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 March 31, 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  May 4, 2010, the registrant had 2,990,520 shares of common stock
outstanding.








TRI-COUNTY
FINANCIAL CORPORATION





FORM
10-Q





INDEX





PagePART
      I - FINANCIAL INFORMATION
                      3Item
      1 – Financial Statements (Unaudited)Consolidated
      Balance Sheets - March 31, 2010and
      December 31, 2009
                      3Consolidated
      Statements of Income -Three
      Months Ended March 31, 2010 and 2009
                      4-5Consolidated
      Statements of Cash Flows -Three
      Months Ended March 31, 2010 and 2009
                      6-7Notes
      to Consolidated Financial Statements
                      8-20Item
      2 – Management’s Discussion and Analysis of Financial
      Conditionand
      Results of Operations
                      21-31Item
      3 – Quantitative and Qualitative Disclosures about Market
    Risk
                      31Item
      4 – Controls and Procedures
                      31PART
      II - OTHER INFORMATIONItem
      1 –    Legal Proceedings
                      31Item
      1A – Risk Factors
                      31Item
      2 –    Unregistered Sales of Equity Securities and Use of
      Proceeds
                      32Item
      3 –    Defaults Upon Senior Securities
                      32Item
      4 –    [Removed and Reserved]
                      32Item
      5 –    Other Information
                      32Item
      6 –    Exhibits
                      32SIGNATURES
                      33




2





PART
I FINANCIAL STATEMENTS


ITEM
I. FINANCIAL STATEMENTS


TRI-COUNTY
FINANCIAL CORPORATION


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





March 31, 2010
                
                
                December 31, 2009AssetsCash
      and due from banks
                
                $
                15,468,016
                
                
                $
                9,960,787Federal
      funds sold
                
                
                2,870,000
                
                
                
                695,000Interest-bearing
      deposits with banks
                
                
                2,582,422
                
                
                
                592,180Securities
      available for sale, at fair value
                
                
                49,873,539
                
                
                
                53,926,109Securities
      held to maturity, at amortized cost
                
                
                90,715,509
                
                
                
                90,287,803Federal
      Home Loan Bank and Federal Reserve Bank stock - at cost
                
                
                6,935,500
                
                
                
                6,935,500Loans
      held for sale
                
                
                80,000
                
                
                
                -
      -Loans
      receivable - net of allowance for loan losses of $7,245,630 and
      $7,471,314, respectively
                
                
                608,019,454
                
                
                
                616,592,976Premises
      and equipment, net
                
                
                11,884,097
                
                
                
                11,987,690Foreclosed
      real estate
                
                
                6,892,816
                
                
                
                922,934Accrued
      interest receivable
                
                
                2,911,991
                
                
                
                2,925,271Investment
      in bank owned life insurance
                
                
                11,048,142
                
                
                
                10,943,396Other
      assets
                
                
                9,893,575
                
                
                
                9,272,888Total
      Assets
                
                $
                819,175,061
                
                
                $
                815,042,534Liabilities
      and Stockholders' EquityLiabilitiesDepositsNon-interest-bearing
      deposits
                
                $
                58,505,941
                
                
                $
                70,001,444Interest-bearing
      deposits
                
                
                603,524,869
                
                
                
                570,417,345Total
      deposits
                
                
                662,030,810
                
                
                
                640,418,789Short-term
      borrowings
                
                
                251,096
                
                
                
                13,080,530Long-term
      debt
                
                
                70,658,404
                
                
                
                75,669,630Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
                
                
                12,000,000
                
                
                
                12,000,000Accrued
      expenses and other liabilities
                
                
                4,774,860
                
                
                
                5,683,736Total
      Liabilities
                
                
                749,715,170
                
                
                
                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 2,981,781
      and 2,976,046 shares, respectively
                
                
                29,818
                
                
                
                29,760Additional
      paid in capital
                
                
                16,786,015
                
                
                
                16,754,627Retained
      earnings
                
                
                36,346,648
                
                
                
                35,193,958Accumulated
      other comprehensive income
                
                
                382,929
                
                
                
                284,474Unearned
      ESOP shares
                
                
                (402,519
                )
                
                
                (389,970
                )Total
      Stockholders' Equity
                
                
                69,459,891
                
                
                
                68,189,849Total
      Liabilities and Stockholders' Equity
                
                $
                819,175,061
                
                
                $
                815,042,534


See
notes to consolidated financial statements


3





TRI-COUNTY
FINANCIAL CORPORATION


CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)


THREE
MONTHS ENDED MARCH 31, 2010 AND 2009


Three Months Ended March 31,2010
                
                
                2009INTEREST
      AND DIVIDEND INCOME:Loans,
      including fees
                
                $
                8,758,786
                
                
                $
                7,877,391Taxable
      interest and dividends on investment securities
                
                
                1,202,574
                
                
                
                1,325,495Interest
      on deposits with banks
                
                
                2,177
                
                
                
                190Total
      interest and dividend income
                
                
                9,963,537
                
                
                
                9,203,076INTEREST
      EXPENSES:Deposits
                
                
                2,819,281
                
                
                
                3,173,365Short-term
      borrowings
                
                
                10,854
                
                
                
                23,866Long-term
      debt
                
                
                648,766
                
                
                
                1,062,840Total
      interest expenses
                
                
                3,478,901
                
                
                
                4,260,071NET
      INTEREST INCOME
                
                
                6,484,636
                
                
                
                4,943,005PROVISION
      FOR LOAN LOSSES
                
                
                858,374
                
                
                
                532,885NET
      INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES
                
                
                5,626,262
                
                
                
                4,410,120




4





TRI-COUNTY
FINANCIAL CORPORATION


CONSOLIDATED
STATEMENTS OF INCOME (UNAUDITED)


THREE
MONTHS ENDED MARCH 31, 2010 AND 2009


(continued)
                
                Three Months Ended March 31,2010
                
                
                2009NONINTEREST
      INCOME:Loan
      appraisal, credit, and miscellaneous charges
                
                $
                170,412
                
                
                $
                115,678Income
      from bank owned life insurance
                
                
                104,746
                
                
                
                101,257Service
      charges
                
                
                404,044
                
                
                
                369,522Gain
      on sale of loans held for sale
                
                
                82,023
                
                
                
                - -Total
      noninterest income
                
                
                761,225
                
                
                
                586,457NONINTEREST
      EXPENSES:Salary
      and employee benefits
                
                
                2,362,534
                
                
                
                2,150,776Occupancy
      expense
                
                
                427,644
                
                
                
                404,527Advertising
                
                
                76,749
                
                
                
                130,112Data
      processing expense
                
                
                246,140
                
                
                
                226,175Professional
      fees
                
                
                158,839
                
                
                
                157,609Depreciation
      of furniture, fixtures, and equipment
                
                
                127,598
                
                
                
                148,142Telephone
      communications
                
                
                40,119
                
                
                
                33,275Office
      supplies
                
                
                45,746
                
                
                
                49,712FDIC
      Insurance
                
                
                352,106
                
                
                
                89,664Other
                
                
                400,934
                
                
                
                424,170Total
      noninterest expenses
                
                
                4,238,409
                
                
                
                3,814,162INCOME
      BEFORE INCOME TAXES
                
                
                2,149,078
                
                
                
                1,182,415Income
      tax expense
                
                
                784,654
                
                
                
                412,575NET
      INCOME
                
                
                1,364,424
                
                
                
                769,840Preferred
      stock dividends
                
                
                211,733
                
                
                
                211,733NET
      INCOME AVAILABLE TO COMMON SHAREHOLDERS
                
                $
                1,152,691
                
                
                $
                558,107INCOME
      PER COMMON SHAREBasic
                
                $
                0.39
                
                
                $
                0.19Diluted
                
                $
                0.38
                
                
                $
                0.19Dividends
      declared per common share
                
                $
                0.40
                
                
                $
                0.40





See
      notes to consolidated financial
statements


5





TRI-COUNTY
FINANCIAL CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)


THREE
MONTHS ENDED MARCH 31, 2010 AND 2009





Three Months Ended March 31,2010
                
                
                2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                
                $
                1,364,424
                
                
                $
                769,840Adjustments
      to reconcile net income to net cash provided by (used in) operating
      activities:Provision
      for loan losses
                
                
                858,374
                
                
                
                532,885Depreciation
      and amortization
                
                
                251,863
                
                
                
                287,453Loans
      originated for resale
                
                
                (3,144,500
                )
                
                
                (16,624,790
                )Proceeds
      from sale of loans originated for sale
                
                
                3,146,147
                
                
                
                -
      -Gain
      on sale of loans held for sale
                
                
                (82,023
                )
                
                
                -
      -Net
      amortization of premium/discount on investment securities
                
                
                (88,162
                )
                
                
                (23,561
                )Increase
      in cash surrender of bank owned life insurance
                
                
                (104,746
                )
                
                
                (101,257
                )Deferred
      income tax benefit
                
                
                (133,570
                )
                
                
                (338,331
                )Decrease
      in accrued interest receivable
                
                
                13,280
                
                
                
                97,906Increase
      in deferred loan fees
                
                
                (32,576
                )
                
                
                (45,180
                )Decrease
      in accounts payable, accrued expenses, other liabilities
                
                
                (908,876
                )
                
                
                (366,688
                )(Increase)
      decrease in other assets
                
                
                (537,836
                )
                
                
                487,920Net
      cash provided by (used in) operating activities
                
                
                601,799
                
                
                
                (15,323,803
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchase
      of investment securities available for sale
                
                
                (33,177
                )
                
                
                (2,765,018
                )Proceeds
      from redemption or principal payments of investment securities available
      for sale
                
                
                4,312,203
                
                
                
                138,530Purchase
      of investment securities held to maturity
                
                
                (5,999,899
                )
                
                
                -
      -Proceeds
      from maturities or principal payments of investment securities held to
      maturity
                
                
                5,583,073
                
                
                
                3,895,210Net
      decrease of FHLB and Federal Reserve stock
                
                
                -
      -
                
                
                
                13,800Loans
      originated or acquired
                
                
                (55,440,499
                )
                
                
                (57,178,523
                )Principal
      collected on loans
                
                
                57,218,716
                
                
                
                51,499,129Purchase
      of premises and equipment
                
                
                (148,270
                )
                
                
                (643,196
                )Net
      cash provided by (used in) investing activities
                
                
                5,492,147
                
                
                
                (5,040,068
                )




6





TRI-COUNTY
FINANCIAL CORPORATION


CONSOLIDATED
STATEMENTS OF CASH FLOWS (UNAUDITED)


THREE
MONTHS ENDED MARCH 31, 2010 AND 2009


(continued)
                
                Three Months Ended March 31,2010
                
                
                2009CASH
      FLOWS FROM FINANCING ACTIVITIES:Net
      increase in deposits
                
                
                21,612,021
                
                
                
                29,100,925Payments
      of long-term borrowings
                
                
                (5,011,226
                )
                
                
                (5,010,785
                )Net
      decrease in short term borrowings
                
                
                (12,829,434
                )
                
                
                (1,115,870
                )Exercise
      of stock options
                
                
                31,446
                
                
                
                60,775Excess
      tax benefits on stock-based compensation
                
                
                -
      -
                
                
                
                2,543Dividends
      Paid
                
                
                (211,733
                )
                
                
                (131,745
                )Net
      change in unearned ESOP shares
                
                
                (12,549
                )
                
                
                (64,319
                )Net
      cash provided by financing activities
                
                
                3,578,525
                
                
                
                22,841,524INCREASE
      IN CASH AND CASH EQUIVALENTS
                
                $
                9,672,471
                
                
                $
                2,477,653CASH
      AND CASH EQUIVALENTS - JANUARY 1
                
                
                11,247,967
                
                
                
                14,474,532CASH
      AND CASH EQUIVALENTS - MARCH 31
                
                $
                20,920,438
                
                
                $
                16,952,185SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION:Cash
      paid during the three months for:Interest
                
                $
                3,636,279
                
                
                $
                4,648,905Income
      taxes
                
                $
                283,000
                
                
                $
                - -Transfer
      from loans to foreclosed real estate
                
                $
                5,969,882
                
                
                $
                - -





See
      notes to consolidated financial
statements


7





NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)


THREE MONTHS ENDED MARCH 31,
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 months ended March
31, 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 three months ended March 31,
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 March 31, 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 March 31,
2010 measured at fair value on a recurring basis.




Fair Value MeasurementsAt March 31, 2010Using: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 GSEs
                      CMOs
                    
                    $
                    41,816,251
                    
                    
                    $
                    -
                    
                    
                    $
                    41,816,251
                    
                    
                    $
                    -MBS
                    
                    
                    4,301,095
                    
                    
                    
                    -
                    
                    
                    
                    4,301,095
                    
                    
                    
                    -Corporate
      equity securities
                    
                    
                    38,387
                    
                    
                    
                    -
                    
                    
                    
                    38,387
                    
                    
                    
                    -Bond
      mutual funds
                    
                    
                    3,717,806
                    
                    
                    
                    -
                    
                    
                    
                    3,717,806
                    
                    
                    
                    -Total
      securities available for sale
                    
                    $
                    49,873,539
                    
                    
                    $
                    -
                    
                    
                    $
                    49,873,539
                    
                    
                    $
                    -Loans
      held for sale
                    
                    $
                    80,000
                    
                    
                    $
                    -
                    
                    
                    $
                    80,000
                    
                    
                    $
                    -




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 March 31,
2010 are included in the table below:





Fair Value MeasurementsAt March 31, 2010Using: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
                      
                      $
                      3,005,985
                      
                      
                      $
                      -
                      
                      
                      $
                      3,005,985
                      
                      
                      $
                      -Residential
      construction
                      
                      
                      1,087,418
                      
                      
                      
                      -
                      
                      
                      
                      1,087,418
                      
                      
                      
                      -Commercial
      lines of credit
                      
                      
                      4,597,170
                      
                      
                      
                      -
                      
                      
                      
                      4,597,170
                      
                      
                      
                      -Total
      impaired loans
                      
                      $
                      8,690,573
                      
                      
                      $
                      -
                      
                      
                      $
                      8,690,573
                      
                      
                      $
                      -Foreclosed
      real estate
                      
                      $
                      6,892,816
                      
                      
                      $
                      -
                      
                      
                      $
                      6,892,816
                      
                      
                      $
                      -





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 March 31, 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 EndedMarch 31,2010
                          
                          
                          2009Net
      Income
                          
                          $
                          1,364,424
                          
                          
                          $
                          769,840Less:
      Dividends payable on preferred stock
                          
                          
                          (211,733
                          )
                          
                          
                          (211,733
                          )Net
      income available to common shareholders
                          
                          $
                          1,152,691
                          
                          
                          $
                          558,107Average
      number of common shares outstanding
                          
                          
                          2,978,388
                          
                          
                          
                          2,951,122Effect
      of dilutive options
                          
                          
                          21,125
                          
                          
                          
                          38,982Average
      number of shares used to calculate earnings per share
      outstanding
                          
                          
                          2,999,513
                          
                          
                          
                          2,990,104




11





6.
            COMPREHENSIVE
      INCOME


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





Three Months EndedMarch 31,2010
                          
                          
                          2009Net
      Income
                          
                          $
                          1,364,424
                          
                          
                          $
                          769,840Other
      comprehensive income net of tax:Net
      unrealized holding gains arising during period
                          
                          
                          98,455
                          
                          
                          
                          212,987Comprehensive
      income
                          
                          $
                          1,462,879
                          
                          
                          $
                          982,827





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 quarters ended March 31, 2010 or
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 March 31, 2010
and changes during the three-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
                    
                    
                    (8,441
                    )
                    
                    
                    7.89
                    
                    
                    
                    38,118Expired
                    
                    
                    -
                    
                    
                    
                    -Forfeited
                    
                    
                    (1
                    )
                    
                    
                    7.90Outstanding
      at March 31, 2010
                    
                    
                    320,801
                    
                    
                    $
                    16.26
                    
                    
                    $
                    283,826
                    
                    
                    
                    1.6Exercisable
      at March 31, 2010
                    
                    
                    320,801
                    
                    
                    $
                    16.26
                    
                    
                    $
                    283,826
                    
                    
                    
                    1.6





The
following table summarizes restricted stock award activity for the Company under
the 2006 Equity Plan for the three months ended March 31, 2010:





Number
                    of Shares
                  
                  
                  Weighted
                    Average Grant
                    Date Fair
                    ValueNonvested
      at January 1, 2010
                  
                  
                  5,360
                  
                  
                  $
                  11.90Granted
                  
                  
                  -
                  
                  
                  
                  -Vested
                  
                  
                  -
                  
                  
                  
                  -Cancelled
                  
                  
                  -
                  
                  
                  
                  -Nonvested
      at March 31, 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, along with the $155,000
for Capital Trust II’s common securities, used the proceeds from this issuance
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 warrants 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
warrants 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%. These warrants
were immediately exercised.




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




13




10.
            SECURITIES





March 31, 2010Amortized
                  
                  
                  Gross Unrealized
                  
                  
                  Gross Unrealized
                  
                  
                  EstimatedCost
                  
                  
                  Gains
                  
                  
                  Losses
                  
                  
                  Fair ValueSecurities
      available for saleAsset-backed
      securities issued by GSEs
                  
                  $
                  45,385,682
                  
                  
                  $
                  793,084
                  
                  
                  $
                  61,420
                  
                  
                  $
                  46,117,346Corporate
      equity securities
                  
                  
                  37,310
                  
                  
                  
                  1,260
                  
                  
                  
                  183
                  
                  
                  
                  38,387Bond
      mutual funds
                  
                  
                  3,601,227
                  
                  
                  
                  116,579
                  
                  
                  
                  -
                  
                  
                  
                  3,717,806Total
      securities available for sale
                  
                  $
                  49,024,219
                  
                  
                  $
                  910,923
                  
                  
                  $
                  61,603
                  
                  
                  $
                  49,873,539Securities
      held to maturityAsset-backed
      securities issued by:GSEs
                  
                  $
                  72,851,154
                  
                  
                  $
                  1,536,999
                  
                  
                  $
                  506,556
                  
                  
                  $
                  73,881,597Other
                  
                  
                  17,859,785
                  
                  
                  
                  43,705
                  
                  
                  
                  3,054,101
                  
                  
                  
                  14,849,389Total
      debt securities held to maturity
                  
                  
                  90,710,939
                  
                  
                  
                  1,580,704
                  
                  
                  
                  3,560,657
                  
                  
                  
                  88,730,986U.S.
      Government obligations
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Other
      investments
                  
                  
                  4,570
                  
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  4,570Total
      securities held to maturity
                  
                  $
                  90,715,509
                  
                  
                  $
                  1,580,704
                  
                  
                  $
                  3,560,657
                  
                  
                  $
                  88,735,556





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 March
31, 2010 certain other securities with a carrying value of $3,429,476 were
pledged to secure certain deposits. At March 31, 2010 securities with a carrying
value of $41,654,762 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 March 31, 2010 are as follows:





Less Than 12 Months
                    
                    
                    More Than 12 Months
                    
                    
                    TotalFairValue
                    
                    
                    Unrealized
                      Loss
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      Loss
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      LossAsset-backed
      securities issued by GSEs:
                    
                    $
                    8,204,202
                    
                    
                    $
                    61,420
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    8,204,202
                    
                    
                    $
                    61,420Corporate
      Equity Securities
                    
                    
                    127
                    
                    
                    
                    183
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    127
                    
                    
                    
                    183$
                    8,204,329
                    
                    
                    $
                    61,603
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    8,204,329
                    
                    
                    $
                    61,603





The
available for sale investment portfolio has a fair value of $49,873,539 of which
$8,204,329 of the securities have some unrealized losses from their amortized
cost. Of these securities, $8,204,202, 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.




The
asset-backed securities have an average duration of less than one year and are
guaranteed by their issuer as to credit risk. 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 March 31,
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 March 31, 2010 are as follows:





Less Than 12 Months
                    
                    
                    More Than 12 Months
                    
                    
                    TotalFairValue
                    
                    
                    Unrealized
                      Loss
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      Loss
                    
                    
                    Fair
                      Value
                    
                    
                    Unrealized
                      LossAsset-backed
      securities issued by GSEs:
                    
                    $
                    8,016,099
                    
                    
                    $
                    27,377
                    
                    
                    $
                    12,976,535
                    
                    
                    $
                    479,179
                    
                    
                    $
                    20,992,634
                    
                    
                    $
                    506,556Asset-backed
      securities issued by others:
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    11,720,264
                    
                    
                    
                    3,054,101
                    
                    
                    
                    11,720,264
                    
                    
                    
                    3,054,101$
                    8,016,099
                    
                    
                    $
                    27,377
                    
                    
                    $
                    24,696,799
                    
                    
                    $
                    3,533,280
                    
                    
                    $
                    32,712,898
                    
                    
                    $
                    3,560,657





The held
to maturity investment portfolio has an estimated fair value of $88,735,555, of
which $32,712,897 or 37%, of the securities have unrealized losses from their
amortized cost. Of these securities, $20,992,634 or 64%, are mortgage-backed
securities issued by GSEs and the remaining $11,720,264 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. They have an average duration of less than two years. The average
unrealized loss on GSE issued held to maturity securities is .70%. 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
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 under three
years. Total unrealized losses on the asset-backed securities issued by others
are $3,054,101 or 16%, of the amortized cost. 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 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 March 31,
2010:





Credit Rating
                        
                        AmountAAA
                        
                        $
                        127,369,468AA+
                        
                        
                        1,611,970AA-
                        
                        
                        2,463,216A-
                        
                        
                        1,218,479BBB+
                        
                        
                        161,722BBB
                        
                        
                        3,301,921B-
                        
                        
                        701,510Total
                        
                        $
                        136,828,286





There
were no sales of investments available for sale securities during the
three-month period ended March 31, 2010 or March 31, 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.
            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 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 715, “Compensation - Retirement Benefits” provides guidance applicable to
endorsement split-dollar life insurance arrangements, whereby the employer owns
and controls the insurance policy or policies, that are associated with a
postretirement benefit. ASC Topic 715 requires that for a split-dollar life
insurance arrangement an employer should recognize a liability for future
benefits if, in substance, a postretirement benefit plan exists or if the
arrangement is, in substance, an individual deferred compensation contract based
on the substantive agreement with the employee. The guidance is effective for
fiscal years beginning after December 15, 2007. The Company adopted the guidance
on January 1, 2008 and recognized a liability for future benefits in the amount
of $314,847 as a cumulative effect adjustment to retained
earnings.


16




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.




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.




17




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.




FASB ASC
TOPIC 825, “Financial Instruments” permits entities to choose to measure
eligible financial instruments at fair value at specified election dates. The
fair value measurement option (1) may be applied instrument by instrument with
certain exceptions, (2) is generally irrevocable and (3) is applied only to
entire instruments and not to portions of instruments. Unrealized gains and
losses on items for which the fair value measurement option has been elected
must be reported in earnings at each subsequent reporting date. The provisions
of ASC Topic 825 became effective for the Company on January 1,
2008.




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.


18





12.
            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.





March
      31, 2010
                      
                      
                      December
      31, 2009Estimated
                      
                      
                      
                      
                      
                      EstimatedCarrying
                      
                      
                      Fair
                      
                      
                      Carrying
                      
                      
                      FairAmount
                      
                      
                      Value
                      
                      
                      Amount
                      
                      
                      ValueAssetsCash
      and cash equivalents
                      
                      $
                      20,920,438
                      
                      
                      $
                      20,920,438
                      
                      
                      $
                      11,247,967
                      
                      
                      $
                      11,247,967Investment
      securities and stock in FHLBand
      FRB
                      
                      
                      147,524,548
                      
                      
                      
                      145,547,000
                      
                      
                      
                      151,149,412
                      
                      
                      
                      148,049,000Loans
      receivable, net
                      
                      
                      608,099,454
                      
                      
                      
                      604,698,000
                      
                      
                      
                      616,592,976
                      
                      
                      
                      610,998,000Foreclosed
      real estate
                      
                      
                      6,892,816
                      
                      
                      
                      6,892,816
                      
                      
                      
                      922,934
                      
                      
                      
                      922,934LiabilitiesSavings,
      NOW, and money market accounts
                      
                      
                      251,214,099
                      
                      
                      
                      251,214,099
                      
                      
                      
                      259,160,873
                      
                      
                      
                      246,139,000Time
      certificates
                      
                      
                      410,816,711
                      
                      
                      
                      415,804,000
                      
                      
                      
                      381,257,916
                      
                      
                      
                      384,848,000Long-term
      debt and other borrowed funds
                      
                      
                      70,909,500
                      
                      
                      
                      67,767,096
                      
                      
                      
                      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 March
31, 2010, the Company had outstanding loan commitments and standby letters of
credit of $7.7 million and $23.3 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.





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.


19




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  March 31, 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, 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, the payment of 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.  As a result of this emphasis, the Bank’s
percentage of assets invested in residential first mortgage lending has declined
since 1997. Conversely, targeted loan types have increased.  The Bank
has also seen an increase in transactional deposit accounts while the percentage
of total liabilities represented by certificates of deposits has
declined.  Management believes that these changes will enhance the
Bank’s overall long-term financial performance.





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.  Besides 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 has stayed at this level
since 2008.





SELECTED
      FINANCIAL DATAThree
      Months EndedMarch
      31,2010
                        
                        
                        2009Condensed
      Income StatementInterest
      and dividend income
                        
                        $
                        9,963,537
                        
                        
                        $
                        9,203,076Interest
      expense
                        
                        
                        3,478,901
                        
                        
                        
                        4,260,071Net
      interest income
                        
                        
                        6,484,636
                        
                        
                        
                        4,943,005Provision
      for loan loss
                        
                        
                        858,374
                        
                        
                        
                        532,885Noninterest
      income
                        
                        
                        761,225
                        
                        
                        
                        586,457Noninterest
      expense
                        
                        
                        4,238,409
                        
                        
                        
                        3,814,162Income
      before income taxes
                        
                        
                        2,149,078
                        
                        
                        
                        1,182,415Income
      taxes
                        
                        
                        784,654
                        
                        
                        
                        412,575Net
      income
                        
                        
                        1,364,424
                        
                        
                        
                        769,840Net
      income available to common shareholders
                        
                        
                        1,152,691
                        
                        
                        
                        558,107Per
      Common ShareBasic
      earnings
                        
                        $
                        0.39
                        
                        
                        $
                        0.19Diluted
      earnings
                        
                        $
                        0.38
                        
                        
                        $
                        0.19Book
      value
                        
                        $
                        17.82
                        
                        
                        $
                        17.43




RESULTS
OF OPERATIONS – THREE MONTHS ENDED MARCH 31, 2010





Net
income for the three-month period ended March 31, 2010 totaled $1,364,424 ($0.39
basic and $0.38 diluted earnings per common share), compared to $769,840 ($0.19
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 March 31, 2010 totaled $1,152,691 compared to $558,107 for the same period
in the prior year.  The increase of $594,584, or 77.23% for net income
or 106.54% for net income available to common shareholders, was primarily due to
increases in net interest income of $1,541,631 and noninterest income of
$174,768 offset by increases in noninterest expense of $424,247 and the
provision for loan loss of $325,489.


22




Three
      Months EndedMarch
      31,2010
                    
                    
                    2009
                    
                    
                    $
      Change
                    
                    
                    %
      ChangeInterest
      and dividend income
                    
                    $
                    9,963,537
                    
                    
                    $
                    9,203,076
                    
                    
                    $
                    760,461
                    
                    
                    
                    8.26
                    %Interest
      expense
                    
                    
                    3,478,901
                    
                    
                    
                    4,260,071
                    
                    
                    
                    (781,170
                    )
                    
                    
                    (18.34
                    )%Net
      interest income
                    
                    
                    6,484,636
                    
                    
                    
                    4,943,005
                    
                    
                    
                    1,541,631
                    
                    
                    
                    31.19
                    %Provision
      for loan losses
                    
                    
                    858,374
                    
                    
                    
                    532,885
                    
                    
                    
                    325,489
                    
                    
                    
                    61.08
                    %





Interest
income increased due to higher average balances in loans and investments, which
were partially offset by lower interest rate yields on loans and
investments.  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 increase in the provision for loan losses was
due to 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.





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





Three
      Months EndedMarch
      31,2010
                          
                          
                          2009
                          
                          
                          $
      Change
                          
                          
                          %
      ChangeNONINTEREST
      INCOME:Loan
      appraisal, credit, and miscellaneous charges
                          
                          $
                          170,412
                          
                          
                          $
                          115,678
                          
                          
                          $
                          54,734
                          
                          
                          
                          47.32
                          %Income
      from bank owned life insurance
                          
                          
                          104,746
                          
                          
                          
                          101,257
                          
                          
                          
                          3,489
                          
                          
                          
                          3.45
                          %Service
      charges
                          
                          
                          404,044
                          
                          
                          
                          369,522
                          
                          
                          
                          34,522
                          
                          
                          
                          9.34
                          %Gain
      on sale of  loans held for sale
                          
                          
                          82,023
                          
                          
                          
                          - -
                          
                          
                          
                          82,023
                          
                          
                          
                          n/aTotal
      noninterest income
                          
                          $
                          761,225
                          
                          
                          $
                          586,457
                          
                          
                          $
                          174,768
                          
                          
                          
                          29.80
                          %





Loan
appraisal, credit, and miscellaneous charges increased due to an increase in the
size of the loan portfolio compared to the same period in the prior year.
Service charge revenues have increased primarily due to increases of per item
charges on certain transactions and increases in total deposits. Gain on sale of
loans held for sale increased because the Bank sold $3,146,147 in loans in 2010
compared to no sales in the same period in the prior year.


23


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





Three
      Months EndedMarch
      31,2010
                          
                          
                          2009
                          
                          
                          $
      Change
                          
                          
                          %
      ChangeNONINTEREST
      EXPENSE:Salary
      and employee benefits
                          
                          $
                          2,362,534
                          
                          
                          $
                          2,150,776
                          
                          
                          $
                          211,758
                          
                          
                          
                          9.85
                          %Occupancy
      expense
                          
                          
                          427,644
                          
                          
                          
                          404,527
                          
                          
                          
                          23,117
                          
                          
                          
                          5.71
                          %Advertising
                          
                          
                          76,749
                          
                          
                          
                          130,112
                          
                          
                          
                          (53,363
                          )
                          
                          
                          (41.01
                          %)Data
      processing expense
                          
                          
                          246,140
                          
                          
                          
                          226,175
                          
                          
                          
                          19,965
                          
                          
                          
                          8.83
                          %Professional
      fees
                          
                          
                          158,839
                          
                          
                          
                          157,609
                          
                          
                          
                          1,230
                          
                          
                          
                          0.78
                          %Depreciation
      of furniture, fixtures, and equipment
                          
                          
                          127,598
                          
                          
                          
                          148,142
                          
                          
                          
                          (20,544
                          )
                          
                          
                          (13.87
                          %)Telephone
      communications
                          
                          
                          40,119
                          
                          
                          
                          33,275
                          
                          
                          
                          6,844
                          
                          
                          
                          20.57
                          %Office
      supplies
                          
                          
                          45,746
                          
                          
                          
                          49,712
                          
                          
                          
                          (3,966
                          )
                          
                          
                          (7.98
                          %)FDIC
      Insurance
                          
                          
                          352,106
                          
                          
                          
                          89,664
                          
                          
                          
                          262,442
                          
                          
                          
                          292.69
                          %Other
                          
                          
                          400,934
                          
                          
                          
                          424,170
                          
                          
                          
                          (23,236
                          )
                          
                          
                          (5.48
                          %)Total
      noninterest expenses
                          
                          $
                          4,238,409
                          
                          
                          $
                          3,814,162
                          
                          
                          $
                          424,247
                          
                          
                          
                          11.12
                          %





The
Company’s
noninterest expense increased by $424,247 or 11.12% from the comparable period
in the prior year due to costs associated with the asset growth of the Bank, the
rising cost of regulatory compliance and increasing FDIC assessments. Salary and
employee benefits expense increased as the Bank added additional employees to
support the Bank’s growth. FDIC
insurance expense reflects increased insurance assessment rates that started
during the third quarter of 2009. Advertising expense was less than the same
period in the prior year due mainly to marketing campaign expenses incurred in
the first quarter of 2009.





The
Company recorded income tax expense of $784,654 or 36.5%, of pretax earnings of
$2,149,078 for the three months ended March 31, 2010 compared with $412,575 or
34.9%, of pretax earnings of $1,182,415 for the three months ended March 31,
2009.





FINANCIAL
CONDITION


March
      31, 2010
                    
                    
                    December
      31, 2009
                    
                    
                    $
      Change
                    
                    
                    %
      ChangeAssetsCash
      and due from banks
                    
                    $
                    15,468,016
                    
                    
                    $
                    9,960,787
                    
                    
                    $
                    5,507,229
                    
                    
                    
                    55.29
                    %Federal
      funds sold
                    
                    
                    2,870,000
                    
                    
                    
                    695,000
                    
                    
                    
                    2,175,000
                    
                    
                    
                    312.95
                    %Interest-bearing
      deposits with banks
                    
                    
                    2,582,422
                    
                    
                    
                    592,180
                    
                    
                    
                    1,990,242
                    
                    
                    
                    336.09
                    %Securities
      available for sale, at fair value
                    
                    
                    49,873,539
                    
                    
                    
                    53,926,109
                    
                    
                    
                    (4,052,570
                    )
                    
                    
                    (7.52
                    )%Securities
      held to maturity, at amortized cost
                    
                    
                    90,715,509
                    
                    
                    
                    90,287,803
                    
                    
                    
                    427,706
                    
                    
                    
                    0.47
                    %Federal
      Home Loan Bank and Federal Reserve Bank stock - at
    cost
                    
                    
                    6,935,500
                    
                    
                    
                    6,935,500
                    
                    
                    
                    -
      -
                    
                    
                    
                    0.00
                    %Loans
      held for sale
                    
                    
                    80,000
                    
                    
                    
                    -
      -
                    
                    
                    
                    80,000
                    
                    
                    
                    n/aLoans
      receivable – net of allowance for loan losses of $7,245,630 and
      $7,471,314, respectively
                    
                    
                    608,019,454
                    
                    
                    
                    616,592,976
                    
                    
                    
                    (8,573,522
                    )
                    
                    
                    (1.39
                    )%Premises
      and equipment, net
                    
                    
                    11,884,097
                    
                    
                    
                    11,987,690
                    
                    
                    
                    (103,593
                    )
                    
                    
                    (0.86
                    )%Foreclosed
      real estate
                    
                    
                    6,892,816
                    
                    
                    
                    922,934
                    
                    
                    
                    5,969,882
                    
                    
                    
                    646.84
                    %Accrued
      interest receivable
                    
                    
                    2,911,991
                    
                    
                    
                    2,925,271
                    
                    
                    
                    (13,280
                    )
                    
                    
                    (0.45
                    )%Investment
      in bank owned life insurance
                    
                    
                    11,048,142
                    
                    
                    
                    10,943,396
                    
                    
                    
                    104,746
                    
                    
                    
                    0.96
                    %Other
      assets
                    
                    
                    9,893,575
                    
                    
                    
                    9,272,888
                    
                    
                    
                    620,687
                    
                    
                    
                    6.69
                    %Total
      Assets
                    
                    $
                    819,175,061
                    
                    
                    $
                    815,042,534
                    
                    
                    $
                    4,132,527
                    
                    
                    
                    0.51
                    %




24





The
Company increased some of its most liquid assets which are cash and due from
banks, 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
$8,573,522 decline in net loans outstanding was caused by seasonal fluctuations
in a few relationships and the resolution of a problem loan relationship that
moved a construction and land development loan into foreclosure. The increase in
foreclosed real estate is due to the resolution of the problem loan
relationship. The increase in other assets was primarily due to increases to
prepaid assets.





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





March
      31, 2010
                                              
                                              
                                              December
      31, 2009Amount
                                              
                                              
                                              %
                                              
                                              
                                              Amount
                                              
                                              
                                              %Real
      Estate LoansCommercial
                                              
                                              $
                                              303,412,489
                                              
                                              
                                              
                                              49.24
                                              %
                                              
                                              $
                                              292,987,963
                                              
                                              
                                              
                                              46.88
                                              %Residential
      first mortgages
                                              
                                              
                                              118,224,360
                                              
                                              
                                              
                                              19.19
                                              %
                                              
                                              
                                              116,225,733
                                              
                                              
                                              
                                              18.59
                                              %Construction
      and land development
                                              
                                              
                                              51,512,016
                                              
                                              
                                              
                                              8.36
                                              %
                                              
                                              
                                              62,509,558
                                              
                                              
                                              
                                              10.00
                                              %Home
      equity and second mortgage
                                              
                                              
                                              25,192,408
                                              
                                              
                                              
                                              4.09
                                              %
                                              
                                              
                                              25,133,155
                                              
                                              
                                              
                                              4.02
                                              %Commercial
      loans
                                              
                                              
                                              98,493,827
                                              
                                              
                                              
                                              15.98
                                              %
                                              
                                              
                                              108,657,910
                                              
                                              
                                              
                                              17.38
                                              %Consumer
      loans
                                              
                                              
                                              1,436,924
                                              
                                              
                                              
                                              0.23
                                              %
                                              
                                              
                                              1,607,765
                                              
                                              
                                              
                                              0.26
                                              %Commercial
      equipment
                                              
                                              
                                              17,934,933
                                              
                                              
                                              
                                              2.91
                                              %
                                              
                                              
                                              17,916,655
                                              
                                              
                                              
                                              2.87
                                              %616,206,957
                                              
                                              
                                              
                                              100.00
                                              %
                                              
                                              
                                              625,038,739
                                              
                                              
                                              
                                              100.00
                                              %Less:Deferred
      loan fees
                                              
                                              
                                              941,873
                                              
                                              
                                              
                                              0.15
                                              %
                                              
                                              
                                              974,449
                                              
                                              
                                              
                                              0.16
                                              %Allowance
      for loan loss
                                              
                                              
                                              7,245,630
                                              
                                              
                                              
                                              1.18
                                              %
                                              
                                              
                                              7,471,314
                                              
                                              
                                              
                                              1.20
                                              %8,187,503
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              8,445,763$
                                              608,019,454
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              616,592,976





The
allowance for loan losses decreased $225,684 to $7,245,630 or 1.18% of loan
balances at March 31, 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 2.29% at March 31, 2010 compared to 3.09% at December 31, 2009. The Company
continues to have a high quality loan portfolio with 89.91% of its nonperforming
loans concentrated among four customers at March 31, 2010. 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.





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





Three
      Months Ended
                    
                    
                    Three
      Months EndedMarch
      31, 2010
                    
                    
                    March
      31, 2009Beginning
      Balance
                    
                    $
                    7,471,314
                    
                    
                    $
                    5,145,673Add:Provision
      charged to operations
                    
                    
                    858,375
                    
                    
                    
                    532,885Recoveries
                    
                    
                    3,200
                    
                    
                    
                    -
      -Less:Charge
      Offs
                    
                    
                    1,087,259
                    
                    
                    
                    11,355Balance
      at the end of the period
                    
                    $
                    7,245,630
                    
                    
                    $
                    5,667,203




25





The
Company incurred $1,087,259 in charge offs for the three months ended March
31,2010 which represented a total of $28,894 of consumer loans and equity lines,
$601,122 for a construction and land development loan moved into foreclosure and
$457,243 for three commercial loans.





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





Balances
      as of
                          
                          
                          Balances
      as ofMarch
      31, 2010
                          
                          
                          December
      31, 2009Restructured
      Loans
                          
                          $
                          12,414,791
                          
                          
                          $
                          11,601,215Nonperforming loansImpaired
      loans on which recognition of interest has been
    discontinued
                          
                          $
                          4,455,460
                          
                          
                          $
                          8,947,173Loans
      on which recognition of interest has been discontinued
                          
                          
                          9,677,096
                          
                          
                          
                          10,340,310Total
      nonperforming loans
                          
                          $
                          14,132,556
                          
                          
                          $
                          19,287,483Impaired loansRestructured
      loans and specific identification
                          
                          $
                          5,972,458
                          
                          
                          $
                          1,675,000Loans
      accounted for on a nonaccrual basis
                          
                          
                          4,455,460
                          
                          
                          
                          8,947,173Total
      impaired loans
                          
                          $
                          10,427,918
                          
                          
                          $
                          10,622,173Nonperforming
      loans to total loans
                          
                          
                          2.29
                          %
                          
                          
                          3.09
                          %Allowance
      for loan losses to non performing loans
                          
                          
                          51.27
                          %
                          
                          
                          38.74
                          %





At March
31, 2010 and December 31, 2009, impaired loans totaled $10,427,918 and
$10,622,173, respectively. Impaired loans include accruing loans that have been
restructured in the amount of $5,972,458 at March 31, 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 March 31, 2010 and December 31, 2009 were $1,737,345 and $1,837,345,
respectively. Loans on which the recognition of interest has been discontinued,
which were not considered impaired, amounted to $9,677,096 and $10,340,310 at
March 31, 2010 and December 31, 2009, respectively.





The
largest dollar concentration of nonperforming loans is in the construction and
land development portfolio loans, which has been particularly affected by recent
economic factors which have slowed absorption of finished lots and homes. 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 to preserve the most value for the
Company.





Nonperforming loans by loan
      typeMarch
      31, 2010
                  
                  
                  December
      31, 2009Dollars
                  
                  
                  Number
      of Loans
                  
                  
                  Dollars
                  
                  
                  Number
      of LoansReal
      Estate LoansCommercial
                  
                  $
                  5,223,648
                  
                  
                  
                  6
                  
                  
                  $
                  6,366,672
                  
                  
                  
                  8Residential
      first mortgages
                  
                  
                  734,691
                  
                  
                  
                  3
                  
                  
                  
                  338,806
                  
                  
                  
                  1Construction
      and land development
                  
                  
                  5,532,019
                  
                  
                  
                  4
                  
                  
                  
                  9,504,414
                  
                  
                  
                  5Home
      equity and second mortgage
                  
                  
                  -
      -
                  
                  
                  
                  -
      -
                  
                  
                  
                  -
      -
                  
                  
                  
                  -
      -Commercial
      lines of credit
                  
                  
                  2,263,717
                  
                  
                  
                  6
                  
                  
                  
                  2,192,308
                  
                  
                  
                  5Consumer
      loans
                  
                  
                  128,112
                  
                  
                  
                  4
                  
                  
                  
                  22,884
                  
                  
                  
                  2Commercial
      equipment
                  
                  
                  250,369
                  
                  
                  
                  2
                  
                  
                  
                  862,399
                  
                  
                  
                  3$
                  14,132,556
                  
                  
                  
                  25
                  
                  
                  $
                  19,287,483
                  
                  
                  
                  24




26




Liabilities
                  
                  March
      31, 2010
                  
                  
                  December
      31, 2009
                  
                  
                  $
      Change
                  
                  
                  %
      ChangeDepositsNon-interest-bearing
      deposits
                  
                  $
                  58,505,941
                  
                  
                  $
                  70,001,444
                  
                  
                  $
                  (11,495,503
                  )
                  
                  
                  (16.42)%Interest-bearing
      deposits
                  
                  
                  603,524,869
                  
                  
                  
                  570,417,345
                  
                  
                  
                  33,107,524
                  
                  
                  
                  5.80%Total
      deposits
                  
                  
                  662,030,810
                  
                  
                  
                  640,418,789
                  
                  
                  
                  21,612,021
                  
                  
                  
                  3.37%Short-term
      borrowings
                  
                  
                  251,096
                  
                  
                  
                  13,080,530
                  
                  
                  
                  (12,829,434
                  )
                  
                  
                  (98.08)%Long-term
      debt
                  
                  
                  70,658,404
                  
                  
                  
                  75,669,630
                  
                  
                  
                  (5,011,226
                  )
                  
                  
                  (6.62)%Subordinated
      debentures
                  
                  
                  12,000,000
                  
                  
                  
                  12,000,000
                  
                  
                  
                  -
      -
                  
                  
                  
                  0.00%Accrued
      expenses and other liabilities
                  
                  
                  4,774,860
                  
                  
                  
                  5,683,736
                  
                  
                  
                  (908,876
                  )
                  
                  
                  (15.99)%Total
      Liabilities
                  
                  $
                  749,715,170
                  
                  
                  $
                  746,852,685
                  
                  
                  $
                  2,862,485
                  
                  
                  
                  0.38%





Total
deposits increased $21,612,021 or 3.37%, to $662,030,810 at March 31, 2010 from
$640,418,789 at December 31, 2009. Deposits have increased $107,762,319 or
19.44%, since March 31, 2009. For the three month period ended March 31, 2010,
deposit balance increases in interest bearing certificates of deposits, savings
and money market accounts were partially offset by decreases in checking and
noninterest checking accounts. 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 $17,840,660 or 20.10%, from $88,750,160 at December 31, 2009 to
$70,909,500 at March 31, 2010, as growing retail deposits replaced wholesale
funds. The increases in deposits were used to increase the balances of cash and
cash equivalents and to reduce long and short-term debt.





Stockholders’
      Equity
                      
                      March
      31, 2010
                      
                      
                      December
      31, 2009
                      
                      
                      $
      Change
                      
                      
                      %
      ChangePerpetual
      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
                      
                      
                      29,818
                      
                      
                      
                      29,760
                      
                      
                      
                      58
                      
                      
                      
                      0.19%Additional
      paid in capital
                      
                      
                      16,786,015
                      
                      
                      
                      16,754,627
                      
                      
                      
                      31,388
                      
                      
                      
                      0.19%Retained
      earnings
                      
                      
                      36,346,648
                      
                      
                      
                      35,193,958
                      
                      
                      
                      1,152,690
                      
                      
                      
                      3.28%Accumulated
      other comprehensive income
                      
                      
                      382,929
                      
                      
                      
                      284,474
                      
                      
                      
                      98,455
                      
                      
                      
                      34.61%Unearned
      ESOP shares
                      
                      
                      (402,519
                      )
                      
                      
                      (389,970
                      )
                      
                      
                      (12,549
                      )
                      
                      
                      3.22%Total
      Stockholders’ Equity
                      
                      $
                      69,459,891
                      
                      
                      $
                      68,189,849
                      
                      
                      $
                      1,270,042
                      
                      
                      
                      1.86%





Retained
earnings increased because of earnings offset by the payment of dividends on
preferred stock. Book value per common share increased from $17.43 per common
share at December 31, 2009 to $17.82 per common share at March 31,
2010.




27


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 for 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 is 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 $41,655,000 as
additional collateral for its advances at March 31, 2010.





The Bank
is limited to total advances of up to 40% of assets or $328,000,000. At March
31, 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. This collateral was sufficient to provide an additional $80,000,000
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
$20,000,000 under this agreement. In addition, the Bank has established
short-term unsecured credit facilities with other commercial banks totaling
$12,000,000 at March 31, 2010. No amounts were outstanding under the Borrower in
Custody or commercial lines at March 31, 2010.





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 March 31, 2010
totaled $20,920,438, an increase of $9,672,471, or 85.99%, from the December 31,
2009 total of $11,247,967.  This increase was due to an increase in
deposits and redemption of AFS securities offset by funds used to pay down
short-term borrowings and long-term debt.  The Bank’s principal
sources of cash flows are its financing activities including deposits and
borrowings.  During the first three months of 2010, all financing
activities provided $3,578,525 in cash compared to $22,841,524 for the same
period in 2009. The decrease in cash provided of $19,262,999 or 84.33%, 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 $21,612,021 for the three months ended
March 31, 2010 from $29,100,925 for the same period in the prior year. The pay
down of debt increased to $17,840,660 for the three months ended March 31, 2010
from $6,126,655 for the same period in the prior year





Operating
activities provided cash of $601,799 in the first three months of 2010 compared
to $15,323,803 used in the same period of 2009. The change was caused primarily
by the $16,624,790 of loans originated for resale for the three months ended
March 31, 2009. For the three months ended March 31, 2010, loans originated for
resale were offset by proceeds from the sale of the loans.


28




Investing
activities provided cash of $5,492,147 in the first three months of 2010
compared to $5,040,068 of cash used in the same period of 2009.  For
the three months ended March 31, 2010, the primary causes for the increase in
cash provided by investing activities were principal repayments of loans
exceeding loan originations by $1,778,217 and net proceeds from security
transactions of $3,862,200. For the three months ended March 31, 2009, the
primary causes for the use of cash were investments in loans exceeding principal
repayments on loans and net proceeds from security transactions.





REGULATORY
MATTERS





The Bank
is subject to Federal Reserve Board capital requirements as well as statutory
capital requirements imposed under Maryland law.  At March 31, 2010,
the Bank’s tangible, leverage and risk-based capital ratios were 9.51%, 11.77%
and 12.88%, respectively.  These levels are in excess of the required
4.0%, 4.0% and 8.0% ratios required by the Federal Reserve Board as well as the
5.0%, 6.0%, and 10% ratios required to be considered well
capitalized.  At March 31, 2010, the Company’s tangible, leverage and
risk-based capital ratios were 10.00%, 12.32% and 13.43%,
respectively.  These levels are also in excess of the 4.0%, 4.0% and
8.0% ratios required by the Federal Reserve Board as well as the 5.0%, 6.0%, and
10% ratios required to be considered well capitalized.





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.


29





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 March 31, 2010, management determined that it is more likely than
not that the entire amount of such assets will be realized.





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.


30




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 March 31, 2010 that have materially affected, or
are reasonable likely to materially affect, the Company’s internal control over
financial reporting.





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.  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.


31





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
      March 31, 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 Repurchase Program, prior to the earlier of
      (a) December 19, 2018 or (b) the date on which the
      Series A preferred stock and the Series B preferred stock has
      been redeemed in full or the Treasury has transferred all of the
      Series A preferred stock and the Series B preferred stock to
      non-affiliates, the Company, without the consent of the Treasury, cannot
      repurchase any shares of its common stock or other capital stock or equity
      securities or trust preferred securities. These repurchase restrictions do
      not apply in certain limited circumstances, including the repurchase of
      common stock in connection with the administration of any employee benefit
      plan in the ordinary course of business and consistent with past practice.
      In addition, during the period beginning on December 19, 2018 and
      ending on the date on which the Series A preferred stock and the
      Series B preferred stock have been redeemed in full or the Treasury
      has transferred all of the Series A preferred stock and the
      Series B preferred stock to non-affiliates, the Company cannot
      repurchase any shares of its common stock or other capital stock or equity
      securities or trust preferred securities without the consent of the
      Treasury.





Item 3 -
Default Upon Senior Securities - None





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




32




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:
      May 7,
2010
                  By:
                  /s/
      Michael L. MiddletonMichael
      L. Middleton, President, Chief
                    Executive
      Officer and Chairman of the
                    BoardDate:
      May 7,
2010
                  By:
                  /s/
      William J. PasenelliWilliam
      J. Pasenelli, Executive VicePresident
      and Chief Financial
Officer




33