -
                  
                  
                  
                  37,452
                  
                  
                  
                  -Bond
      mutual funds
                  
                  
                  3,816,125
                  
                  
                  
                  -
                  
                  
                  
                  3,816,125
                  
                  
                  
                  -Total
      securities available for sale
                  
                  $
                  44,432,692
                  
                  
                  $
                  -
                  
                  
                  $
                  44,432,692
                  
                  
                  $
                  -Loans
      held for sale
                  
                  $
                  512,000
                  
                  
                  $
                  -
                  
                  
                  $
                  512,000
                  
                  
                  $
                  -


10


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 nonrecurring 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 June 30, 2010 are included in the table below:





Fair Value MeasurementsAt June 30, 2010Using:Estimated Fair Value
                  
                  
                  Quoted Prices in
                    Active Markets
                    for Identical
                    Assets
                    (Level 1)
                  
                  
                  Significant Other
                    Observable
                    Inputs
                    (Level 2)
                  
                  
                  Significant
                    Unobservable
                    Inputs
                    (Level 3)Description
      of AssetImpaired
      loans:Commercial
      real estate
                  
                  $
                  4,116,452
                  
                  
                  $
                  -
                  
                  
                  $
                  4,116,452
                  
                  
                  $
                  -Residential
      construction
                  
                  
                  712,019
                  
                  
                  
                  -
                  
                  
                  
                  712,019
                  
                  
                  
                  -Commercial
      lines of credit
                  
                  
                  5,956,348
                  
                  
                  
                  -
                  
                  
                  
                  5,956,348
                  
                  
                  
                  -Commercial
      equipment
                  
                  
                  116,509
                  
                  
                  
                  -
                  
                  
                  
                  116,509
                  
                  
                  
                  -Total
      impaired loans
                  
                  $
                  10,901,328
                  
                  
                  $
                  -
                  
                  
                  $
                  10,901,328
                  
                  
                  $
                  -Foreclosed
      Real Estate
                  
                  $
                  10,876,740
                  
                  
                  $
                  -
                  
                  
                  $
                  10,876,740
                  
                  
                  $
                  -





4.
            INCOME
      TAXES


The
Company files a consolidated federal income tax return with its subsidiaries.
Deferred tax assets and liabilities are determined using the liability (or
balance sheet) method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the temporary differences
between the book and tax bases of the various balance sheet assets and
liabilities and gives current recognition to changes in tax rates and laws. It
is the Company’s policy to recognize accrued interest and penalties related to
unrecognized tax benefits as a component of tax expense.





5.
            EARNINGS
      PER COMMON SHARE


Basic
earnings 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 earnings per share are computed by dividing net
income less dividends on preferred shares, 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 June 30, 2010 and
2009, there were 253,359 and 190,479 shares, respectively, 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 common and common equivalent shares
outstanding as follows:


Three Months Ended
                
                
                Six Months EndedJune 30,
                
                
                June 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Net
      Income
                
                $
                1,036,084
                
                
                $
                522,214
                
                
                $
                2,400,508
                
                
                $
                1,292,054Less:
      Dividends payable on preferred stock
                
                
                (211,732
                )
                
                
                (211,732
                )
                
                
                (423,465
                )
                
                
                (423,465
                )Net
      income available to common shareholders
                
                $
                824,352
                
                
                $
                310,482
                
                
                $
                1,977,043
                
                
                $
                868,589Average
      number of common shares outstanding
                
                
                2,984,808
                
                
                
                2,958,397
                
                
                
                2,981,616
                
                
                
                2,954,779Effect
      of dilutive options
                
                
                16,934
                
                
                
                27,370
                
                
                
                17,617
                
                
                
                34,283Average
      number of shares used to calculate earnings per share
      outstanding
                
                
                3,001,742
                
                
                
                2,985,767
                
                
                
                2,999,233
                
                
                
                2,989,062




11





6.
            COMPREHENSIVE
      INCOME


Comprehensive
income is net income adjusted for net unrealized holding gains or losses for the
period.





Three Months Ended
                      June 30,
                    
                    
                    Six Months Ended
                      June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Net
      Income
                    
                    $
                    1,036,084
                    
                    
                    $
                    522,214
                    
                    
                    $
                    2,400,508
                    
                    
                    $
                    1,292,054Other
      comprehensive income net of tax:Net
      unrealized holding gains (losses) arising during period
                    
                    
                    108,162
                    
                    
                    
                    (220,599
                    )
                    
                    
                    206,617
                    
                    
                    
                    (7,612
                    )Comprehensive
      income
                    
                    $
                    1,144,246
                    
                    
                    $
                    301,615
                    
                    
                    $
                    2,607,125
                    
                    
                    $
                    1,284,442





7.
            STOCK-BASED
      COMPENSATION


The
Company has stock-based incentive compensation 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 consolidated financial statements included
in our Annual Report to Stockholders for the year ended December 31,
2009.   Stock-based compensation expense was not recognized for
the quarter ended June 30, 2010 compared to $4,780 for the quarter ended June
30, 2009. The Company and the Bank currently maintain incentive plans which
provide for payments to be made in cash, stock, 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–based compensation because such payments are subject to the future
election of the recipient. A summary of the Company’s stock option plans as of
June 30, 2010 and changes during the six-month period then ended is presented
below:





Weighted
                          
                          
                          
                          
                          Weighted-AverageAverage
                          
                          
                          Aggregate
                          
                          Contractual LifeExercise
                          
                          
                          Intrinsic
                          
                          Remaining InShares
                          
                          
                          Price
                          
                          
                          Value
                          
                          YearsOutstanding
      at December 31, 2009
                          
                          
                          329,243
                          
                          
                          $
                          16.04
                          
                          
                          $
                          222,607Granted
      at fair value
                          
                          
                          -
                          
                          
                          
                          -Exercised
                          
                          
                          (8,493
                          )
                          
                          
                          7.89
                          
                          
                          
                          38,331Expired
                          
                          
                          -
                          
                          
                          
                          -Forfeited
                          
                          
                          (1
                          )
                          
                          
                          7.90Outstanding
      at June 30, 2010
                          
                          
                          320,749
                          
                          
                          $
                          16.26
                          
                          
                          $
                          161,941
                          
                          1.1Exercisable
      at June 30, 2010
                          
                          
                          320,749
                          
                          
                          $
                          16.26
                          
                          
                          $
                          161,941
                          
                          1.1





The
following table summarizes restricted stock award activity for the Company under
the 2006 Equity Plan for the six months ended June 30, 2010:




Numberof Shares
                  
                  WeightedAverage
                    Grant
                    Date Fair
                    ValueNonvested
      at January 1, 2010
                  5,360
                  
                  $
                  11.90Granted
                  -
                  
                  
                  -Vested
                  -
                  
                  
                  -Cancelled
                  -
                  
                  
                  -Nonvested
      at June 30, 2010
                  5,360
                  
                  $
                  11.90




12





8.
            GUARANTEED
      PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED
      DEBENTURES


On 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
variable-rate capital in a private pooled transaction. The variable rate is
based on the 90-day LIBOR rate plus 1.70%. The Trust used the proceeds from this
issuance, along with the $155,000 for Capital Trust II’s common securities, to
purchase $5,155,000 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
variable-rate capital securities in a private pooled transaction. The variable
rate is based on the 90-day LIBOR rate plus 2.60%. The Trust used the proceeds
from this issuance, along with the Company’s $217,000 capital contribution for
Capital Trust I’s common securities, to purchase $7,217,000 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 debentures 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.





9.
            PREFERRED
      STOCK


On
December 19, 2008, the United States Department of the Treasury (“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”) issued by 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 unless the Company has redeemed all Series B Preferred Stock
(defined below), 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 a warrant to purchase Fixed Rate Cumulative Perpetual Preferred Stock,
Series B Preferred Stock (“Series B Preferred Stock”) in the amount of 5% of the
Series A Preferred Stock or 770 shares with a par value of $777,000. The warrant
had an exercise price of $.01 per share. The Series B Preferred Stock has the
same rights, preferences and privileges as the Series A Preferred Stock except,
the Series B Preferred Stock has a dividend rate of 9%. This warrant was
immediately exercised.





The
Company believes that it is in compliance with all terms of the Preferred Stock
Purchase Agreement.


13





10.
            SECURITIES





June 30, 2010Amortized
                
                
                Gross Unrealized
                
                
                Gross Unrealized
                
                
                EstimatedCost
                
                
                Gains
                
                
                Losses
                
                
                Fair ValueSecurities
      available for saleAsset-backed
      securities issued by GSEs
                
                $
                39,750,778
                
                
                $
                921,926
                
                
                $
                93,589
                
                
                $
                40,579,115Corporate
      equity securities
                
                
                37,310
                
                
                
                411
                
                
                
                269
                
                
                
                37,452Bond
      mutual funds
                
                
                3,634,149
                
                
                
                181,976
                
                
                
                -
                
                
                
                3,816,125Total
      securities available for sale
                
                $
                43,422,237
                
                
                $
                1,104,313
                
                
                $
                93,858
                
                
                $
                44,432,692Securities
      held to maturityAsset-backed
      securities issued by:GSEs
                
                $
                77,705,482
                
                
                $
                1,700,981
                
                
                $
                240,204
                
                
                $
                79,166,259Other
                
                
                16,743,566
                
                
                
                94,195
                
                
                
                2,487,709
                
                
                
                14,350,052Total
      debt securities held to maturity
                
                
                94,449,048
                
                
                
                1,795,176
                
                
                
                2,727,913
                
                
                
                93,516,311U.S.
      Government obligations
                
                
                755,207
                
                
                
                -
                
                
                
                370
                
                
                
                754,837Agency
      Bonds
                
                
                6,000,000
                
                
                
                13,140
                
                
                
                -
                
                
                
                6,013,140Other
      investments
                
                
                432,813
                
                
                
                -
                
                
                
                -
                
                
                
                432,813Total
      securities held to maturity
                
                $
                101,637,068
                
                
                $
                1,808,316
                
                
                $
                2,728,283
                
                
                $
                100,717,101





December 31, 2009Amortized
                
                
                Gross Unrealized
                
                
                Gross Unrealized
                
                
                EstimatedCost
                
                
                Gains
                
                
                Losses
                
                
                Fair ValueSecurities
      available for saleAsset-backed
      securities issued by GSEs
                
                $
                49,617,856
                
                
                $
                646,198
                
                
                $
                30,628
                
                
                $
                50,233,426Corporate
      equity securities
                
                
                37,310
                
                
                
                1,416
                
                
                
                163
                
                
                
                38,563Bond
      mutual funds
                
                
                3,568,050
                
                
                
                86,070
                
                
                
                -
                
                
                
                3,654,120Total
      securities available for sale
                
                $
                53,223,216
                
                
                $
                733,684
                
                
                $
                30,791
                
                
                $
                53,926,109Securities
      held to maturityAsset-backed
      securities issued by:GSEs
                
                $
                71,276,709
                
                
                $
                1,689,252
                
                
                $
                137,919
                
                
                $
                72,828,042Other
                
                
                19,005,847
                
                
                
                12,088
                
                
                
                3,353,964
                
                
                
                15,663,971Total
      debt securities held to maturity
                
                
                90,282,556
                
                
                
                1,701,340
                
                
                
                3,491,883
                
                
                
                88,492,013U.S.
      Government obligations
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Other
      investments
                
                
                5,247
                
                
                
                -
                
                
                
                -
                
                
                
                5,247Total
      securities held to maturity
                
                $
                90,287,803
                
                
                $
                1,701,340
                
                
                $
                3,491,883
                
                
                $
                88,497,260





At June
30, 2010, certain other securities with a carrying value of $7,146,403 were
pledged to secure certain deposits. At June 30, 2010, securities with a carrying
value of $38,138,441 were pledged as collateral for advances from the Federal
Home Loan Bank of Atlanta.




14


Gross
unrealized losses and estimated fair value by length of time that the individual
available for sale securities have been in a continuous unrealized loss position
at June 30, 2010 are as follows:





Less Than 12
                  
                  
                  More Than 12Months
                  
                  
                  Months
                  
                  
                  TotalFair
                    Value
                  
                  
                  Unrealized
                    Loss
                  
                  
                  Fair
                    Value
                  
                  
                  Unrealized
                    Loss
                  
                  
                  Fair
                    Value
                  
                  
                  Unrealized
                    LossAsset-backed
      securities issued by GSEs
                  
                  $
                  10,276,779
                  
                  
                  $
                  93,589
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  10,276,779
                  
                  
                  $
                  93,589Corporate
      Equity Securities
                  
                  
                  41
                  
                  
                  
                  269
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  41
                  
                  
                  
                  269$
                  10,276,820
                  
                  
                  $
                  93,858
                  
                  
                  $
                  -
                  
                  
                  $
                  -
                  
                  
                  $
                  10,276,820
                  
                  
                  $
                  93,858





The
available for sale investment portfolio has a fair value of $44,432,692 of which
$10,276,820 of the securities have some unrealized losses from their amortized
cost. Of these securities, $10,276,779 or 99%, are mortgage-backed securities
issued by GSEs. The unrealized losses that exist in the asset-backed securities
and mutual fund shares are the result of market changes in interest rates on
similar instruments.





Total
unrealized losses on these investments are small (less than 1%). We believe that
the losses in the equity securities are temporary. Persistent losses may require
a reevaluation of these losses. Because our intention is not to sell the
investments and it is not more likely than not that we will be required to sell
the investments before recovery of their amortized cost basis, which may be
maturity, management does not consider these investments to be
other-than-temporarily impaired at June 30, 2010.





Gross
unrealized losses and estimated fair value by length of time that the individual
held to maturity securities have been in a continuous unrealized loss position
at June 30, 2010 are as follows:





Less Than 12
                  
                  
                  More Than 12Months
                  
                  
                  Months
                  
                  
                  TotalFair
                    Value
                  
                  
                  Unrealized
      Loss
                  
                  
                  Fair
                    Value
                  
                  
                  Unrealized
                    Loss
                  
                  
                  Fair
                    Value
                  
                  
                  Unrealized
                    LossAsset-backed
      securities issued by GSEs
                  
                  $
                  7,311,773
                  
                  
                  $
                  46,572
                  
                  
                  $
                  19,523,445
                  
                  
                  $
                  193,632
                  
                  
                  $
                  26,835,218
                  
                  
                  $
                  240,204Asset-backed
      securities issued by others
                  
                  
                  -
                  
                  
                  $
                  -
                  
                  
                  
                  10,595,326
                  
                  
                  
                  2,487,709
                  
                  
                  
                  10,595,326
                  
                  
                  
                  2,487,709$
                  7,311,773
                  
                  
                  $
                  46,572
                  
                  
                  $
                  30,118,771
                  
                  
                  $
                  2,681,341
                  
                  
                  $
                  37,430,544
                  
                  
                  $
                  2,727,913





The held
to maturity investment portfolio has an estimated fair value of $100,717,101 of
which $37,430,544 or 37%, of the securities have unrealized losses from their
amortized cost. Of these securities, $26,835,218 or 72%, are mortgage-backed
securities issued by GSEs and the remaining $10,595,326 are asset-backed
securities issued by others. As with the available for sale securities, we
believe that the losses are the result of general perceptions of safety and
credit worthiness of the entire sector and a general disruption of orderly
markets in the asset class. The securities issued by GSEs are guaranteed by the
issuer. The average unrealized loss on GSE issued held to maturity securities is
small (less than 1%). We believe that the securities will either recover in
market value or be paid off as agreed. The Company intends to, and has the
ability to hold these securities to maturity.




15


The
asset-backed securities issued by others are mortgage-backed securities. All of
the securities have credit support tranches which absorb losses prior to the
tranches which the Company owns. The Company reviews credit support positions on
its securities regularly. These securities have an average life of 2.2 and an
average duration of 1.4 years.  Total unrealized losses are $2,487,709
or 19%, of $13,083,035 in amortized cost on the asset-backed securities issued
by others for securities with continued unrealized losses. We believe that the
securities will either recover in market value or be paid off as agreed. The
Company intends to, and has the ability to, hold these securities to
maturity.





The table
below presents the Standard & Poor’s credit rating of available for sale and
held to maturity asset-backed securities issued by GSEs and others at June 30,
2010:




Credit Rating
                        
                        AmountAAA
                        
                        $
                        125,910,982AA+
                        
                        
                        503,609AA-
                        
                        
                        2,344,095A-
                        
                        
                        1,196,401BBB+
                        
                        
                        160,079BBB-
                        
                        
                        971,835BB-
                        
                        
                        3,257,606B+
                        
                        
                        683,556Total
                        
                        $
                        135,028,163





There
were no sales of investments available for sale securities during the six-month
period ended June 30, 2010 compared to sales of $73,200 during the six-month
period ended June 30, 2009. These sales resulted in a net loss of $12,863 for
the six-month period ended June 30, 2009. Asset-backed securities are comprised
of mortgage-backed securities as well as mortgage-derivative securities such as
collateralized mortgage obligations and real estate mortgage investment
conduits.





11.
            FORECLOSED
      REAL ESTATE


Foreclosed
assets are presented net of an allowance for losses. An analysis of the
allowance for losses on foreclosed assets is as follows.




Six Months Ended June 30,2010
                  
                  
                  2009Balance
      at beginning of year
                  
                  $
                  922,934
                  
                  
                  $
                  -Additions
      to underlying property
                  
                  
                  10,241,740
                  
                  
                  
                  922,934Valuation
      allowance
                  
                  
                  (287,934
                  )
                  
                  
                  -Balance
      at end of period
                  
                  $
                  10,876,740
                  
                  
                  $
                  922,934




Expenses
applicable to foreclosed assets include the following.




Three Months Ended
                    
                    
                    Six Months EndedJune 30,
                    
                    
                    June 30,2010
                    
                    
                    2009
                    
                    
                    2010
                    
                    
                    2009Valuation
      allowance
                    
                    $
                    287,934
                    
                    
                    $
                    -
                    
                    
                    $
                    287,934
                    
                    
                    $
                    -Operating
      expenses
                    
                    
                    48,142
                    
                    
                    
                    12,123
                    
                    
                    
                    49,928
                    
                    
                    
                    12,123$
                    336,076
                    
                    
                    $
                    12,123
                    
                    
                    $
                    337,862
                    
                    
                    $
                    12,123




16


12.
            NEW
      ACCOUNTING STANDARDS


FASB ASC
TOPIC 105, “Generally Accepted Accounting Principles” (“GAAP”) establishes the
Codification as the single source of authoritative GAAP in the United States
except for rules and interpretive releases of the SEC, which are sources of
authoritative GAAP for SEC registrants. The Financial Accounting Standards
Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective on
July 1, 2009. The provisions of FASB ASC Topic 105 were adopted for the year
ending December 31, 2009 and did not have a material effect on the Company’s
consolidated financial statements.




FASB ASC
TOPIC 260, “Earnings per Share” provides guidance that 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. This guidance 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 earnings per
share data. The Company adopted this guidance effective March 31, 2009, and
adoption did not have a material effect on consolidated results of operations or
earnings per share.




FASB ASC
TOPIC 310, “Receivables” - In April 2010, FASB issued ASU No.
2010-18, Effect of a Loan
Modification When the Loan is Part of a Pool That is Accounted for as a Single
Asset.Modifications of loans that are accounted for within a pool do not
result in the removal of those loans from the pool even if the modification of
those loans would otherwise be considered a troubled debt restructuring. ASU No.
2010-18 is effective for modifications of loans accounted for within pools for
the first interim or annual period ending on or after July 15, 2010 and are to
be applied prospectively although early application is permitted. The adoption
of this guidance is not anticipated to have a significant impact on the
Company’s consolidated financial position, results of operations or cash
flows.




FASB ASC
TOPIC 320, “Investments - Debt and Equity Securities” provides guidance on
impairment of securities. FASB ASC Topic 320 (1) changes existing guidance for
determining whether an impairment is other than temporary to debt securities and
(2) replaces the existing requirement that the entity’s management assert it has
both the intent and ability to hold an impaired security until recovery with a
requirement that management assert: (a) it does not have the intent to sell the
security; and (b) it is more likely than not it will not have to sell the
security before recovery of its cost basis. Under ASC Topic 320, declines in the
fair value of held to maturity and available for sale securities below their
cost that are deemed to be other than temporary are reflected in earnings as
realized losses to the extent the impairment is related to credit losses. The
amount of the impairment related to other factors is recognized in other
comprehensive income. The Company adopted this guidance effective September 30,
2009, and adoption did not have a material effect on the Company’s consolidated
financial statements.




FASB ASC
TOPIC 805, “Business Combinations” provides guidance for business combinations
for which the acquisition date is on or after December 15, 2008. These business
combinations use “acquisition accounting” which 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.  The Company adopted this new guidance effective January 1,
2009, and adoption did not have a material impact on the Company’s consolidated
financial statements.




FASB ASC
TOPIC 810, “Consolidation” provides guidance that establishes 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.  This guidance is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after December 15,
2008. Management adopted this guidance effective March 31, 2009, and adoption
did not have a material impact on the Company’s consolidated financial condition
or results of operations.




17


Additional
guidance issued under ASC Topic 810 related to variable interest entities
(“VIEs”) amends the original guidance to require an enterprise to perform an
analysis to determine whether the enterprise’s variable interest or interests
give it a controlling financial interest in a VIE.  This analysis
identifies the primary beneficiary of a VIE as the enterprise that has both (1)
the power to direct the activities of a VIE that most significantly impact the
entity’s economic performance, and (2) the obligation to absorb losses of the
entity that could potentially be significant to the
VIE.  Additionally, this new guidance requires an enterprise to assess
whether it has an implicit financial responsibility to ensure that a VIE
operates as designed when determining it has the power to direct the activities
of the VIE that most significantly impact the entity’s economic
performance.   It is effective at the beginning of a company’s
first fiscal year that begins after November 15, 2009.  Adoption of
this new guidance, effective January 1, 2010, did not have a material impact on
the Company’s consolidated financial statements.




FASB ASC
TOPIC 815, “Derivatives and Hedging” provides guidance regarding disclosures for
derivatives.  This guidance 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. This guidance is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008. Adoption of
this new guidance, effective January 1, 2009, did not have a material impact on
the Company’s consolidated financial statements.




FASB ASC
Topic 820, “Fair Value Measurements and Disclosures” defines fair value,
establishes a framework for measuring fair value in GAAP and expands disclosures
about fair value measurements. The provisions of ASC Topic 820 became effective
for the Company on January 1, 2008 for financial assets and financial
liabilities and became effective on January 1, 2010 for non-financial assets and
non-financial liabilities.




Additional
guidance under ASC Topic 820 affirms that the objective of fair value when the
market for an asset is not active is the price that would be received to sell
the asset in an orderly transaction, and clarifies and includes additional
factors for determining whether there has been a significant decrease in market
activity for an asset when the market for that asset is not active. ASC Topic
820 requires an entity to base its conclusion about whether a transaction was
not orderly on the weight of the evidence. The new accounting guidance amended
prior guidance to expand certain disclosure requirements. The Company adopted
this guidance effective September 30, 2009, and adoption did not have a material
effect on the Company’s consolidated financial statements.




Additional guidance (Accounting
Standards Update (“ASU”) No. 2009-5) under ASC Topic 820 provides guidance for
measuring the fair value of a liability in circumstances in which a quoted price
in an active market for the identical liability is not available. In such
instances, a reporting entity is required to measure fair value utilizing a
valuation technique that uses (1) the quoted price of the identical liability
when traded as an asset, (2) quoted prices for similar liabilities or similar
liabilities when traded as assets, or (3) another valuation technique that is
consistent with the existing principles of ASC Topic 820, such as an income
approach or market approach. The new guidance also clarifies that when
estimating the fair value of a liability, a reporting entity is not required to
include a separate input or adjustment to other inputs relating to the existence
of a restriction that prevents the transfer of the liability. The Company
adopted this guidance effective September 30, 2009, and adoption did not have a
material effect on the Company’s consolidated financial
statements.




Additional
guidance (ASU No. 2010-06) issued  under ASC Topic
820  requires expanded disclosures related to fair value measurements
including (i) the amounts of significant transfers of assets or liabilities
between Levels 1 and 2 of the fair value hierarchy and the reasons for the
transfers, (ii) the reasons for transfers of assets or liabilities in or out of
Level 3 of the fair value hierarchy, with significant transfers disclosed
separately, (iii) the policy for determining when transfers between levels of
the fair value hierarchy are recognized and (iv) for recurring fair value
measurements of assets and liabilities in Level 3 of the fair value hierarchy, a
gross presentation of information about purchases, sales, issuances and
settlements. ASU 2010-06 further clarifies that (i) fair value measurement
disclosures should be provided for each class of assets and liabilities (rather
than major category), which would generally be a subset of assets or liabilities
within a line item in the statement of financial position and (ii) company’s
should provide disclosures about the valuation techniques and inputs used to
measure fair value for both recurring and nonrecurring fair value measurements
for each class of assets and liabilities included in Levels 2 and 3 of the fair
value hierarchy. The disclosures related to the gross presentation of purchases,
sales, issuances and settlements of assets and liabilities included in Level 3
of the fair value hierarchy will be required for the Company beginning January
1, 2011. The remaining disclosure requirements and clarifications made by ASU
2010-06 became effective for the Company on January 1, 2010.




18


FASB ASC
TOPIC 855, “Subsequent Events” provides guidance to establish general standards
of accounting for and disclosures of events that occur after the balance sheet
date, but before financial statements are issued or are available to be issued.
The Company adopted this guidance effective September 30, 2009, and adoption did
not have a material impact on the Company’s consolidated financial condition or
results of operations.




FASB ASC
TOPIC 860, “Transfers and Servicing” provides guidance that eliminates the
concept of a “qualifying special-purpose entity” from the original accounting
guidance and removes the exception from applying FASB guidance on consolidation
of variable interest entities, to qualifying special-purpose
entities.  This guidance is effective at the beginning of a reporting
entity’s first fiscal year that begins after November 15,
2009.  Adoption of this new guidance, effective January 1, 2010, did
not have a material impact on the Company’s consolidated financial
statements.




13.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS


The
estimated fair value amounts have been determined by the Company using available
market information and appropriate valuation methodologies. However,
considerable judgment is required to interpret market data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Therefore, any aggregate unrealized gains or losses should not be interpreted as
a forecast of future earnings or cash flows. Furthermore, the fair values
disclosed should not be interpreted as the aggregate current value of the
Company.





June 30, 2010
                  
                  
                  December 31, 2009Estimated
                  
                  
                  
                  
                  
                  EstimatedCarrying
                  
                  
                  Fair
                  
                  
                  Carrying
                  
                  
                  FairAmount
                  
                  
                  Value
                  
                  
                  Amount
                  
                  
                  ValueAssetsCash
      and cash equivalents
                  
                  $
                  16,932,524
                  
                  
                  $
                  16,932,524
                  
                  
                  $
                  11,247,967
                  
                  
                  $
                  11,247,967Investment
      securities and stock in FHLB and FRB
                  
                  
                  153,005,260
                  
                  
                  
                  152,085,293
                  
                  
                  
                  151,149,412
                  
                  
                  
                  148,049,000Loans
      receivable, net (including loans held for sale)
                  
                  
                  624,492,878
                  
                  
                  
                  625,614,000
                  
                  
                  
                  616,592,976
                  
                  
                  
                  610,998,000Foreclosed
      real estate
                  
                  
                  10,876,740
                  
                  
                  
                  10,876,740
                  
                  
                  
                  922,934
                  
                  
                  
                  922,934LiabilitiesSavings,
      NOW, and money market accounts
                  
                  
                  262,744,321
                  
                  
                  
                  262,744,321
                  
                  
                  
                  259,160,873
                  
                  
                  
                  246,139,000Time
      certificates
                  
                  
                  420,934,387
                  
                  
                  
                  426,777,000
                  
                  
                  
                  381,257,916
                  
                  
                  
                  384,848,000Long-term
      debt and other borrowed funds
                  
                  
                  70,788,382
                  
                  
                  
                  69,603,317
                  
                  
                  
                  88,750,160
                  
                  
                  
                  83,381,000Guaranteed
      preferred beneficial interest in junior subordinated
      securities
                  
                  
                  12,000,000
                  
                  
                  
                  2,400,000
                  
                  
                  
                  12,000,000
                  
                  
                  
                  2,400,000





At June
30, 2010, the Company had outstanding loan commitments and standby letters of
credit of $13.1 million and $23.7 million, respectively. Based on the short-term
lives of these instruments, the Company does not believe that the fair value of
these instruments differs significantly from their carrying values.




19


Valuation
Methodology





Cash and Cash Equivalents-
For cash and cash equivalents, the carrying amount is a reasonable estimate of
fair value.





Investment Securities- Fair
values are based on quoted market prices or dealer quotes. If a quoted market
price is not available, fair value is estimated using quoted market prices for
similar securities.  FHLB and FRB stock are carried and valued at
cost.





Loans Receivable- For
conforming residential first-mortgage loans, the market price for loans with
similar coupons and maturities was used. For nonconforming loans with maturities
similar to conforming loans, the coupon was adjusted for credit risk. Loans
which did not have quoted market prices were priced using the discounted cash
flow method. The discount rate used was the rate currently offered on similar
products. Loans priced using the discounted cash flow method included
residential construction loans, commercial real estate loans, and consumer
loans. The estimated fair value of loans held for sale is based on the terms of
the related sale commitments.





Foreclosed Real Estate-Fair value is based upon
independent market prices, appraised value of the collateral or management’s
estimation of the value of the collateral.





Deposits- The fair value of
checking accounts, saving accounts, and money market accounts was the amount
payable on demand at the reporting date.





Time Certificates- The fair
value was determined using the discounted cash flow method. The discount rate
was equal to the rate currently offered on similar products.





Long-Term Debt and Other Borrowed
Funds- These were valued using the discounted cash flow method. The
discount rate was equal to the rate currently offered on similar
borrowings.





Guaranteed Preferred Beneficial
Interest in Junior Subordinated Securities -These were valued using
discounted cash flows. The discount rate was equal to the rate currently offered
on similar borrowings.





Off-Balance Sheet Instruments- The Company charges fees for commitments to extend credit. Interest
rates on loans for which these commitments are extended are normally committed
for periods of less than one month. Fees charged on standby letters of credit
and other financial guarantees are deemed to be immaterial and these guarantees
are expected to be settled at face amount or expire unused. It is impractical to
assign any fair value to these commitments.





The fair
value estimates presented herein are based on pertinent information available to
management as of June 30, 2010 and December 31, 2009. Although management is not
aware of any factors that would significantly affect the estimated fair value
amounts, such amounts have not been comprehensively revalued for purposes of
these financial statements since that date and, therefore, current estimates of
fair value may differ significantly from the amount presented
herein.


20


ITEM
2


MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS





This
document contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, including: discussions of Tri-County
Financial Corporation’s (the “Company”) goals, strategies and expected outcomes;
estimates of risks and future costs; and reports of the Company’s ability to
achieve its financial and other goals. Forward-looking statements are generally
preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and
similar expressions. These forward-looking statements are subject to significant
known and unknown risks and uncertainties because they are based upon future
economic conditions, particularly interest rates, loan demand, competition
within and without the banking industry, changes in laws and regulations
applicable to the Company, changes in accounting principles, and various other
matters.  Additional factors that may affect our results are discussed
in Part I of the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009 (the “Form 10-K”) and Part II of this Quarterly Report on Form
10-Q under “Item 1A. Risk Factors.”  Because of these uncertainties,
there can be no assurance that actual results, performance or achievements of
the Company will not differ materially from any future results, performance or
achievements expressed or implied by these forward-looking statements. The
Company does not undertake – and specifically disclaims any obligation – to
publicly release the result of any revisions that may be made to any
forward-looking statement to reflect events or circumstances after the date of
such statements or to reflect the occurrence of anticipated or unanticipated
events.





GENERAL





The
Company is a bank holding company organized in 1989 under the laws of the State
of Maryland.  It owns all the outstanding shares of capital stock of
Community Bank of Tri-County (the “Bank”), a Maryland-chartered commercial
bank.  The Company engages in no significant activity other than
holding the stock of the Bank, paying its subordinated debt and preferred stock
obligations, and directing the business of the Bank.  Accordingly, the
information set forth in this report, including financial statements and related
data, relates primarily to the Bank and its subsidiaries.





The Bank
serves Southern Maryland through its main office and nine branches located in
Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, Prince
Frederick, Lusby, and California, Maryland.  The Bank is engaged in
the commercial and retail banking business as authorized by the banking statutes
of the State of Maryland and applicable Federal regulations.  The Bank
accepts deposits and uses these funds, along with funds generated from
operations and borrowings from the Federal Home Loan Bank (the “FHLB”), to fund
loan originations to individuals, associations, partnerships and corporations
and to invest in securities. The Bank makes real estate loans including
residential first and second mortgage loans, home equity lines of credit,
commercial mortgage loans, commercial loans, including secured and unsecured
loans, and consumer loans.  The Bank is a member of the Federal
Reserve and FHLB Systems. The Federal Deposit Insurance Corporation provides
deposit insurance coverage up to applicable limits.





Since its
conversion to a state chartered commercial bank in 1997, the Bank has sought to
increase its commercial and commercial real estate lending as well as the level
of transactional deposits.  Management recognizes that the shift in
composition of the Bank’s loan portfolio away from residential first mortgage
lending will increase its exposure to credit losses.  The Bank
continues to evaluate its allowance for loan losses and the associated provision
to compensate for the increased risk. Any evaluation of the allowance for loan
losses is inherently inexact and reflects management’s expectations as to future
interest rates, economic conditions in the Southern Maryland area as well as
individual borrowers’ circumstances.  Management believes that its
allowance for loan losses is adequate.  For further information on the
Bank’s allowance for loan losses see the discussion in the sections captioned
“Financial Condition” and “Critical Accounting Policies” as well as the relevant
discussions in the Form 10-K and Annual Report for the year ended December 31,
2009.




21


The
Company’s results are influenced by local and national economic conditions.
These conditions include the level of short-term interest rates such as the
federal funds rate, the differences between short- and long-term interest rates,
the prospects for economic growth or decline, and the rates of anticipated and
current inflation. Local conditions, including employment growth or declines,
may have direct or indirect effects on our borrowers’ ability to meet their
obligations.





Interest
rates can directly influence the Bank’s funding costs and loan and investment
yields, and also act to increase or decrease general economic activity. The
federal funds target rate increased for much of 2006 and 2007, hitting a
multi-year peak on September 29, 2007 of 5.25%. Shortly afterwards, it became
clear that the U.S. economy suffered from an over-extension of credit in many
sectors. This realization led to a sudden, dramatic decline in the availability
of credit to many borrowers which deflated a housing price bubble and threatened
to create a credit crisis.  The Federal Reserve reacted by cutting the
Federal Funds rate by 50 basis points in September 2007.  Despite
further Federal Reserve rate cuts, the crisis in housing, which was once
confined to subprime mortgage loans continued to spread.  The U.S.
Treasury responded by injecting capital directly into banks by using the Capital
Purchase Program (“CPP”) of the Troubled Asset Repurchase Program
(“TARP”).  The Federal Reserve, Treasury, FDIC and other governmental
bodies chose to guarantee various forms of debt issuance to stave off a total
collapse of credit markets.  In addition, the U.S. government provided
cash and debt guarantees to many private companies.  In addition to
these policy moves, the Federal Reserve reduced the Federal Funds rate to a
range of 0% to 0.25% in December 2008. The Federal Funds rate remains at this
level as of June 30, 2010.





SELECTED FINANCIAL DATAThree Months Ended
                  
                  
                  Six Months EndedJune 30,
                  
                  
                  June 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Condensed
      Income StatementInterest
      and dividend income
                  
                  $
                  9,893,082
                  
                  
                  $
                  9,350,365
                  
                  
                  $
                  19,856,619
                  
                  
                  $
                  18,553,441Interest
      expense
                  
                  
                  3,329,856
                  
                  
                  
                  4,180,031
                  
                  
                  
                  6,808,757
                  
                  
                  
                  8,440,102Net
      interest income
                  
                  
                  6,563,226
                  
                  
                  
                  5,170,334
                  
                  
                  
                  13,047,862
                  
                  
                  
                  10,113,339Provision
      for loan loss
                  
                  
                  804,430
                  
                  
                  
                  929,488
                  
                  
                  
                  1,662,804
                  
                  
                  
                  1,462,373Noninterest
      income
                  
                  
                  744,344
                  
                  
                  
                  781,771
                  
                  
                  
                  1,505,569
                  
                  
                  
                  1,368,228Noninterest
      expense
                  
                  
                  4,899,633
                  
                  
                  
                  4,278,673
                  
                  
                  
                  9,138,042
                  
                  
                  
                  8,092,835Income
      before income taxes
                  
                  
                  1,603,507
                  
                  
                  
                  743,944
                  
                  
                  
                  3,752,585
                  
                  
                  
                  1,926,359Income
      taxes
                  
                  
                  567,423
                  
                  
                  
                  221,730
                  
                  
                  
                  1,352,077
                  
                  
                  
                  634,305Net
      income
                  
                  
                  1,036,084
                  
                  
                  
                  522,214
                  
                  
                  
                  2,400,508
                  
                  
                  
                  1,292,054Net
      income available to common shareholders
                  
                  
                  824,352
                  
                  
                  
                  310,482
                  
                  
                  
                  1,977,043
                  
                  
                  
                  868,589Per
      Common ShareBasic
      earnings
                  
                  $
                  0.28
                  
                  
                  $
                  0.10
                  
                  
                  $
                  0.66
                  
                  
                  $
                  0.29Diluted
      earnings
                  
                  $
                  0.27
                  
                  
                  $
                  0.10
                  
                  
                  $
                  0.66
                  
                  
                  $
                  0.29Book
      value
                  
                  $
                  17.73
                  
                  
                  $
                  17.09
                  
                  
                  $
                  17.73
                  
                  
                  $
                  17.09





RESULTS
OF OPERATIONS – SIX MONTHS ENDED JUNE 30, 2010





Net
income for the six-month period ended June 30, 2010 totaled $2,400,508 ($0.66
basic and diluted earnings per common share), compared to $1,292,054 ($0.29
basic and diluted earnings per common share) for the same period in the prior
year. Net income available to common shareholders for the six-month period ended
June 30, 2010 totaled $1,977,043 compared to $868,589 for the same period in the
prior year.  The increase of $1,108,454, or 85.79% for net income or
127.62% for net income available to common shareholders, was primarily due to
increases in net interest income of $2,934,523 offset by increases in
noninterest expense of $1,045,207.


22




Six Months EndedJune 30,2010
                  
                  
                  2009
                  
                  
                  $ Change
                  
                  
                  % ChangeInterest
      and dividend income
                  
                  $
                  19,856,619
                  
                  
                  $
                  18,553,441
                  
                  
                  $
                  1,303,178
                  
                  
                  
                  9.86
                  %Interest
      expense
                  
                  
                  6,808,757
                  
                  
                  
                  8,440,102
                  
                  
                  
                  (1,631,345
                  )
                  
                  
                  (19.33
                  )%Net
      interest income
                  
                  
                  13,047,862
                  
                  
                  
                  10,113,339
                  
                  
                  
                  2,934,523
                  
                  
                  
                  29.02
                  %Provision
      for loan losses
                  
                  
                  1,662,804
                  
                  
                  
                  1,462,373
                  
                  
                  
                  200,431
                  
                  
                  
                  13.71
                  %





Interest
and dividend income increased due to higher average balances in loans and
investments, which were partially offset by lower interest rate yields on loans
and investments. The growth of the loan portfolio by 14.92% since the beginning
of 2009 has resulted in an increase in interest income, while the Company has
limited the effect of the lower interest rate environment on loan rates through
pricing. Interest expense decreased due to lower interest rates paid on deposits
and borrowings offset by higher average balances of deposits and borrowings for
the period. The decreased yields and rates paid were due to lower market
interest rates. The Company has been successful in increasing its core deposits
and reducing its cost of funds in the low interest-rate environment over the
last year. The Company’s interest rate margin increased to 3.41% for the six
months ended June 30, 2010 from 2.90% for the six months ended June 30,
2009.





The
increase in the provision for loan losses was principally attributable to an
increase in net charge-offs.  Net charge-offs increased $1,015,853 up
from $226,998 for the six months ended June 30, 2009 to $1,242,851 for the six
months ended June 30, 2010. The Company’s allowance for loan losses increased
from 1.20% of loan balances at December 31, 2009 to 1.25% of loan balances at
June 30, 2010. The provision was adjusted for economic conditions that affected
the loss factors used to compute the allowance as well as changes in the
circumstances of specific impaired loans and increases in the level of
delinquencies, charge-offs and nonperforming loans.





The
following table shows the components of noninterest income and the dollar and
percentage changes for the periods presented.





Six Months EndedJune 30,2010
                    
                    
                    2009
                    
                    
                    $ Change
                    
                    
                    % ChangeNONINTEREST
      INCOME:Recognition
      of other than temporary declinein
      value of investment securities
                    
                    $
                    -
                    
                    
                    $
                    (118,744
                    )
                    
                    $
                    118,744
                    
                    
                    
                    (100.00
                    )%Less:
      portion recorded as comprehensive income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    n/aImpairment
      loss on investment securities, net
                    
                    
                    -
                    
                    
                    
                    (118,744
                    )
                    
                    
                    118,744
                    
                    
                    
                    (100.00
                    )%Loan
      appraisal, credit, and miscellaneous charges
                    
                    
                    253,800
                    
                    
                    
                    360,892
                    
                    
                    
                    (107,092
                    )
                    
                    
                    (29.67
                    )%Gain
      on sale of asset
                    
                    
                    22,500
                    
                    
                    
                    -
                    
                    
                    
                    22,500
                    
                    
                    
                    n/aLoss
      on sale investment securities
                    
                    
                    -
                    
                    
                    
                    (12,863
                    )
                    
                    
                    12,863
                    
                    
                    
                    (100.00
                    )%Income
      from bank owned life insurance
                    
                    
                    210,914
                    
                    
                    
                    201,473
                    
                    
                    
                    9,441
                    
                    
                    
                    4.69
                    %Service
      charges
                    
                    
                    846,655
                    
                    
                    
                    769,096
                    
                    
                    
                    77,559
                    
                    
                    
                    10.08
                    %Gain
      on loans held for sale
                    
                    
                    171,700
                    
                    
                    
                    168,374
                    
                    
                    
                    3,326
                    
                    
                    
                    1.98
                    %Total
      noninterest income
                    
                    $
                    1,505,569
                    
                    
                    $
                    1,368,228
                    
                    
                    $
                    137,341
                    
                    
                    
                    10.04
                    %





Noninterest
income increased primarily because no investment security impairment charges
were recorded in the current year. Increases in service charge revenue due to
the increased size and number of deposits and increases in per item charges on
certain transactions were offset by a reduction in loan appraisal, credit, and
miscellaneous charges due to the slower growth of the loan portfolio in
2010.


23


The
following table shows the components of noninterest expense and the dollar
percentage changes for the periods presented.





Six Months Ended June 30,2010
                
                
                2009
                
                
                $ Change
                
                
                % ChangeNONINTEREST
      EXPENSE:Salary
      and employee benefits
                
                $
                4,761,355
                
                
                $
                4,251,834
                
                
                $
                509,521
                
                
                
                11.98
                %Occupancy
                
                
                894,042
                
                
                
                870,748
                
                
                
                23,294
                
                
                
                2.68
                %Advertising
                
                
                178,602
                
                
                
                229,962
                
                
                
                (51,360
                )
                
                
                (22.33
                )%Data
      processing
                
                
                494,817
                
                
                
                436,620
                
                
                
                58,197
                
                
                
                13.33
                %Professional
      fees
                
                
                444,233
                
                
                
                359,908
                
                
                
                84,325
                
                
                
                23.43
                %Depreciation
      of furniture, fixtures, and equipment
                
                
                261,943
                
                
                
                299,105
                
                
                
                (37,162
                )
                
                
                (12.42
                )%Telephone
      communications
                
                
                82,228
                
                
                
                68,173
                
                
                
                14,055
                
                
                
                20.62
                %Office
      supplies
                
                
                79,436
                
                
                
                87,385
                
                
                
                (7,949
                )
                
                
                (9.10
                )%FDIC
      Insurance
                
                
                746,765
                
                
                
                633,611
                
                
                
                113,154
                
                
                
                17.86
                %Valuation
      allowance on foreclosed real estate
                
                
                287,934
                
                
                
                -
                
                
                
                287,934
                
                
                
                n/aOther
                
                
                906,687
                
                
                
                855,489
                
                
                
                51,198
                
                
                
                5.98
                %Total
      noninterest expenses
                
                $
                9,138,042
                
                
                $
                8,092,835
                
                
                $
                1,045,207
                
                
                
                12.92
                %





The
Company’s noninterest expense increased by $1,045,207 or 12.92% from the
comparable period in the prior year primarily due to increased costs associated
with the asset growth of the Bank, the rising cost of regulatory compliance,
increasing FDIC assessments and the valuation allowance on foreclosed real
estate. Salary and employee benefits expense increased as the Bank added
additional employees to support the Bank’s balance sheet growth. Advertising
expense decreased due mainly to marketing campaign expenses incurred in the
first quarter of 2009. Professional fees reflect the increased cost of
compliance. FDIC insurance assessment rates increased during the second half of
2009. A valuation adjustment was recorded in the second quarter of 2010 to
adjust a foreclosed property to the agreed contracted sales price at disposition
compared to no adjustment for the same period in the prior year.





The
Company recorded income tax expense of $1,352,077 or 36.0%, of pretax earnings
of $3,752,585 for the six months ended June 30, 2010 compared with $634,305 or
32.9%, of pretax earnings of $1,926,359 for the six months ended June 30, 2009.
The increase in the effective tax rate is the result of tax exempt income being
relatively lower to total income in 2010.





RESULTS
OF OPERATIONS – THREE MONTHS ENDED JUNE 30, 2010





Net
income for the three-month period ended June 30, 2010 totaled $1,036,084 ($0.28
basic and $0.27 diluted earnings per common share), compared to $522,214 ($0.10
basic and diluted earnings per common share) for the same period in the prior
year. Net income available to common shareholders for the three-month period
ended June 30, 2010 totaled $824,352 compared to $310,482 for the same period in
the prior year.  The increase of $513,870, or 98.40%, for net income
or 165.51% for net income available to common shareholders, was primarily due to
increases in net interest income of $1,392,892 offset by increases in
noninterest expense of $620,960.





Three Months EndedJune 30,2010
                  
                  
                  2009
                  
                  
                  $ Change
                  
                  
                  % ChangeInterest
      and dividend income
                  
                  $
                  9,893,082
                  
                  
                  $
                  9,350,365
                  
                  
                  $
                  542,717
                  
                  
                  
                  8.55
                  %Interest
      expense
                  
                  
                  3,329,856
                  
                  
                  
                  4,180,031
                  
                  
                  
                  (850,175
                  )
                  
                  
                  (20.34
                  )%Net
      interest income
                  
                  
                  6,563,226
                  
                  
                  
                  5,170,334
                  
                  
                  
                  1,392,892
                  
                  
                  
                  26.94
                  %Provision
      for loan losses
                  
                  
                  804,430
                  
                  
                  
                  929,488
                  
                  
                  
                  (125,058
                  )
                  
                  
                  (13.45
                  )%




24


The
growth in the loan portfolio and the decrease in the Company’s cost of funds
continue to be the key drivers of positive growth in the second quarter of 2010.
Interest and dividend income increased due to higher average balances in loans
and investments, which were partially offset by lower interest rate yields on
loans and investments. The growth of the loan portfolio by $40.3 million since
June 30, 2009 has resulted in an increase in interest income. Interest expense
decreased due to lower interest rates paid on deposits and borrowings and a
reduction in net borrowings offset by higher average balances of
deposits.





The
decrease in the provision for loan losses was principally attributable to an
adjustment in the provision for economic conditions that affected the loss
factors used to compute the allowance as well as changes in the circumstances of
specific impaired loans, increases in the level of delinquencies, charge-offs
and nonperforming loans. Second quarter 2010 net charge-offs were $155,592
compared to $215,643 for the second quarter of 2009. As stated above, the
Company’s allowance for loan losses increased from 1.20% of loan balances at
December 31, 2009 to 1.25% of loan balances at June 30, 2010.





The
following table shows the components of noninterest income and the dollar and
percentage changes for the periods presented.





Three Months Ended June 30,2010
                    
                    
                    2009
                    
                    
                    $ Change
                    
                    
                    % ChangeNONINTEREST
      INCOME:Recognition
      of other than temporary declinein
      value of investment securities
                    
                    $
                    -
                    
                    
                    $
                    (118,744
                    )
                    
                    $
                    118,744
                    
                    
                    
                    (100.00
                    )%Less:
      Portion recorded as comprehensive income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    n/aImpairment
      loss on investment securities, net
                    
                    
                    -
                    
                    
                    
                    (118,744
                    )
                    
                    
                    118,744
                    
                    
                    
                    (100.00
                    )%Loan
      appraisal, credit, and miscellaneous charges
                    
                    
                    83,388
                    
                    
                    
                    245,214
                    
                    
                    
                    (161,826
                    )
                    
                    
                    (65.99
                    )%Gain
      on sale of asset
                    
                    
                    22,500
                    
                    
                    
                    -
                    
                    
                    
                    22,500
                    
                    
                    
                    n/aLoss
      on sale investment securities
                    
                    
                    -
                    
                    
                    
                    (12,863
                    )
                    
                    
                    12,863
                    
                    
                    
                    (100.00
                    )%Income
      from bank owned life insurance
                    
                    
                    106,168
                    
                    
                    
                    100,216
                    
                    
                    
                    5,952
                    
                    
                    
                    5.94
                    %Service
      charges
                    
                    
                    442,611
                    
                    
                    
                    399,574
                    
                    
                    
                    43,037
                    
                    
                    
                    10.77
                    %Gain
      on loans held for sale
                    
                    
                    89,677
                    
                    
                    
                    168,374
                    
                    
                    
                    (78,697
                    )
                    
                    
                    (46.74
                    )%Total
      noninterest income
                    
                    $
                    744,344
                    
                    
                    $
                    781,771
                    
                    
                    $
                    (37,427
                    )
                    
                    
                    (4.79
                    )%





Noninterest
income decreased from the comparable period in the prior year primarily due to
fewer loan sales and decreases in loan appraisal, credit and, miscellaneous
charges from slower 2010 net loan growth partially offset by increases in
service charge revenue due to an increased number and size of deposits and no
investment security impairment charges recorded in the current
year.




25


The
following table shows the components of noninterest expense and the dollar
percentage changes for the periods presented.


Three Months Ended June 30,2010
                
                
                2009
                
                
                $ Change
                
                
                % ChangeNONINTEREST
      EXPENSE:Salary
      and employee benefits
                
                $
                2,398,821
                
                
                $
                2,101,058
                
                
                $
                297,763
                
                
                
                14.17
                %Occupancy
                
                
                466,398
                
                
                
                466,221
                
                
                
                177
                
                
                
                0.04
                %Advertising
                
                
                101,853
                
                
                
                99,850
                
                
                
                2,003
                
                
                
                2.01
                %Data
      processing
                
                
                248,677
                
                
                
                210,445
                
                
                
                38,232
                
                
                
                18.17
                %Legal
      and professional fees
                
                
                285,394
                
                
                
                202,299
                
                
                
                83,095
                
                
                
                41.08
                %Depreciation
      of furniture, fixtures, and equipment
                
                
                134,345
                
                
                
                150,963
                
                
                
                (16,618
                )
                
                
                (11.01
                )%Telephone
      communications
                
                
                42,109
                
                
                
                34,898
                
                
                
                7,211
                
                
                
                20.66
                %Office
      supplies
                
                
                33,690
                
                
                
                37,673
                
                
                
                (3,983
                )
                
                
                (10.57
                )%FDIC
      Insurance
                
                
                394,659
                
                
                
                543,947
                
                
                
                (149,288
                )
                
                
                (27.45
                )%Valuation
      allowance on foreclosed real estate
                
                
                287,934
                
                
                
                -
                
                
                
                287,934
                
                
                
                n/aOther
                
                
                505,753
                
                
                
                431,319
                
                
                
                74,434
                
                
                
                17.26
                %Total
      noninterest expense
                
                $
                4,899,633
                
                
                $
                4,278,673
                
                
                $
                620,960
                
                
                
                14.51
                %





The
Company’s noninterest expense increased from the comparable period in the prior
year primarily due to costs associated with the asset growth of the Bank, the
rising cost of regulatory compliance and the valuation allowance on foreclosed
real estate. Salary and employee benefits expense increased as the Bank added
additional employees to support the Bank’s balance sheet growth. Professional
fees reflect the increased cost of compliance. FDIC insurance expense decreased
due to a one-time special assessment of $343,600 incurred during the three
months ended June 30, 2009. As noted above, FDIC insurance assessment rates
increased during the second half of 2009.  A valuation adjustment was
booked in the second quarter of 2010 to adjust a foreclosed property to the
estimated realizable value.





The
Company recorded income tax expense of $567,423 or 35.4%, of pretax earnings of
$1,603,507 for the three months ended June 30, 2010 compared with $221,730 or
29.8%, of pretax earnings of $743,944 for the three months ended June 30, 2009.
The increase in the effective tax rate is the result of tax exempt income being
relatively lower to total income in 2010.





FINANCIAL
CONDITION


June 30, 2010
                
                
                December 31, 2009
                
                
                $ change
                
                
                % ChangeAssetsCash
      and due from banks
                
                $
                8,155,908
                
                
                $
                9,960,787
                
                
                $
                (1,804,879
                )
                
                
                (18.12
                )%Federal
      funds sold
                
                
                7,815,000
                
                
                
                695,000
                
                
                
                7,120,000
                
                
                
                1024.46
                %Interest-bearing
      deposits with banks
                
                
                961,616
                
                
                
                592,180
                
                
                
                369,436
                
                
                
                62.39
                %Securities
      available for sale, at fair value
                
                
                44,432,692
                
                
                
                53,926,109
                
                
                
                (9,493,417
                )
                
                
                (17.60
                )%Securities
      held to maturity, at amortized cost
                
                
                101,637,068
                
                
                
                90,287,803
                
                
                
                11,349,265
                
                
                
                12.57
                %Federal
      Home Loan Bank and FederalReserve
      Bank stock - at cost
                
                
                6,935,500
                
                
                
                6,935,500
                
                
                
                -
                
                
                
                0.00
                %Loans
      held for sale
                
                
                512,000
                
                
                
                -
                
                
                
                512,000
                
                
                
                n/aLoans
      receivable - net of allowance for loanlosses
      of $7,896,967 and $7,471,314, respectively
                
                
                623,980,878
                
                
                
                616,592,976
                
                
                
                7,387,902
                
                
                
                1.20
                %Premises
      and equipment, net
                
                
                11,932,394
                
                
                
                11,987,690
                
                
                
                (55,296
                )
                
                
                (0.46
                )%Foreclosed
      real estate
                
                
                10,876,740
                
                
                
                922,934
                
                
                
                9,953,806
                
                
                
                1078.50
                %Accrued
      interest receivable
                
                
                2,881,928
                
                
                
                2,925,271
                
                
                
                (43,343
                )
                
                
                (1.48
                )%Investment
      in bank owned life insurance
                
                
                11,154,310
                
                
                
                10,943,396
                
                
                
                210,914
                
                
                
                1.93
                %Other
      assets
                
                
                10,275,564
                
                
                
                9,272,888
                
                
                
                1,002,676
                
                
                
                10.81
                %Total
      Assets
                
                $
                841,551,598
                
                
                $
                815,042,534
                
                
                $
                26,509,064
                
                
                
                3.25
                %




26


The
Company increased some of its most liquid assets with increases to federal funds
sold and interest-bearing deposits with banks. The securities available for sale
portfolio decreased due to proceeds received from maturing asset-backed
securities issued by government-sponsored entities. The securities held to
maturity portfolio increased due to additional purchases of securities offset by
principal paydowns, primarily of asset-backed securities issued by
government-sponsored entities. The differences in allocations between the
different cash and investment categories reflect operational needs. The increase
in net loans outstanding was impacted by the resolution of two problem loan
relationships with construction and land development loans that transferred
$10.2 million into foreclosed real estate. The increase in foreclosed real
estate represents two construction and land development properties that were
recorded at fair value upon transfer of the loans to foreclosed real estate
offset by an increase in the valuation allowance of $287,934.  The
increase in other assets was primarily due to net increases to deferred tax and
prepaid assets.





Details
of the Bank’s loan portfolio are presented below:





June 30, 2010
                  
                  
                  
                  
                  
                  December 31, 2009Amount
                  
                  
                  %
                  
                  
                  Amount
                  
                  
                  %Real
      Estate LoansCommercial
                  
                  $
                  316,921,037
                  
                  
                  
                  50.08
                  %
                  
                  $
                  292,987,963
                  
                  
                  
                  46.88
                  %Residential
      first mortgages
                  
                  
                  120,820,143
                  
                  
                  
                  19.09
                  %
                  
                  
                  116,225,733
                  
                  
                  
                  18.59
                  %Construction
      and land development
                  
                  
                  44,713,750
                  
                  
                  
                  7.07
                  %
                  
                  
                  62,509,558
                  
                  
                  
                  10.00
                  %Home
      equity and second mortgage
                  
                  
                  25,131,263
                  
                  
                  
                  3.97
                  %
                  
                  
                  25,133,155
                  
                  
                  
                  4.02
                  %Commercial
      loans
                  
                  
                  104,867,617
                  
                  
                  
                  16.57
                  %
                  
                  
                  108,657,910
                  
                  
                  
                  17.38
                  %Consumer
      loans
                  
                  
                  1,329,052
                  
                  
                  
                  0.21
                  %
                  
                  
                  1,607,765
                  
                  
                  
                  0.26
                  %Commercial
      equipment
                  
                  
                  19,026,188
                  
                  
                  
                  3.01
                  %
                  
                  
                  17,916,655
                  
                  
                  
                  2.87
                  %632,809,050
                  
                  
                  
                  100.00
                  %
                  
                  
                  625,038,739
                  
                  
                  
                  100.00
                  %Less:Deferred
      loan fees
                  
                  
                  931,205
                  
                  
                  
                  0.15
                  %
                  
                  
                  974,449
                  
                  
                  
                  0.16
                  %Allowance
      for loan loss
                  
                  
                  7,896,967
                  
                  
                  
                  1.25
                  %
                  
                  
                  7,471,314
                  
                  
                  
                  1.20
                  %8,828,172
                  
                  
                  
                  
                  
                  
                  
                  8,445,763$
                  623,980,878
                  
                  
                  
                  
                  
                  
                  $
                  616,592,976





The loan
portfolio increased as a result of increases in commercial real estate loans,
residential first mortgage loans and commercial equipment loans. These increases
were partially offset by decreases in construction and land development loans,
commercial loans and consumer loans.





The
allowance for loan losses increased $425,653 to $7,896,967 or 1.25% of loan
balances at June 30, 2010 from $7,471,314 or 1.20% of loan balances at December
31, 2009. Nonperforming loans as a percentage of total loans amounted to 1.90%
at June 30, 2010 compared to 3.09% at December 31, 2009.The Company had 26
nonperforming loans at June 30, 2010 of which 60% of nonperforming loan balances
were concentrated with three customers.The Company’s nonperforming
assets as a percentage of total assets, which includes nonperforming loans and
foreclosed real estate, increased from 2.48% at December 31, 2009 to 2.72% at
June 30, 2010, as the Company continues to collect on and resolve problem loans.
Management’s determination of the adequacy of the allowance is based on a
periodic evaluation of the portfolio with consideration given to: the overall
loss experience; current economic conditions; volume, growth and composition of
the loan portfolio; financial condition of the borrowers; and other relevant
factors that, in management’s judgment, warrant recognition in providing an
adequate allowance. Management believes that the allowance is adequate.
Additional loan information for prior years is presented in the Company’s Form
10-K for the year ended December 31, 2009.




27


The
following table summarizes changes in the allowance for loan losses for the
periods indicated.





Six Months Ended
                  
                  
                  Six Months EndedJune 30, 2010
                  
                  
                  June 30, 2009Beginning
      Balance
                  
                  $
                  7,471,314
                  
                  
                  $
                  5,145,673Add:Provision
      charged to operations
                  
                  
                  1,662,804
                  
                  
                  
                  1,462,373Recoveries
                  
                  
                  5,700
                  
                  
                  
                  -Less:Charge
      Offs
                  
                  
                  1,242,851
                  
                  
                  
                  226,998Balance
      at the end of the period
                  
                  $
                  7,896,967
                  
                  
                  $
                  6,381,048





The
Company incurred $1,242,851 in charge-offs for the six months ended June 30,
2010, which represented a total of $27,000 of consumer loans and equity lines,
$601,000 for construction and land development loans, $118,000 for commercial
real estate loans and $497,000 for commercial and commercial equipment
loans.





The
following table provides information with respect to our nonperforming loans at
the dates indicated.





Balances as of
                      
                      
                      Balances as ofJune 30, 2010
                      
                      
                      December 31, 2009Troubled
      debt restructurings (TDRs)
                      
                      $
                      17,450,676
                      
                      
                      $
                      11,601,215Nonperforming loansImpaired
      loans on which recognition of interest has been
    discontinued
                      
                      $
                      4,277,870
                      
                      
                      $
                      8,947,173Loans
      on which recognition of interest has been discontinued
                      
                      
                      7,752,113
                      
                      
                      
                      10,340,310Total
      nonperforming loans
                      
                      $
                      12,029,983
                      
                      
                      $
                      19,287,483Impaired loansTDRs
      and performing loans
                      
                      $
                      6,623,458
                      
                      
                      $
                      1,675,000Loans
      accounted for on a nonaccrual basis
                      
                      
                      4,277,870
                      
                      
                      
                      8,947,173Total
      impaired loans
                      
                      $
                      10,901,328
                      
                      
                      $
                      10,622,173Nonperforming
      loans to total loans
                      
                      
                      1.90
                      %
                      
                      
                      3.09
                      %Allowance
      for loan losses to nonperforming loans
                      
                      
                      65.64
                      %
                      
                      
                      38.74
                      %Nonperforming
      assets to total assets
                      
                      
                      2.72
                      %
                      
                      
                      2.48
                      %





At June
30, 2010 and December 31, 2009, impaired loans totaled $10,901,328 and
$10,622,173, respectively. Impaired loans include accruing loans that have been
restructured in the amount of $6,623,458 at June 30, 2010 and $1,675,000 at
December 31, 2009.  Impaired loans had specific allocations within the
allowance for loan losses or have been reduced by charge-offs to recoverable
values. Allocations of the allowance for loan losses relative to impaired loans
at June 30, 2010 and December 31, 2009 were $2,386,717 and $1,837,345,
respectively. Loans on which the recognition of interest has been discontinued,
which were not considered impaired under FASB ASC 820 amounted to $7,752,113 and
$10,340,310 at June 30, 2010 and December 31, 2009,
respectively.


28





Nonperforming loans by loan typeJune 30, 2010
                
                
                December 31, 2009Dollars
                
                
                Number of Loans
                
                
                Dollars
                
                
                Number of LoansReal
      Estate LoansCommercial
                
                $
                6,030,442
                
                
                
                7
                
                
                $
                6,366,672
                
                
                
                8Residential
      first mortgages
                
                
                2,000,365
                
                
                
                6
                
                
                
                338,806
                
                
                
                1Construction
      and land development
                
                
                1,392,019
                
                
                
                3
                
                
                
                9,504,414
                
                
                
                5Home
      equity and second mortgage
                
                
                173,578
                
                
                
                2
                
                
                
                -
                
                
                
                -Commercial
      loans
                
                
                2,266,565
                
                
                
                6
                
                
                
                2,192,308
                
                
                
                5Consumer
      loans
                
                
                505
                
                
                
                1
                
                
                
                22,884
                
                
                
                2Commercial
      equipment
                
                
                166,509
                
                
                
                1
                
                
                
                862,399
                
                
                
                3$
                12,029,983
                
                
                
                26
                
                
                $
                19,287,483
                
                
                
                24





As of
June 30, 2010, the largest dollar concentrations of nonperforming loans are
commercial real estate loans which have been impacted by economic conditions in
our local market mainly due to higher than expected vacancies in commercial
office space. Delinquencies in residential first mortgages have increased
primarily due to specific customer issues with unemployment and other
circumstances requiring the liquidation of family
assets.  Nonperforming construction and land development loans
decreased $8,112,395 during the six months ended June 30, 2010 as the Company
has resolved problem loans with foreclosures and workouts. Construction and land
development loans have been particularly affected by economic factors which have
slowed absorption of finished lots and homes.  Commercial equipment
loans have primarily decreased due to a charge-off of $468,000 and a loan
restructure. Other loan types have also been affected by the economic conditions
in our local and national markets. Management continues to monitor these loans
and is working to resolve these loans in a manner that will preserve the most
value for the Company.





June 30, 2010
                  
                  
                  December 31, 2009
                  
                  
                  $ change
                  
                  
                  % ChangeLiabilitiesDepositsNon-interest-bearing
      deposits
                  
                  $
                  72,957,088
                  
                  
                  $
                  70,001,444
                  
                  
                  $
                  2,955,644
                  
                  
                  
                  4.22
                  %Interest-bearing
      deposits
                  
                  
                  610,721,620
                  
                  
                  
                  570,417,345
                  
                  
                  
                  40,304,275
                  
                  
                  
                  7.07
                  %Total
      deposits
                  
                  
                  683,678,708
                  
                  
                  
                  640,418,789
                  
                  
                  
                  43,259,919
                  
                  
                  
                  6.75
                  %Short-term
      borrowings
                  
                  
                  141,317
                  
                  
                  
                  13,080,530
                  
                  
                  
                  (12,939,213
                  )
                  
                  
                  (98.92
                  )%Long-term
      debt
                  
                  
                  70,647,065
                  
                  
                  
                  75,669,630
                  
                  
                  
                  (5,022,565
                  )
                  
                  
                  (6.64
                  )%Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
                  
                  
                  12,000,000
                  
                  
                  
                  12,000,000
                  
                  
                  
                  -
                  
                  
                  
                  0.00
                  %Accrued
      expenses and other liabilities
                  
                  
                  5,811,189
                  
                  
                  
                  5,683,736
                  
                  
                  
                  127,453
                  
                  
                  
                  2.24
                  %Total
      Liabilities
                  
                  $
                  772,278,279
                  
                  
                  $
                  746,852,685
                  
                  
                  $
                  25,425,594
                  
                  
                  
                  3.40
                  %





Deposits
have increased $90,814,488, or 15.32%, since June 30, 2009. At June 30, 2010,
non-brokered deposits totaled $652,735,324 or 94.57% of total deposits. The
increases in total deposits are due to the Bank’s continuing efforts to increase
its market share through branch improvements and marketing efforts. Long-term
debt and short-term borrowings decreased by $17,961,778, or 20.24%, from
$88,750,160 at December 31, 2009 to $70,788,382 at June 30, 2010, as growing
retail deposits replaced debt. The increases in deposits were used to increase
the balances of cash and cash equivalents and investments, fund net loan growth
and reduce long and short-term debt.


29





June 30, 2010
                
                
                December 31, 2009
                
                
                $ change
                
                
                % ChangeStockholders'
      EquityPerpetual
      Preferred Stock, Series A
                
                $
                15,540,000
                
                
                $
                15,540,000
                
                
                $
                -
                
                
                
                0.00
                %Perpetual
      Preferred Stock, Series B
                
                
                777,000
                
                
                
                777,000
                
                
                
                -
                
                
                
                0.00
                %Common
      stock - par value
                
                
                29,863
                
                
                
                29,760
                
                
                
                103
                
                
                
                0.35
                %Additional
      paid in capital
                
                
                16,786,426
                
                
                
                16,754,627
                
                
                
                31,799
                
                
                
                0.19
                %Retained
      earnings
                
                
                35,974,812
                
                
                
                35,193,958
                
                
                
                780,854
                
                
                
                2.22
                %Accumulated
      other comprehensive gain (loss)
                
                
                491,091
                
                
                
                284,474
                
                
                
                206,617
                
                
                
                72.63
                %Unearned
      ESOP shares
                
                
                (325,873
                )
                
                
                (389,970
                )
                
                
                64,097
                
                
                
                (16.44
                )%Total
      Stockholders' Equity
                
                $
                69,273,319
                
                
                $
                68,189,849
                
                
                $
                1,083,470
                
                
                
                1.59
                %





The
change in stockholders’ equity was primarily due to net income of $2,400,508
offset by the payment of preferred stock dividends of $423,466 and common stock
dividends of $1,196,188. Common stockholders' equity of $52,956,319 resulted in
a book value of $17.73 per common share at June 30, 2010, an increase of $0.30
per share from December 31, 2009.





LIQUIDITY AND CAPITAL
RESOURCES





The
Company currently conducts no business other than holding the stock of the Bank
and paying interest on its subordinated debentures and preferred
stock.  Its primary uses of funds are for the payment of dividends on
common and preferred stock and the payment of interest and principal on
debentures.  The Company's principal sources of liquidity are cash on
hand and dividends received from the Bank. The Bank is subject to various
regulatory restrictions on the payment of dividends.





The
Bank’s principal sources of funds for investments and operations are net income,
deposits from its primary market area, principal and interest payments on loans,
proceeds from the sale of loans, advances and other borrowings, interest
received on investment securities and proceeds from the sale and maturity of
investment securities. Its principal funding commitments are the origination or
purchase of loans, the purchase of investment securities and the payment of
maturing deposits. Deposits are considered a primary source of funds supporting
the Bank’s lending and investment activities. The Bank also uses various
wholesale funding instruments including FHLB advances, which are required to be
supported by certain eligible loans held by the Bank. Under the terms of an
Agreement for Advances and Security Agreement with Blanket Floating Lien (the
“Agreement”), the Company maintained eligible collateral consisting of
one-to-four family residential first mortgage loans equal to 100% of its total
outstanding long and short-term Federal Home Loan Bank advances. During 2003 and
2004, the Bank entered into addendums to the Agreement that expanded the types
of eligible collateral under the Agreement to include certain commercial real
estate and second mortgage loans. These loans are subject to eligibility rules,
and eligible collateral values of the unpaid loan principal balances are
established at 90% of residential first mortgages, at 50% for commercial real
estate and at 40% for second mortgage loans. In addition, only 50% of total
collateral for Federal Home Loan Bank advances may consist of commercial real
estate loans. Additionally, the Bank has pledged its Federal Home Loan Bank
stock of $5,817,600 and securities with a carrying value of $38,745,000 as
additional collateral for its advances at June 30, 2010.





The Bank
is limited to total advances of up to 40% of assets or $337,000,000. At June 30,
2010, the Bank had filed collateral statements identifying collateral sufficient
to borrow $67,000,000 in addition to amounts already outstanding. In addition,
the Bank had additional collateral in safekeeping at the Federal Home Loan Bank
of Atlanta that had not been specifically pledged to the Federal Home Loan Bank
or for other purposes. This collateral was sufficient to provide an additional
$85,000,000 in borrowing capacity.  The Bank also has established a
short-term credit facility with the Federal Reserve Bank of Richmond under its
Borrower in Custody program. The Bank has segregated collateral sufficient to
draw $18,000,000 under this agreement. In addition, the Bank has established
short-term unsecured credit facilities with other commercial banks totaling
$12,000,000 at June 30, 2010. No amounts were outstanding under the Borrower in
Custody or short-term unsecured credit facilities at June 30, 2010.




30


The
Bank’s most liquid assets are cash and cash equivalents, which are cash on hand,
amounts due from financial institutions, federal funds sold, and money market
mutual funds. The levels of such assets are dependent on the Bank’s operating
financing and investment activities at any given time. The variations in levels
of cash and cash equivalents are influenced by deposit flows and anticipated
future deposit flows.





Cash,
cash equivalents, and interest-bearing deposits with banks as of June 30, 2010
totaled $16,932,524, an increase of $5,684,557, or 50.54%, from the December 31,
2009 total of $11,247,967.  The increase to cash was primarily due to
increases in deposits partially offset by funds used to pay down short-term
borrowings and long-term debt and net cash used for loan activities, as net
loans originated exceeded principal collected on loans. The Bank’s principal
sources of cash flows are its financing activities including deposits and
borrowings.  During the first six months of 2010, all financing
activities provided $23,774,486 in cash compared to $61,057,417 for the same
period in 2009. The decrease in cash provided of $37,282,931 or 61.06%, was
primarily due to a reduction in the net increase in deposits and an increase in
the use of cash to pay down short-term borrowings and long-term debt. Net
increases in deposits were reduced to $43,259,919 for the six months ended June
30, 2010 from $67,696,654 for the same period in the prior year. The pay down of
debt increased to $17,961,778 for the six months ended June 30, 2010 from
$5,902,056 for the same period in the prior year





Operating
activities provided cash of $2,852,598 in the first six months of 2010 compared
to $321,650 provided in the same period of 2009, an increase in cash provided of
$2,530,948. The increase in cash was primarily due to increases in net income, a
decrease in the difference between loans originated for resale and proceeds from
the sale of loans and decreases to accounts payable and accrued expenses
partially offset by decreases to cash from an increase to other
assets.





The
Bank’s principal use of cash has been in investments in loans, investment
securities and other assets. Investing activities used cash of $20,942,527 in
the first six months of 2010 compared to $48,477,759 of cash used in the same
period of 2009.  For the six months ended June 30, 2010, the primary
causes for the increase in cash used by investing activities were loan
originations exceeding principal repayments by $19,154,225 and net purchases
from security transactions of $1,345,645. For the six months ended June 30,
2009, the primary causes for the increase in cash used were investments in loans
exceeding principal repayments on loans and net purchases from security
transactions.




31


REGULATORY
MATTERS





The Bank
is subject to Federal Reserve Board capital requirements as well as statutory
capital requirements imposed under Maryland law.  To be categorized as
well-capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the table. The Company’s
and the Bank’s actual capital amounts and ratios at June 30, 2010 are presented
in the following table.





Actual
                    
                    
                    Required for Capital
                      Adequacy Purposes
                    
                    
                    To be Considered Well
                      Capitalized Under
                      Prompt
                      Corrective Action(in thousands)At June 30, 2010Total
      Capital (to risk weighted assets)The
      Company
                    
                    $
                    88,694
                    
                    
                    
                    13.19
                    %
                    
                    $
                    53,813
                    
                    
                    
                    8.00
                    %The
      Bank
                    
                    $
                    86,115
                    
                    
                    
                    12.84
                    %
                    
                    $
                    53,602
                    
                    
                    
                    8.00
                    %
                    
                    $
                    67,002
                    
                    
                    
                    10.00
                    %Tier
      1 Capital (to risk weighted assets)The
      Company
                    
                    $
                    80,782
                    
                    
                    
                    12.01
                    %
                    
                    $
                    26,906
                    
                    
                    
                    4.00
                    %The
      Bank
                    
                    $
                    78,203
                    
                    
                    
                    11.67
                    %
                    
                    $
                    26,801
                    
                    
                    
                    4.00
                    %
                    
                    $
                    40,201
                    
                    
                    
                    6.00
                    %Tier
      1 Capital (to average assets)The
      Company
                    
                    $
                    80,782
                    
                    
                    
                    9.79
                    %
                    
                    $
                    33,009
                    
                    
                    
                    4.00
                    %The
      Bank
                    
                    $
                    78,203
                    
                    
                    
                    9.50
                    %
                    
                    $
                    32,929
                    
                    
                    
                    4.00
                    %
                    
                    $
                    41,162
                    
                    
                    
                    5.00
                    %





CRITICAL
ACCOUNTING POLICIES





Critical
accounting policies are defined as those that involve significant judgments and
uncertainties, and could potentially result in materially different results
under different assumptions and conditions. The Company considers its
determination of the allowance for loan losses, the valuation of foreclosed real
estate and the valuation of deferred tax assets to be critical accounting
policies.





The
Company’s consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and the
general practices of the United States banking industry.  Application
of these principles requires management to make estimates, assumptions and
judgments that affect the amounts reported in the financial statements and
accompanying notes. These estimates, assumptions and judgments are based on
information available as of the date of the financial statements. Accordingly,
as this information changes, the financial statements could reflect different
estimates, assumptions and judgments. Certain policies inherently have a greater
reliance on the use of estimates, assumptions and judgments and as such have a
greater possibility of producing results that could be materially different than
originally reported.





Estimates,
assumptions and judgments are necessary when assets and liabilities are required
to be recorded at fair value, when a decline in the value of an asset not
carried on the financial statements at fair value warrants an impairment
write-down or valuation reserve to be established, or when an asset or liability
needs to be recorded contingent upon a future event. Carrying assets and
liabilities at fair value inherently results in more financial statement
volatility. The fair values and the information used to record valuation
adjustments for certain assets and liabilities are based either on quoted market
prices or are provided by other third-party sources, when
available.  When these sources are not available, management makes
estimates based upon what it considers to be the best available
information.





Allowance
for Loan Losses


The
allowance for loan losses is an estimate of the losses that may be sustained in
the loan portfolio. The allowance is based on two principles of accounting: (1)
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 450 “Contingencies,” which requires that losses be accrued when
they are probable of occurring and are estimable and (2) FASB ASC 310
“Receivables”, which requires that losses be accrued when it is probable that
the Company will not collect all principal and interest payments according to
the contractual terms of the loan. The loss, if any, is determined by the
difference between the loan balance and the value of collateral, the present
value of expected future cash flows and values observable in the secondary
markets.




32


The
allowance for loan loss balance is an estimate based upon management’s
evaluation of the loan portfolio.   The allowance is comprised of
a specific and a general component.  The specific component consists
of management’s evaluation of certain classified and non-accrual loans and their
underlying collateral. Management assesses the ability of the borrower to repay
the loan based upon all information available. Loans are examined to determine a
specific allowance based upon the borrower’s payment history, economic
conditions specific to the loan or borrower, and other factors that would impact
the borrower’s ability to repay the loan on its contractual
basis.  Depending on the assessment of the borrower’s ability to pay
and the type, condition and amount of collateral, management will establish an
allowance amount specific to the loan.





In
establishing the general component of the allowance, management analyzes
non-classified and non-impaired loans in the portfolio including changes in the
amount and type of loans.  Management also examines the Bank’s
historical loss experience (write-offs and recoveries) within each loan
category.  The state of the local and national economy is also
considered.   Based upon these factors, the Bank’s loan portfolio
is categorized and a loss factor is applied to each category.  These
loss factors may be higher or lower than the Bank’s actual recent average losses
in any particular loan category, particularly in loan categories that are
increasing or decreasing in size.  Based upon these factors, the Bank
will adjust the loan loss allowance by increasing or decreasing the provision
for loan losses.  Management has significant discretion in making the
judgments inherent in the determination of the allowance for loan losses,
including in connection with the valuation of collateral, a borrower’s prospects
of repayment and in establishing loss factors on the general component of the
allowance. Changes in loss factors will have a direct impact on the amount of
the provision and a corresponding effect on net income. Errors in management’s
perception and assessment of the global factors and their impact on the
portfolio could result in the allowance not being adequate to cover losses in
the portfolio, and may result in additional provisions or
charge-offs.





For
additional information regarding the allowance for loan losses, refer to Notes 1
and 5 of the Consolidated Financial Statements as presented in the Company’s
Form 10-K for the year ended December 31, 2009.





Foreclosed
Real Estate


The
Company maintains a valuation allowance on its foreclosed real
estate.  As with the allowance for loan losses, the valuation
allowance on foreclosed real estate is based on FASB ASC 450 “Contingencies” as
well as the accounting guidance on impairment of long-lived assets. These
statements require that the Company establish a valuation allowance when it has
determined that the carrying amount of a foreclosed asset exceeds its fair
value.  Fair value of a foreclosed asset is measured by the cash flows
expected to be realized from its subsequent disposition.  These cash
flows should be reduced for the costs of selling or otherwise disposing of the
asset.





In
estimating the cash flows from the sale of foreclosed real estate, management
must make significant assumptions regarding the timing and amount of cash flows.
For example, in cases where the real estate acquired is undeveloped land,
management must gather the best available evidence regarding the market value of
the property, including appraisals, cost estimates of development and broker
opinions.  Due to the highly subjective nature of this evidence, as
well as the limited market, long time periods involved and substantial risks,
cash flow estimates are highly subjective and subject to
change.  Errors regarding any aspect of the costs or proceeds of
developing, selling, or otherwise disposing of foreclosed real estate could
result in the allowance being inadequate to reduce carrying costs to fair value
and may require an additional provision for valuation allowances.





Deferred
Tax Assets


The
Company accounts for income taxes in accordance with FASB ASC 740, “Income
Taxes,” which requires that deferred tax assets and liabilities be recognized
using enacted tax rates for the effect of temporary differences between the book
and tax bases of recorded assets and liabilities. FASB ASC 740 requires that
deferred tax assets be reduced by a valuation allowance if it is more likely
than not that some portion or the entire deferred tax asset will not be
realized. At June 30, 2010, management determined that it is more likely than
not that the entire amount of such assets will be realized.




33


The
Company periodically evaluates the ability of the Company to realize the value
of its deferred tax asset.  If the Company were to determine that it
was not more likely than not that the Company would realize the full amount of
the deferred tax asset, it would establish a valuation allowance to reduce the
carrying value of the deferred tax asset to the amount it believes would be
realized.  The factors used to assess the likelihood of realization
are the company’s forecast of future taxable income and available tax-planning
strategies that could be implemented to realize the net deferred tax
assets.





Failure
to achieve forecasted taxable income might affect the ultimate realization of
the net deferred tax assets.  Factors that may affect the Company’s
ability to achieve sufficient forecasted taxable income include, but are not
limited to, the following: increased competition, a decline in net interest
margin, a loss of demand for financial services and national and regional
economic conditions.





The
Company’s provision for income taxes and the determination of the resulting
deferred tax assets and liabilities involve a significant amount of management
judgment and are based on the best information available at the time. The
Company operates within federal and state taxing jurisdictions and is subject to
audit in these jurisdictions.





For
additional information regarding the deferred tax assets, refer to Note 11 in
the Consolidated Financial Statements as presented in the Company’s Form 10-K
for the year ended December 31, 2009.





ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK





Not
applicable as the Company is a smaller reporting company.





ITEM
4.  CONTROLS AND PROCEDURES





As of the
end of the period covered by this report, management of the Company carried out
an evaluation, under the supervision and with the participation of the Company’s
principal executive officer and principal financial officer, of the
effectiveness of the Company’s disclosure controls and procedures. Based on this
evaluation, the Company’s principal executive officer and principal financial
officer concluded that the Company’s disclosure controls and procedures are
effective in ensuring that information required to be disclosed by the Company
in reports that it files or submits under the Securities Exchange Act of 1934,
as amended, (1) is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission’s rules and forms
and (2) is accumulated and communicated to the Company’s management, including
its principal executive and financial officers as appropriate to allow timely
decisions regarding required disclosure. It should be noted that the design of
the Company’s disclosure controls and procedures is based in part upon certain
reasonable assumptions about the likelihood of future events, and there can be
no reasonable assurance that any design of disclosure controls and procedures
will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote, but the Company’s principal executive and
financial officers have concluded that the Company’s disclosure controls and
procedures are, in fact, effective at a reasonable assurance level.





There
were no changes in the Company’s internal control over financial reporting
during the three months ended June 30, 2010 that have materially affected, or
are reasonable likely to materially affect, the Company’s internal control over
financial reporting.




34


PART II - OTHER
INFORMATION





Item 1 -
Legal Proceedings – The Company is not involved in any pending legal
proceedings. The Bank is not involved in any pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of
business.  Such routine legal proceedings, in the aggregate, are
believed by management to be immaterial to the financial condition and results
of operations of the Company.





Item 1A -
Risk Factors





Recently
enacted regulatory reform may have a material impact on our
operations.





On July
21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and
Consumer Protection Act (the “Dodd-Frank Act”).  The Dodd-Frank Act
restructures the regulation of depository institutions.  The
Dodd-Frank Act contains various provisions designed to enhance the regulation of
depository institutions and prevent the recurrence of a financial crisis such as
occurred in 2008-2009.  Also included is the creation of a new federal
agency to administer and enforce consumer and fair lending laws, a function that
is now performed by the depository institution regulators.  The
federal preemption of state laws currently accorded federally chartered
depository institutions will be reduced as well.  The full impact of
the Dodd-Frank Act on our business and operations will not be known for years
until regulations implementing the statute are written and
adopted.  The Dodd-Frank Act may have a material impact on our
operations, particularly through increased compliance costs resulting from
possible future consumer and fair lending regulations.





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Form
10-K, which could materially affect our business, financial condition or future
results.  The risks described in the Form 10-K are not the only risks
that we face.  Additional risks and uncertainties not currently known
to us or that we currently deem to be immaterial also may materially adversely
affect our business, financial condition and/or operating results.





Item 2 –
Unregistered Sales of Equity Securities and Use of Proceeds





(a)
            Not
      applicable





(b)
            Not
      applicable





(c)
            The
      Company did not repurchase any shares of common stock in the quarter ended
      June 30, 2010.  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 Relief 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.





Item 3 -
Default Upon Senior Securities - None




35


Item 4 -
[Removed and Reserved]





Item 5 -
Other Information - None





Item 6 -
Exhibits





Exhibit
31 - Rule 13a-14(a) Certifications


Exhibit
32 - Section 1350 Certifications


36





SIGNATURES





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





TRI-COUNTY
      FINANCIAL CORPORATIONDate:
              July
      29, 2010
              
              
              By:
              /s/
      Michael L. MiddletonMichael
      L. Middleton, President, ChiefExecutive
      Officer and Chairman of the BoardDate:
              July
      29, 2010
              
              
              By:
              /s/
      William J. PasenelliWilliam
      J. Pasenelli, Executive VicePresident
      and Chief Financial Officer




37