EXHIBIT
13




ANNUAL
REPORT TO STOCKHOLDERS







[LETTER
HEAD OF TRI-COUNTY FINANCIAL CORPORATION]
  Dear
Shareholder:
 
 I am
pleased to report to you the operating results of Tri-County Financial
Corporation and its subsidiary, Community Bank of Tri-County for the year ended
December 31, 2009.  During 2009, while the banking industry and U.S.
economy experienced stress at historic levels and in the face of extremely low
interest rates, your company remained profitable in every
quarter.  The ability to follow the Company’s strategic plan while
achieving great progress in many critical areas is significant for our
shareholders.  For the year ended December 31, 2009, net income
decreased to $2,867,090 from $3,815,332 for the previous
year.  Diluted earnings per share decreased to $0.68 from $1.29 in the
previous year.  This reduction reflects the cost of the preferred
stock issued through the U.S. Treasury’s Capital Purchase Program (CPP) and the
impact of economic conditions, which led to a robust increase in the provision
for loan losses.  Your Company, due to its operational success during
this challenging year, declared a cash dividend of $0.40 per share payable in
April 2010.
 
 One of
the strategic objectives for 2009 was to responsibly deploy the $15,540,000 in
proceeds received from the CPP preferred stock issued in December
2008.  To do so, the Bank greatly enhanced its relationship banking
efforts and acquired new deposits of $115,251,223 for an increase of
21.9%.  Of that growth, over 99% were retail deposits.  This
put the Bank firmly in place as the community banking leader in Southern
Maryland and third place for overall deposit share of the
market.  That growth funded over $274,000,000 in new loans to increase
the net loan portfolio by $73,615,838 or 13.6%.
 
 Another
strategic objective was to maintain a strong capital position.  With
the impressive growth in assets, deposits and loans, our capital position
remains strong.  At December 31, 2009, the average equity to average
assets ratio was 10.03% and the risk-based capital ratio was
13.46%.  Both of these capital ratios are in excess of all regulatory
capital requirements.  This level of excess capital will support
future growth over a multi-year time horizon.
 
 During
2009, loan quality remained strong but non-performing assets as a percent of
loans outstanding increased from the historically very low rate to near the
level of our peer banks, according to the FDIC.  The increase in
non-performing loans was due to local economic conditions.  Loan
charge-offs also increased in 2009 but remained below peer
ratios.  The bulk of our non-performing loans are commercial real
estate loans and over 91%, or $17.7 million, is concentrated among just four
customers.  Those loans are in workout or foreclosure.  Our
residential loan portfolio continues to perform extremely well.
 
 Another
strategic objective for 2009 was to increase our net interest
income.  Through a combination of increased revenues from earning
asset growth and reductions in the overall cost of funding, we were able to
achieve an increase in net interest income of $2,498,279 for the
year.
 
 While the
recession was declared officially over in October of last year, the economic
impact on our local market continues to linger.  Fortunately for our
Company, the Southern Maryland market appears to be recovering more rapidly than
many areas of the country.  Over the last year, we continued our flow
of credit and deposit services when many larger financial institutions
significantly reduced support of the market.  Our objective for the
current year is to diligently pursue a return of the Company back to its recent
performance trends.  With the continued advocacy of our shareholders,
your Board of Directors and management will be able to support Southern
Maryland’s recovery as we strive for normalcy in our economic
activities.
 
 Yours
truly,
 
 
 Michael
L. Middleton
 Chairman
of the Board







Management’s
Discussion and Analysis
 FORWARD-LOOKING
STATEMENTS
  This
annual report contains forward-looking statements that are based on assumptions
and may describe future plans, strategies and expectations of Tri-County
Financial Corporation (the “Company”) and Community Bank of Tri-County (the
“Bank”).  These forward-looking statements are generally identified by
use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,”
“project” or similar expressions.
 
 The
Company and the Bank’s ability to predict results or the actual effect of future
plans or strategies is inherently uncertain.  Factors that could have
a material adverse effect on the operations of the Company and its subsidiaries
include, but are not limited to, changes in interest rates, national and
regional economic conditions, legislative and regulatory changes, monetary and
fiscal policies of the U.S. government, including policies of the U.S. Treasury
and the Federal Reserve Board, the quality and composition of the loan or
investment portfolios, demand for loan products, deposit flows, competition,
demand for financial services in the Company and the Bank’s market area, changes
in real estate market values in the Company and the Bank’s market area, and
changes in relevant accounting principles and guidelines. These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such statements.  Except as
required by applicable law or regulation, the Company does not undertake, and
specifically disclaims any obligation, to release publicly the result of any
revisions that may be made to any forward-looking statements to reflect events
or circumstances after the date of the statements or to reflect the occurrence
of anticipated or unanticipated events.
  MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
 RESULTS
OF OPERATIONS
  OVERVIEW
  Since its
conversion to a commercial bank charter in 1997, the Bank has sought to increase
total assets as well as certain targeted loan types. The Bank believes that its
ability to offer fast, flexible and local decision-making will continue to
attract significant new loans and enhance asset growth.  The Bank’s
targeted marketing is also directed towards increasing its balances of consumer
and business transaction deposit accounts. The Bank believes that increases in
these account types will lessen the Bank’s dependence on higher-costing
deposits, such as certificates of deposit and borrowings to fund loan
growth.  Although management believes that this strategy will increase
financial performance over time, it recognizes that increasing the balances of
certain products, such as commercial lending and transaction accounts, will also
increase the Bank’s noninterest expense. It also recognizes that certain lending
and deposit products also increase the possibility of losses from credit and
other risks.
 
 In
December 2008, the Company elected to participate in the Capital Purchase
Program (“CPP”) of the United States Treasury in order to better serve its
market in Southern Maryland. As part of the transaction, the Company received
$15.5 million from the U.S. Department of the Treasury in exchange for 15,540
shares of preferred stock, which carries a 5% annual dividend yield for five
years, and 9% thereafter.  In addition, the U.S. Treasury also
exercised warrants under which it purchased an additional 777 shares of
preferred stock, which carries a 9% annual dividend yield.  The
Company has, and intends to continue to use the additional capital to pursue
growth opportunities in line with its strategic initiatives and to increase its
lending activities in its market.  For more details on the CPP
preferred stock see Note 18 of our consolidated financial
statements.
 
 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.
  1
  Management’s
Discussion and Analysis
 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.
 
 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. At December 31, 2009, the allowance for loan losses
was $7,471,314 or 1.2% of total loans. An increase or decrease in the allowance
could result in a charge or credit to income before income taxes that materially
impacts earnings. For additional information regarding the allowance for loan
losses, refer to Notes 1 and 5 to the consolidated financial statements and the
discussion under the caption “Provision for Loan Losses” below.
  2
  Management’s
Discussion and Analysis
 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
December 31, 2009 and 2008, the Company had deferred tax assets in excess of
deferred tax liabilities of $4,364,189 and $2,822,155, respectively.  At
December 31, 2009 and 2008, 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.
  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 margins, a loss
of market share 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 to the consolidated financial
statements.
  3
  Management’s
Discussion and Analysis
 COMPARISON
OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009 AND
2008
 
 General
 For the
year ended December 31, 2009, the Company reported consolidated net income of
$2,867,090 ($0.68 basic and $0.68 diluted earnings per common share) compared to
consolidated net income of $3,815,332 ($1.29 basic and $1.24 diluted earnings
per common share) for the year ended December 31, 2008. The decrease in net
income for 2009 was primarily attributable to increases in the provision for
loan losses and noninterest expenses. These were partially offset by an increase
in net interest income and a modest increase in noninterest income. Earnings per
share were affected in 2009 by a full year of preferred stock dividends (See
Note 18 to the consolidated financial statements).
 
 Net
Interest Income
 The
primary component of the Company’s net income is its net interest income, which
is the difference between income earned on assets and interest paid on the
deposits and borrowings used to fund them.  Net interest income is
affected by the spread between the yields earned on the Company’s
interest-earning assets and the rates paid on interest-bearing liabilities as
well as the relative amounts of such assets and liabilities. Net interest
income, divided by average interest-earning assets, represents the Company’s net
interest margin.
 
 Net
interest income for the year ended December 31, 2009 was $21,721,225 compared to
$19,222,946 for the year ended December 31, 2008. The $2,498,279 increase was
due to an increase in interest income of $629,596 and a decrease in interest
expense of $1,868,683. Changes in the components of net interest income due to
changes in average balances of assets and liabilities and to changes caused by
changes in interest rates are presented in the following rate volume
analysis.
 
 During
2009, interest income increased due to higher average asset balances offset by
lower rates earned on interest earning assets. The lower rates on assets were
primarily the result of lower rates earned on loans tied to the prime rate as
the prime rate decreased in the fourth quarter of 2008 and remained at a low
level for the balance of 2009.  In addition, as treasury rates
decreased in 2009 compared with 2008, the Company’s securities portfolio average
yields also declined.
 
 Interest
expense decreased as a result of lower interest rates on certain deposit types,
partially offset by a higher average balance of interest-bearing liabilities.
The lower deposit rates were primarily in shorter-term interest bearing deposits
such as short-term certificates of deposit and money market deposit
accounts.  The rates on these accounts tend to decrease when the
federal funds target rate decreases. In the fourth quarter of 2008 and the first
quarter of 2009, due largely to the financial crisis, market pressures on
deposit rates kept deposit rates artificially high. In the second half of 2009
the Company’s interest-bearing liabilities, such as savings accounts, returned
to more traditional market rates.
 
 For the
year ended December 31, 2009, the Company’s overall interest rate spread and net
interest margin decreased five basis points and 11 basis points,
respectively.  By the end of the third quarter, the trend of a
decreasing interest rate spread and net interest margin reversed as decreases in
the rates of the Company’s interest-bearing liabilities decreased at a faster
rate than rates of interest earning assets.
  4
  Management’s
Discussion and Analysis
  The
following table presents information on the average balances of the Company’s
interest-earning assets and interest-bearing liabilities and interest earned or
paid thereon for the past two fiscal years.
 
 2009
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        2008Average
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        AverageAverage
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Yield/
                                                        
                                                        
                                                        Average
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        Yield/dollars
      in thousands
                                                        
                                                        Balance
                                                        
                                                        
                                                        Interest
                                                        
                                                        
                                                        Cost
                                                        
                                                        
                                                        Balance
                                                        
                                                        
                                                        Interest
                                                        
                                                        
                                                        CostAssetsInterest-earning
      assets:Loan portfolio (1)
                                                        
                                                        $
                                                        574,966
                                                        
                                                        
                                                        $
                                                        32,685
                                                        
                                                        
                                                        5.68%
                                                        
                                                        
                                                        $
                                                        491,075
                                                        
                                                        
                                                        $
                                                        31,869
                                                        
                                                        
                                                        6.49%Investment
      securities, federal funds sold and interest-bearing
    deposits
                                                        
                                                        
                                                        143,966
                                                        
                                                        
                                                        
                                                        5,202
                                                        
                                                        
                                                        3.61%
                                                        
                                                        
                                                        
                                                        122,674
                                                        
                                                        
                                                        
                                                        5,389
                                                        
                                                        
                                                        4.39%Total
      interest-earning assets
                                                        
                                                        
                                                        718,932
                                                        
                                                        
                                                        
                                                        37,887
                                                        
                                                        
                                                        5.27%
                                                        
                                                        
                                                        
                                                        613,749
                                                        
                                                        
                                                        
                                                        37,258
                                                        
                                                        
                                                        6.07%Cash
      and cash equivalents
                                                        
                                                        
                                                        13,533
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        4,477Other
      assets
                                                        
                                                        
                                                        30,138
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        27,091Total
      Assets
                                                        
                                                        $
                                                        762,603
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        645,317Liabilities
      and Stockholders' EquityInterest-bearing
      liabilities:Savings
                                                        
                                                        $
                                                        28,486
                                                        
                                                        
                                                        $
                                                        46
                                                        
                                                        
                                                        0.16%
                                                        
                                                        
                                                        $
                                                        26,434
                                                        
                                                        
                                                        $
                                                        156
                                                        
                                                        
                                                        0.59%Interest-bearing
      demand and moneymarket
      accounts
                                                        
                                                        
                                                        142,513
                                                        
                                                        
                                                        
                                                        1,458
                                                        
                                                        
                                                        1.02%
                                                        
                                                        
                                                        
                                                        132,522
                                                        
                                                        
                                                        
                                                        2,317
                                                        
                                                        
                                                        1.75%Certificates
      of deposit
                                                        
                                                        
                                                        355,489
                                                        
                                                        
                                                        
                                                        10,727
                                                        
                                                        
                                                        3.02%
                                                        
                                                        
                                                        
                                                        268,363
                                                        
                                                        
                                                        
                                                        10,541
                                                        
                                                        
                                                        3.93%Long-term
      debt
                                                        
                                                        
                                                        94,745
                                                        
                                                        
                                                        
                                                        3,502
                                                        
                                                        
                                                        3.70%
                                                        
                                                        
                                                        
                                                        102,113
                                                        
                                                        
                                                        
                                                        4,179
                                                        
                                                        
                                                        4.09%Short-term
      debt
                                                        
                                                        
                                                        1,421
                                                        
                                                        
                                                        
                                                        29
                                                        
                                                        
                                                        2.04%
                                                        
                                                        
                                                        
                                                        4,355
                                                        
                                                        
                                                        
                                                        156
                                                        
                                                        
                                                        3.59%Guaranteed
      preferrred beneficial interest in junior subordinated
      debentures
                                                        
                                                        
                                                        12,000
                                                        
                                                        
                                                        
                                                        404
                                                        
                                                        
                                                        3.37%
                                                        
                                                        
                                                        
                                                        12,000
                                                        
                                                        
                                                        
                                                        686
                                                        
                                                        
                                                        5.72%Total
      interest-bearing liabilities
                                                        
                                                        
                                                        634,654
                                                        
                                                        
                                                        
                                                        16,166
                                                        
                                                        
                                                        2.55%
                                                        
                                                        
                                                        
                                                        545,787
                                                        
                                                        
                                                        
                                                        18,035
                                                        
                                                        
                                                        3.30%Noninterest-bearing
      demand deposits
                                                        
                                                        
                                                        53,584
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        42,955Other
      liabilities
                                                        
                                                        
                                                        6,000
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        6,215Stockholders'
      equity
                                                        
                                                        
                                                        68,365
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        50,360Total
      Liabilities and Stockholders' Equity
                                                        
                                                        $
                                                        762,603
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        645,317Net
      interest income
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        21,721
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        $
                                                        19,223Interest
      rate spread
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        2.72%
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        2.77%Net
      yield on interest-earning assets
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        3.02%
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        3.13%Ratio
      of average interest-earningassets
      to average
      interest-bearing liabilities
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        113.28%
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        112.45%
 
 (1)
Average balance includes non-accrual loans
  5
  Management’s
Discussion and Analysis
 The table
below sets forth certain information regarding changes in interest income and
interest expense of the Bank for the periods indicated.  For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to (1) changes in volume (changes in volume
multiplied by old rate); and (2) changes in rate (changes in rate multiplied by
old volume).  Changes in rate-volume (changes in rate multiplied by
the change in volume) have been allocated to changes due to volume.
 
 Year
      ended December 31, 2009compared
      to year endedDecember
      31,2008Due
      toVolume
                                  
                                  
                                  Rate
                                  
                                  
                                  TotalInterest
      income:Loan
      portfolio (1)
                                  
                                  $
                                  4,769
                                  
                                  
                                  $
                                  (3,953
                                  )
                                  
                                  $
                                  816Investment
      securities, federal funds
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -sold
      and interest-bearing deposits
                                  
                                  
                                  769
                                  
                                  
                                  
                                  (956
                                  )
                                  
                                  
                                  (187
                                  )Total
      Interest-Earning Assets
                                  
                                  $
                                  5,538
                                  
                                  
                                  $
                                  (4,909
                                  )
                                  
                                  $
                                  629Interest-bearing
      liabilities:Savings
                                  
                                  
                                  3
                                  
                                  
                                  
                                  (113
                                  )
                                  
                                  
                                  (110
                                  )Interest-bearing
      demand and moneymarket
      accounts
                                  
                                  
                                  102
                                  
                                  
                                  
                                  (961
                                  )
                                  
                                  
                                  (859
                                  )Certificates
      of deposit
                                  
                                  
                                  2,629
                                  
                                  
                                  
                                  (2,443
                                  )
                                  
                                  
                                  186Long-term
      debt
                                  
                                  
                                  (272
                                  )
                                  
                                  
                                  (405
                                  )
                                  
                                  
                                  (677
                                  )Short-term
      debt
                                  
                                  
                                  (61
                                  )
                                  
                                  
                                  (66
                                  )
                                  
                                  
                                  (127
                                  )Guaranteed
      preferrred beneficial interest in junior subordinated
      debentures
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (282
                                  )
                                  
                                  
                                  (282
                                  )Total
      Interest-Bearing Liabilities
                                  
                                  $
                                  2,401
                                  
                                  
                                  $
                                  (4,270
                                  )
                                  
                                  $
                                  (1,869
                                  )Net
      Change in Net Interest Income
                                  
                                  $
                                  3,137
                                  
                                  
                                  $
                                  (639
                                  )
                                  
                                  $
                                  2,498( 1)
      Average balance includes non-accrual
    loans
 
 Provision
for Loan Losses
 Provision
for loan losses for the year ended December 31, 2009 was $3,472,608, compared to
$1,300,826 for the year ended December 31, 2008. The loan loss provision
increased in 2009 due to the impact of increases in charge-offs, non-performing
loans, current economic conditions and the increase in non-accrual loans. The
loan loss provision also increased as the Bank continued to add loans to its
portfolio particularly in commercial real estate and commercial loan categories,
which carry a higher risk of default than other loans in the Bank’s portfolio.
In 2009, the Bank recorded net charge-offs of $1,146,967 (0.20% of average
loans) compared to net charge-offs of $637,636 (0.13% of average loans) in 2008
and an increase in non-accrual loans to $19,287,000 in 2009 from $4,936,000 in
2008.  The loan loss allowance and the provision for loan losses is
determined based upon an analysis of individual loans and the application of
certain loss factors to different loan categories. Loss factors increased in
2009 due primarily to increases in non-performing commercial
loans.  Individual loans are analyzed for impairment as the facts and
circumstances warrant.  In addition, a general component of the loan
loss allowance is added based on a review of the portfolio’s size and
composition. At December 31, 2009, the allowance for loan loss equaled 39% of
non-performing loans compared to 104% at December 31, 2008.
  6
  Management’s
Discussion and Analysis
  Noninterest
Income
  Years
      Ended December 31,
                    
                    
                    %
      change2009
                    
                    
                    2008
                    
                    
                    2009
      vs. 2008Recognition
      of other than temporary decline in value of  investment
      securities
                    
                    $
                    (538,614
                    )
                    
                    $
                    (54,772
                    )
                    
                    
                    (883.37
                    )%Less:
      portion recorded as comprehensive
                    
                    
                    271,870
                    
                    
                    
                    -
                    
                    
                    
                    n/aImpairment
      loss on investment securities, net
                    
                    
                    (266,744
                    )
                    
                    
                    (54,772
                    )
                    
                    
                    (387.01
                    )%Loan
      appraisal, credit, and miscellaneous charges
                    
                    
                    688,101
                    
                    
                    
                    416,605
                    
                    
                    
                    65.17
                    %Income
      from bank owned life insurance
                    
                    
                    417,110
                    
                    
                    
                    491,136
                    
                    
                    
                    (15.07
                    )%Service
      charges
                    
                    
                    1,658,544
                    
                    
                    
                    1,665,700
                    
                    
                    
                    (0.43
                    )%Gain
      on sale of loans held for sale
                    
                    
                    325,671
                    
                    
                    
                    -
                    
                    
                    
                    n/aLoss
      on the sale of investment securities
                    
                    
                    (12,863
                    )
                    
                    
                    -
                    
                    
                    
                    n/aTotal
      Noninterest Income
                    
                    $
                    2,809,819
                    
                    
                    $
                    2,518,669
                    
                    
                    
                    11.56
                    %
  Income
from loan fees increased as the Bank’s volume of loans originated increased in
2009. Service charges and fees are primarily generated by the Bank’s ability to
attract and retain transaction-based deposit accounts and by loan servicing
fees. The increase in gain on sale of loans held for sale reflects the sale of
$20,994,916 of longer-term, fixed rate mortgage loans in 2009, while none were
sold in 2008. Increases in noninterest income were offset by a decrease in BOLI
earnings due to a refund of $89,000 in 2008, and other than temporary impairment
was negatively impacted in the current year by write-downs of Silverton Bank
common stock and a CMO issue totaling $266,744.
 
 Noninterest
Expenses
  Years
      Ended December 31,
                    
                    
                    %
      change2009
                    
                    
                    2008
                    
                    
                    2009
      vs. 2008Salary
      and employee benefits
                    
                    $
                    8,607,141
                    
                    
                    $
                    8,052,008
                    
                    
                    
                    6.89
                    %Occupancy
      expense
                    
                    
                    1,779,497
                    
                    
                    
                    1,691,038
                    
                    
                    
                    5.23
                    %Advertising
                    
                    
                    449,155
                    
                    
                    
                    557,782
                    
                    
                    
                    (19.47
                    )%Data
      processing expense
                    
                    
                    914,250
                    
                    
                    
                    710,832
                    
                    
                    
                    28.62
                    %Depreciation
      of furniture, fixtures, and equipment
                    
                    
                    613,205
                    
                    
                    
                    581,256
                    
                    
                    
                    5.50
                    %Telephone
      communications
                    
                    
                    152,649
                    
                    
                    
                    83,469
                    
                    
                    
                    82.88
                    %Office
      supplies
                    
                    
                    164,154
                    
                    
                    
                    162,096
                    
                    
                    
                    1.27
                    %Professional
      fees
                    
                    
                    749,467
                    
                    
                    
                    720,512
                    
                    
                    
                    4.02
                    %FDIC
      insurance
                    
                    
                    1,134,926
                    
                    
                    
                    274,282
                    
                    
                    
                    313.78
                    %Other
                    
                    
                    2,015,234
                    
                    
                    
                    1,749,182
                    
                    
                    
                    15.21
                    %Total
      Noninterest Expenses
                    
                    $
                    16,579,678
                    
                    
                    $
                    14,582,457
                    
                    
                    
                    13.70
                    %
  The
increase in salary and employee benefit costs reflect growth in the Bank’s
workforce to fully staff branches, an additional branch opening in late 2008, an
increasing need for highly skilled employees due to the higher complexity level
of the Bank’s business and continued increases in the Bank’s benefit costs. The
increase in occupancy expense reflects increases in land rentals on certain
properties.  Advertising expense decreased as the Bank had fewer
advertising campaigns in 2009. The data processing change reflects increased
costs due to the growth of the Bank and a $140,000 credit received in 2008.
Telephone communications expenses increased due to the increases in the size of
the Company’s operations. In addition, the Bank utilized additional
telecommunication services to aid in providing data backup services.
Professional fees increased slightly due to increased regulatory compliance
efforts, including the Bank’s participation in the CPP program. FDIC insurance
is higher than in the prior year due to a special assessment in the amount of
$343,600, an increase in the assessment rate and growth in Bank’s deposits. In
addition, in 2008, the Bank was able to offset much of its regular FDIC
insurance expense by the use of credits available to it. These credits were used
up by the end of 2008. Other noninterest expense increased due to increases in
ATM expenses related to a change in service providers and higher REO expenses
than in the prior year due to tax and insurance payments on foreclosed property
and the growing size and complexity of the Bank.
  7
  Management’s
Discussion and Analysis
  Income
Tax Expense
 For the
year ended December 31, 2009, the Company recorded income tax expense of
$1,611,668 compared to $2,043,000 in the prior year.  The Company’s
effective tax rates for the years ended December 31, 2009 and 2008 were 35.98%
and 34.87%, respectively. The higher effective tax rate in the current year was
caused by an increase in the amount of non-deductible expenses in
2009.
 
 COMPARISON
OF FINANCIAL CONDITION AT DECEMBER 31, 2009 AND 2008
  General
 In 2009,
the Bank used the December 2008 proceeds of $15,540,000 from the issuance of
preferred stock to the Department of Treasury to increase the Bank’s asset size
through the origination of loans and the purchase of securities. These asset
increases were also funded by increases in deposits.
 
 Assets
  December
      31,
                    
                    
                    %
      change2009
                    
                    
                    2008
                    
                    
                    2009
      vs. 2008Cash
      and due from banks
                    
                    $
                    9,960,787
                    
                    
                    $
                    5,071,614
                    
                    
                    
                    96.40
                    %Federal
      Funds sold
                    
                    
                    695,000
                    
                    
                    
                    989,754
                    
                    
                    
                    (29.78
                    )%Interest-bearing
      deposits with banks
                    
                    
                    592,180
                    
                    
                    
                    8,413,164
                    
                    
                    
                    (92.96
                    )%Securities
      available for sale, at fair value
                    
                    
                    53,926,109
                    
                    
                    
                    14,221,674
                    
                    
                    
                    279.18
                    %Securities
      held to maturity, at amortized cost
                    
                    
                    90,287,803
                    
                    
                    
                    108,712,281
                    
                    
                    
                    (16.95
                    )%Federal
      Home Loan Bank and Federal Reserve Bank stock - at cost
                    
                    
                    6,935,500
                    
                    
                    
                    6,453,000
                    
                    
                    
                    7.48
                    %Loans
      receivable - net of allowance for loan losses of$7,471,314
      and $5,145,673
                    
                    
                    616,592,976
                    
                    
                    
                    542,977,138
                    
                    
                    
                    13.56
                    %Premises
      and equipment, net
                    
                    
                    11,987,690
                    
                    
                    
                    12,235,999
                    
                    
                    
                    (2.03
                    )%Foreclosed
      real estate
                    
                    
                    922,934
                    
                    
                    
                    -
                    
                    
                    
                    n/aAccrued
      interest receivable
                    
                    
                    2,925,271
                    
                    
                    
                    2,965,813
                    
                    
                    
                    (1.37
                    )%Investment
      in bank owned life insurance
                    
                    
                    10,943,396
                    
                    
                    
                    10,526,286
                    
                    
                    
                    3.96
                    %Other
      assets
                    
                    
                    9,272,888
                    
                    
                    
                    4,118,187
                    
                    
                    
                    125.17
                    %Total
      Assets
                    
                    $
                    815,042,534
                    
                    
                    $
                    716,684,910
                    
                    
                    
                    13.72
                    %
  Securities
available for sale as of December 31, 2009 totaled $53,926,109 an increase of
$39,704,435 or 279%, from the December 31, 2008 total of $14,221,674. Securities
available for sale increased to 37.4% of the securities portfolio at December
31, 2009 compared to 12% of the securities portfolio at December 31, 2008. The
Bank increased securities available for sale holdings during the year to give it
additional flexibility in using its securities portfolio to fulfill liquidity
needs. The securities held to maturity portfolio declined due to principal
pay-downs offset by additional purchases of securities, primarily asset-backed
securities issued by government-sponsored entities. The increases in loans
receivable reflect the Bank’s continuing efforts to build its market share in
Southern Maryland. In 2009, the Bank continued to increase its loan portfolio
and invest in Southern Maryland as many community banks decreased their loan
portfolios during the financial crisis.  The small decrease in
premises and equipment was due to net additions being less than depreciation.
The Bank foreclosed on some real estate during 2009, increasing the foreclosed
real estate balance. The increase in other assets was primarily due to an FDIC
special assessment to member banks requiring a prepayment of three years of
risk-based fees in the amount of $3,816,104 and a net increase in deferred tax
assets related to increases in the allowance for loan losses.
  8
  Management’s
Discussion and Analysis
 Liabilities
  December
      31,
                    
                    
                    %
      change2009
                    
                    
                    2008
                    
                    
                    2009
      vs. 2008DepositsNon-interest-bearing
      deposits
                    
                    $
                    70,001,444
                    
                    
                    $
                    50,642,273
                    
                    
                    
                    38.23
                    %Interest-bearing
      deposits
                    
                    
                    570,417,345
                    
                    
                    
                    474,525,293
                    
                    
                    
                    20.21
                    %Total
      deposits
                    
                    
                    640,418,789
                    
                    
                    
                    525,167,566
                    
                    
                    
                    21.95
                    %Short-term
      borrowings
                    
                    
                    13,080,530
                    
                    
                    
                    1,522,367
                    
                    
                    
                    759.22
                    %Long-term
      debt
                    
                    
                    75,669,630
                    
                    
                    
                    104,963,428
                    
                    
                    
                    (27.91
                    )%Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
                    
                    
                    12,000,000
                    
                    
                    
                    12,000,000
                    
                    
                    
                    0.00
                    %Accrued
      expenses and other liabilities
                    
                    
                    5,683,736
                    
                    
                    
                    5,917,130
                    
                    
                    
                    (3.94
                    )%Total
      Liabilities
                    
                    $
                    746,852,685
                    
                    
                    $
                    649,570,491
                    
                    
                    
                    14.98
                    %
  In order
to fund the asset growth noted above, the Bank increased its deposit base
through marketing efforts focused on small and medium sized businesses and
retail customers in the Southern Maryland area. Total deposits increased by
$115,251,223. Of this amount, $114,580,980 or 99.42%, was retail deposit growth,
while $670,235 or 0.58%, was a result of growth in brokered deposits. The Bank
paid down net borrowings by $17,735,635 or 16.7%, during 2009 and decreased
long-term borrowings by $29,293,798, decreasing its reliance on higher cost
sources of funds in favor of lower cost retail deposits.
 
 Equity
  December
      31,
                        
                        
                        %
      change2009
                        
                        
                        2008
                        
                        
                        2009
      vs. 2008Fixed
      Rate Cumulative Perpetual Preferred Stock, Series A par value $1,000;
      authorized 15,540;  issued 15,540
                        
                        $
                        15,540,000
                        
                        
                        $
                        15,540,000
                        
                        
                        
                        0.00
                        %Fixed
      Rate Cumulative Perpetual Preferred Stock, Series B par value $1,000;
      authorized 777; issued 777
                        
                        
                        777,000
                        
                        
                        
                        777,000
                        
                        
                        
                        0.00
                        %Common
      stock - par value $.01; authorized - 15,000,000 shares;
      issued  2,976,046 and 2,947,759 shares,
    respectively
                        
                        
                        29,760
                        
                        
                        
                        29,478
                        
                        
                        
                        0.96
                        %Additional
      paid in capital
                        
                        
                        16,754,627
                        
                        
                        
                        16,517,649
                        
                        
                        
                        1.43
                        %Retained
      earnings
                        
                        
                        35,193,958
                        
                        
                        
                        34,280,719
                        
                        
                        
                        2.66
                        %Accumulated
      other comprehensive gain
                        
                        
                        284,474
                        
                        
                        
                        229,848
                        
                        
                        
                        23.77
                        %Unearned
      ESOP shares
                        
                        
                        (389,970
                        )
                        
                        
                        (260,275
                        )
                        
                        
                        49.83
                        %Total
      Stockholders' Equity
                        
                        $
                        68,189,849
                        
                        
                        $
                        67,114,419
                        
                        
                        
                        1.60
                        %
  Total
equity increased $1,075,430 during the year. The Company earned net income of
$2,867,090. In addition, the exercise of incentive stock options for $122,308
also increased equity. Smaller increases were the result of an increase in
accumulated other comprehensive income of $54,626, stock grants in the
settlement of accrued compensation of $99,980, and the tax effect of the
exercise of non-ISO options and stock grants of $14,947. These increases were
partially offset by decreases from the payment of dividends of $1,186,907 for
common shares and the payment of preferred stock dividends of $766,944 to the
United States Department of the Treasury. Equity also decreased due to the net
decrease in the value of ESOP shares of $129,670.
  9
  Management’s
Discussion and Analysis
 LIQUIDITY
AND CAPITAL RESOURCES
  The
Company has no business other than holding the stock of the Bank and does not
currently have any material funding requirements, except for the payment of
dividends on preferred and common stock, and the payment of interest on
subordinated debentures. Under the terms of the Treasury purchase of preferred
stock, the Company cannot repurchase common stock without Treasury’s consent
until December 19, 2018 or until the preferred stock issued to the Treasury is
redeemed. 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 investment and operations are net income,
deposits from its primary market area, borrowings, principal and interest
payments on loans, principal and interest received on investment securities and
proceeds from the maturity and sale of investment securities. Its principal
funding commitments are for the origination or purchase of loans, the purchase
of securities and the payment of maturing deposits. Deposits are considered the
primary source of funds supporting the Bank’s lending and investment activities.
The Bank also uses borrowings from the FHLB of Atlanta to supplement deposits.
The amount of FHLB advances available to the Bank is limited to the lower of 40%
of Bank assets or the amount supportable by eligible collateral including FHLB
stock, loans and securities.  In addition, the Bank has established
lines of credit with the Federal Reserve Bank and commercial banks. For a
discussion of these agreements including collateral see Note 10 to the
consolidated financial statements.
 
 The
Bank’s most liquid assets are cash, cash equivalents and federal funds sold. 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 and
cash equivalents as of December 31, 2009 totaled $11,247,967, a decrease of
$3,226,565 or 22.29%, from the December 31, 2008 total of
$14,474,532.  The decrease in cash and cash equivalents has minimal
impact on operational needs as the Bank has substantial sources of funds
available from other sources.
 
 The
Bank’s principal sources of cash flows are its financing activities including
deposits and borrowings. In 2009, the Bank continued to increase its deposit
activity to increase the size of its operations and increase market share.
During 2009, all financing activities provided $95,669,299 in cash inflows
compared to $113,379,324 during 2008. The decrease in cash flows from financing
activity in 2009 was principally due to a decrease in net borrowings by
$17,735,638 in 2009 compared to an increase in net borrowings of $18,924,964 in
2008, and the Treasury purchase of $15,540,000 of preferred stock in 2008. These
decreases were partially offset by an increase in the amount of net deposit
growth from $80,173,551 in 2008 to $115,251,223 in 2009.
 
 The
Bank’s principal use of cash has been in investing activities including its
investments in loans, investment securities and other assets. In 2009, the level
of investing decreased slightly to $101,070,448 from $116,156,395 in 2008. In
2009, the Bank continued to increase its loan and investment portfolios. The
decrease in net investing activity was caused by an increase in principal
collected on loans from $145,882,731 in 2008 to $195,795,216 in 2009, partially
offset by the increase in amount of loans originated or acquired to $274,171,579
in 2009 from $236,486,198 in 2008. In addition, the purchase of premises and
equipment declined from $3,919,059 in 2008 to $939,751 in 2009.  Net
cash invested in security transactions increased slightly from $21,643,710 in
2008 to $21,754,334 in 2009, with most of the activity taking proceeds from
maturing held to maturity investments to fund purchases of available for sale
securities.
 
 At
December 31, 2009, the Bank had $12,168,100 in loan commitments
outstanding.  Certificates of deposit due within one year of December
31, 2009 totaled $314,126,386, representing 82.39% of certificates of deposit at
December 31, 2009.  If these maturing deposits do not remain with us,
we will be required to seek other sources of funds, including other certificates
of deposit and borrowings. Depending on market conditions, we may be required to
pay higher rates on such deposits or other borrowing than we currently pay on
the certificates of deposit due on or before December 31, 2010.  We
believe, however, based on past experience that a significant portion of our
certificates of deposit will remain with us.  We have the ability to
attract and retain deposits by adjusting the interest rates
offered.
  10
  Management’s
Discussion and Analysis
 Federal
banking regulations require the Company and the Bank to maintain specified
levels of capital. At December 31, 2009, the Company was in compliance with
these requirements with a leverage ratio of 10.03%, a Tier 1 risk-based capital
ratio of 12.30% and total risk-based capital ratio of 13.46%. At December 31,
2009, the Bank met the criteria for designation as a well-capitalized depository
institution under Federal Reserve Bank regulations.  See Note 15 of
the consolidated financial statements.
 
 OFF-BALANCE
SHEET ARRANGEMENTS
  In the
normal course of operations, we engage in a variety of financial transaction
that, in accordance with U.S. generally accepted accounting principles, are not
recorded in our financial statements.  These transactions involve, to
varying degrees, elements of credit, interest rate and liquidity risk. Such
transactions are used primarily to manage customers’ requests for funding and
take the form of loan commitments, letters of credit and lines of credit. For a
discussion of these agreements including collateral and other arrangements see
Note 12 to the consolidated financial statements.
 
 For the
years ended December 31, 2009 and 2008, the Company did not engage in any
off-balance sheet transactions reasonably likely to have a material effect on
its financial condition, results of operations or cash flows.
 
 CONTRACTUAL
OBLIGATIONS
  In the
normal course of its business, the Bank commits to make future payments to
others to satisfy contractual obligations. These obligations include commitments
to repay short and long-term borrowings and commitments incurred under operating
lease agreements.
 
 IMPACT OF
INFLATION AND CHANGING PRICES
 
 The
consolidated financial statements and notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles in the
United States of America, which require the measurement of financial position
and operating results in terms of historical dollars without considering the
changes in the relative purchasing power of money over time due to inflation.
Unlike most industrial companies, nearly all of the Company’s assets and
liabilities are monetary in nature. As a result, interest rates have a greater
impact on the Company's performance than do the effects of general levels of
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
  11
  Management’s
Discussion and Analysis
 SELECTED
FINANCIAL DATA
  Dollars
      in thousands except per share data
                                                                                  
                                                                                  Year
      Ended December 31,2009
                                                                                  
                                                                                  
                                                                                  2008
                                                                                  
                                                                                  
                                                                                  2007
                                                                                  
                                                                                  
                                                                                  2006
                                                                                  
                                                                                  
                                                                                  2005Operations
      DataNet
      interest income
                                                                                  
                                                                                  $
                                                                                  21,721
                                                                                  
                                                                                  
                                                                                  $
                                                                                  19,223
                                                                                  
                                                                                  
                                                                                  $
                                                                                  18,992
                                                                                  
                                                                                  
                                                                                  $
                                                                                  17,327
                                                                                  
                                                                                  
                                                                                  $
                                                                                  15,571Provision
      for loan losses
                                                                                  
                                                                                  
                                                                                  3,473
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,301
                                                                                  
                                                                                  
                                                                                  
                                                                                  855
                                                                                  
                                                                                  
                                                                                  
                                                                                  406
                                                                                  
                                                                                  
                                                                                  
                                                                                  329Noninterest
      income
                                                                                  
                                                                                  
                                                                                  2,810
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,519
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,402
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,247
                                                                                  
                                                                                  
                                                                                  
                                                                                  1,641Noninterest
      expense
                                                                                  
                                                                                  
                                                                                  16,580
                                                                                  
                                                                                  
                                                                                  
                                                                                  14,582
                                                                                  
                                                                                  
                                                                                  
                                                                                  13,459
                                                                                  
                                                                                  
                                                                                  
                                                                                  12,562
                                                                                  
                                                                                  
                                                                                  
                                                                                  10,851Net
      income
                                                                                  
                                                                                  $
                                                                                  2,861
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3,815
                                                                                  
                                                                                  
                                                                                  $
                                                                                  5,106
                                                                                  
                                                                                  
                                                                                  $
                                                                                  4,441
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3,979Share
      DataBasic
      net income per common share
                                                                                  
                                                                                  $
                                                                                  0.68
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1.29
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1.92
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1.68
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1.53Diluted
      net income per common share
                                                                                  
                                                                                  $
                                                                                  0.68
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1.24
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1.79
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1.58
                                                                                  
                                                                                  
                                                                                  $
                                                                                  1.44Cash
      dividends paid per common share
                                                                                  
                                                                                  $
                                                                                  0.40
                                                                                  
                                                                                  
                                                                                  $
                                                                                  0.40
                                                                                  
                                                                                  
                                                                                  $
                                                                                  0.40
                                                                                  
                                                                                  
                                                                                  $
                                                                                  0.37
                                                                                  
                                                                                  
                                                                                  $
                                                                                  0.35Weighted
      average commonShares
      outstanding:Basic
                                                                                  
                                                                                  
                                                                                  2,961,293
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,943,002
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,664,036
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,637,531
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,597,806Diluted
                                                                                  
                                                                                  
                                                                                  2,987,901
                                                                                  
                                                                                  
                                                                                  
                                                                                  3,053,690
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,852,494
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,815,985
                                                                                  
                                                                                  
                                                                                  
                                                                                  2,763,616Financial
      Condition DataTotal
      assets
                                                                                  
                                                                                  $
                                                                                  815,043
                                                                                  
                                                                                  
                                                                                  $
                                                                                  716,685
                                                                                  
                                                                                  
                                                                                  $
                                                                                  598,406
                                                                                  
                                                                                  
                                                                                  $
                                                                                  575,496
                                                                                  
                                                                                  
                                                                                  $
                                                                                  541,287Loans
      receivable, net
                                                                                  
                                                                                  
                                                                                  616,593
                                                                                  
                                                                                  
                                                                                  
                                                                                  542,977
                                                                                  
                                                                                  
                                                                                  
                                                                                  453,614
                                                                                  
                                                                                  
                                                                                  
                                                                                  422,480
                                                                                  
                                                                                  
                                                                                  
                                                                                  369,592Total
      deposits
                                                                                  
                                                                                  
                                                                                  640,419
                                                                                  
                                                                                  
                                                                                  
                                                                                  525,168
                                                                                  
                                                                                  
                                                                                  
                                                                                  444,994
                                                                                  
                                                                                  
                                                                                  
                                                                                  418,013
                                                                                  
                                                                                  
                                                                                  
                                                                                  363,374Long
      and short-term debt
                                                                                  
                                                                                  
                                                                                  88,750
                                                                                  
                                                                                  
                                                                                  
                                                                                  106,486
                                                                                  
                                                                                  
                                                                                  
                                                                                  87,561
                                                                                  
                                                                                  
                                                                                  
                                                                                  102,614
                                                                                  
                                                                                  
                                                                                  
                                                                                  127,899Total
      stockholders’ equity
                                                                                  
                                                                                  $
                                                                                  68,190
                                                                                  
                                                                                  
                                                                                  $
                                                                                  67,114
                                                                                  
                                                                                  
                                                                                  $
                                                                                  48,847
                                                                                  
                                                                                  
                                                                                  $
                                                                                  37,729
                                                                                  
                                                                                  
                                                                                  $
                                                                                  34,578Performance
      RatiosReturn
      on average assets
                                                                                  
                                                                                  
                                                                                  0.38
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.59
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.87
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.80
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.74
                                                                                  %Return
      on average equity
                                                                                  
                                                                                  
                                                                                  4.18
                                                                                  %
                                                                                  
                                                                                  
                                                                                  7.57
                                                                                  %
                                                                                  
                                                                                  
                                                                                  12.62
                                                                                  %
                                                                                  
                                                                                  
                                                                                  12.13
                                                                                  %
                                                                                  
                                                                                  
                                                                                  12.11
                                                                                  %Net
      interest margin
                                                                                  
                                                                                  
                                                                                  3.02
                                                                                  %
                                                                                  
                                                                                  
                                                                                  3.13
                                                                                  %
                                                                                  
                                                                                  
                                                                                  3.41
                                                                                  %
                                                                                  
                                                                                  
                                                                                  3.24
                                                                                  %
                                                                                  
                                                                                  
                                                                                  3.05
                                                                                  %Efficiency
      ratio
                                                                                  
                                                                                  
                                                                                  67.59
                                                                                  %
                                                                                  
                                                                                  
                                                                                  67.07
                                                                                  %
                                                                                  
                                                                                  
                                                                                  60.10
                                                                                  %
                                                                                  
                                                                                  
                                                                                  64.18
                                                                                  %
                                                                                  
                                                                                  
                                                                                  63.04
                                                                                  %Dividend
      payout ratio
                                                                                  
                                                                                  
                                                                                  41.49
                                                                                  %
                                                                                  
                                                                                  
                                                                                  31.04
                                                                                  %
                                                                                  
                                                                                  
                                                                                  20.80
                                                                                  %
                                                                                  
                                                                                  
                                                                                  21.91
                                                                                  %
                                                                                  
                                                                                  
                                                                                  23.39
                                                                                  %Capital
      RatiosAverage
      equity to averageassets
                                                                                  
                                                                                  
                                                                                  10.03
                                                                                  %
                                                                                  
                                                                                  
                                                                                  11.54
                                                                                  %
                                                                                  
                                                                                  
                                                                                  10.41
                                                                                  %
                                                                                  
                                                                                  
                                                                                  8.74
                                                                                  %
                                                                                  
                                                                                  
                                                                                  8.62
                                                                                  %Leverage
      ratio
                                                                                  
                                                                                  
                                                                                  10.03
                                                                                  %
                                                                                  
                                                                                  
                                                                                  11.54
                                                                                  %
                                                                                  
                                                                                  
                                                                                  10.41
                                                                                  %
                                                                                  
                                                                                  
                                                                                  8.74
                                                                                  %
                                                                                  
                                                                                  
                                                                                  8.62
                                                                                  %Total
      risk-based capital ratio
                                                                                  
                                                                                  
                                                                                  13.46
                                                                                  %
                                                                                  
                                                                                  
                                                                                  14.73
                                                                                  %
                                                                                  
                                                                                  
                                                                                  13.80
                                                                                  %
                                                                                  
                                                                                  
                                                                                  11.98
                                                                                  %
                                                                                  
                                                                                  
                                                                                  11.93
                                                                                  %Asset
      Quality RatiosAllowance
      for loan losses tototal
      loans
                                                                                  
                                                                                  
                                                                                  1.20
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.94
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.98
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.89
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.91
                                                                                  %Non-performing
      loans to total loans
                                                                                  
                                                                                  
                                                                                  3.09
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.90
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.09
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.25
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.16
                                                                                  %Allowance
      for loan losses tonon-performing
      loans
                                                                                  
                                                                                  
                                                                                  38.74
                                                                                  %
                                                                                  
                                                                                  
                                                                                  104.25
                                                                                  %
                                                                                  
                                                                                  
                                                                                  1082.71
                                                                                  %
                                                                                  
                                                                                  
                                                                                  361.59
                                                                                  %
                                                                                  
                                                                                  
                                                                                  572.96
                                                                                  %Net
      charge-offs to average loans
                                                                                  
                                                                                  
                                                                                  0.20
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.13
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.04
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.00
                                                                                  %
                                                                                  
                                                                                  
                                                                                  0.00
                                                                                  %
 
 All per
share amounts have been adjusted for the three-for-two stock splits which were
effected in December 2005 and 2006.
  12
  Management’s
Discussion and Analysis
 MARKET
FOR THE REGISTRANT’S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
 
 Market
Information
 The
following table sets forth high and low bid quotations reported on the OTC
Bulletin for the Company’s common stock for each quarter during 2009 and
2008.  These quotes reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not necessarily reflect actual
transactions.
 
 High
                        
                        
                        Low2008Fourth
      Quarter
                        
                        $
                        18.75
                        
                        
                        $
                        16.15Third
      Quarter
                        
                        $
                        24.00
                        
                        
                        $
                        17.85Second
      Quarter
                        
                        $
                        28.00
                        
                        
                        $
                        22.00First
      Quarter
                        
                        $
                        25.00
                        
                        
                        $
                        22.55
 
 High
                        
                        
                        Low2009Fourth
      Quarter
                        
                        $
                        15.00
                        
                        
                        $
                        10.50Third
      Quarter
                        
                        $
                        13.99
                        
                        
                        $
                        11.30Second
      Quarter
                        
                        $
                        13.85
                        
                        
                        $
                        11.50First
      Quarter
                        
                        $
                        20.00
                        
                        
                        $
                        10.50
 
 Holders
 The
number of stockholders of record of the Company at March 5, 2010 was
613.
 
 Dividends
 The
Company has paid annual cash dividends since 1994.  For each of fiscal
years 2009 and 2008, the Company paid an annual cash dividend of $0.40 per
share.  As part of the Company’s participation in the Capital Purchase
Program of the U.S. Department of Treasury’s Troubled Asset Repurchase Program:
(1) before the earlier of (a) December 19, 2011 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 cannot, without consent
of the Treasury, increase its per share cash dividend above $0.40; (2) during
the period beginning on December 19, 2011 and ending on 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 pay
any per share cash dividend that is greater than 103% of the aggregate per share
dividends paid for the prior fiscal year; and (3) during the period beginning on
December 19, 2018 and ending on the date on which all of 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 pay any cash dividends.
 
 In
addition, the Company is required to pay annual preferred stock dividends to the
United States Department of the Treasury at 5% for Fixed Rate Cumulative
Perpetual Preferred Stock, Series A and at 9% for Fixed Rate Cumulative
Perpetual Preferred Stock, Series B. See Note 18 to the consolidated financial
statements.
 
 The
Company’s ability to pay dividends is governed by the policies and regulations
of the Federal Reserve Board (the “FRB”), which prohibits the payment of
dividends under certain circumstances dependent on the Company’s financial
condition and capital adequacy.  The Company’s ability to pay
dividends is also dependent on the receipt of dividends from the
Bank.
  13
  Management’s
Discussion and Analysis
 Federal
regulations impose certain limitations on the payment of dividends and other
capital distributions by the Bank.  The Bank’s ability to pay
dividends is governed by the Maryland Financial Institutions Code and the
regulations of the FRB.  Under the Maryland Financial Institutions
Code, a Maryland bank (1) may only pay dividends from undivided profits or, with
prior regulatory approval, its surplus in excess of 100% of required capital
stock and, (2) may not declare dividends on its common stock until its surplus
funds equals the amount of required capital stock, or if the surplus fund does
not equal the amount of capital stock, in an amount in excess of 90% of net
earnings.
 
 Without
the approval of the FRB, a state member bank may not declare or pay a dividend
if the total of all dividends declared during the year exceeds its net income
during the current calendar year and retained net income for the prior two
years.  The Bank is further prohibited from making a capital
distribution if it would not be adequately capitalized thereafter.  In
addition, the Bank may not make a capital distribution that would reduce its net
worth below the amount required to maintain the liquidation account established
for the benefit of its depositors at the time of its conversion to stock
form.
  14
 
  
 Tri-County
Financial Corporation
 
 REPORT
ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS
  For the
Years Ended December 31, 2009 and 2008
 
 15
 
 Tri-County
Financial Corporation
 
 Table
of Contents
 
 Management’s
      Report on Internal Control over Financial Reporting
                    17Report
      of Independent Registered Public Accounting Firm
                    18Consolidated
      Financial StatementsBalance
      Sheets
                    19Statements
      of Income
                    20Statements
      of Changes in Stockholders’ Equity
                    21Statements
      of Cash Flows
                    22Notes
      to Consolidated Financial Statements
                    24
  16
 
 Tri-County
Financial Corporation
 
 MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
 
 The
management of Tri-County Financial Corporation (“the Company”) is responsible
for establishing and maintaining adequate internal control over financial
reporting.  The internal control process has been designed under our
supervision to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of the Company’s financial statements
for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America.
 
 Management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2009, utilizing the framework
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).  Based
on this assessment, management has determined that the Company’s internal
control over financial reporting as of December 31, 2009, is
effective.
 
 Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that accurately and fairly reflect, in
reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States; (2) receipts and expenditures are being
made only in accordance with authorizations of management and the directors of
the Company; and (3) unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the Company’s financial
statements are prevented or timely detected.
 
 All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to
attestation by the Company’s independent registered public accounting firm
pursuant to temporary rules of the Securities and Exchange Commission that
permit the Company to provide only the management’s report in this annual
report.
 
 17
  REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Board of
Directors and Stockholders
 Tri-County
Financial Corporation
 Waldorf,
Maryland
 
 We have
audited the accompanying consolidated balance sheets of Tri-County Financial
Corporation (the “Company”) as of December 31, 2009 and 2008, and the related
consolidated statements of income, changes in stockholders’ equity, and cash
flows for each of the years in the two-year period ended December 31, 2009.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tri-County
Financial Corporation as of December 31, 2009 and 2008, and the results of its
consolidated operations and cash flows for each of the years in the two-year
period ended December 31, 2009 in conformity with accounting principles
generally accepted in the United States of America.
 
 
 
 Baltimore,
Maryland
 March 5,
2010
 
 
  18
  Tri-County
Financial Corporation
 
 CONSOLIDATED
BALANCE SHEETS
 
 December 31,2009
                                        
                                        
                                        2008AssetsCash
      and due from banks
                                        
                                        $
                                        9,960,787
                                        
                                        
                                        $
                                        5,071,614Federal
      Funds sold
                                        
                                        
                                        695,000
                                        
                                        
                                        
                                        989,754Interest-bearing
      deposits with banks
                                        
                                        
                                        592,180
                                        
                                        
                                        
                                        8,413,164Securities
      available for sale, at fair value
                                        
                                        
                                        53,926,109
                                        
                                        
                                        
                                        14,221,674Securities
      held to maturity, at amortized cost
                                        
                                        
                                        90,287,803
                                        
                                        
                                        
                                        108,712,281Federal
      Home Loan Bank and Federal Reserve Bank stock - at cost
                                        
                                        
                                        6,935,500
                                        
                                        
                                        
                                        6,453,000Loans
      receivable - net of allowance for loan losses of $7,471,314 and
      $5,145,673
                                        
                                        
                                        616,592,976
                                        
                                        
                                        
                                        542,977,138Premises
      and equipment, net
                                        
                                        
                                        11,987,690
                                        
                                        
                                        
                                        12,235,999Foreclosed
      real estate
                                        
                                        
                                        922,934
                                        
                                        
                                        
                                        -Accrued
      interest receivable
                                        
                                        
                                        2,925,271
                                        
                                        
                                        
                                        2,965,813Investment
      in bank owned life insurance
                                        
                                        
                                        10,943,396
                                        
                                        
                                        
                                        10,526,286Other
      assets
                                        
                                        
                                        9,272,888
                                        
                                        
                                        
                                        4,118,187Total
      Assets
                                        
                                        $
                                        815,042,534
                                        
                                        
                                        $
                                        716,684,910Liabilities
      and Stockholders' EquityDepositsNoninterest-bearing
      deposits
                                        
                                        $
                                        70,001,444
                                        
                                        
                                        $
                                        50,642,273Interest-bearing
      deposits
                                        
                                        
                                        570,417,345
                                        
                                        
                                        
                                        474,525,293Total
      deposits
                                        
                                        
                                        640,418,789
                                        
                                        
                                        
                                        525,167,566Short-term
      borrowings
                                        
                                        
                                        13,080,530
                                        
                                        
                                        
                                        1,522,367Long-term
      debt
                                        
                                        
                                        75,669,630
                                        
                                        
                                        
                                        104,963,428Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
                                        
                                        
                                        12,000,000
                                        
                                        
                                        
                                        12,000,000Accrued
      expenses and other liabilities
                                        
                                        
                                        5,683,736
                                        
                                        
                                        
                                        5,917,130Total
      Liabilities
                                        
                                        
                                        746,852,685
                                        
                                        
                                        
                                        649,570,491Stockholders'
      EquityFixed
      Rate Cumulative Perpetual Preferred Stock, Series A - par value $1,000;
      authorized 15,540;  issued 15,540
                                        
                                        
                                        15,540,000
                                        
                                        
                                        
                                        15,540,000Fixed
      Rate Cumulative Perpetual Preferred Stock, Series B - par value $1,000;
      authorized 777; issued 777
                                        
                                        
                                        777,000
                                        
                                        
                                        
                                        777,000Common
      stock - par value $.01; authorized - 15,000,000 shares; issued 2,976,046
      and 2,947,759 shares, respectively
                                        
                                        
                                        29,760
                                        
                                        
                                        
                                        29,478Additional
      paid in capital
                                        
                                        
                                        16,754,627
                                        
                                        
                                        
                                        16,517,649Retained
      earnings
                                        
                                        
                                        35,193,958
                                        
                                        
                                        
                                        34,280,719Accumulated
      other comprehensive gain
                                        
                                        
                                        284,474
                                        
                                        
                                        
                                        229,848Unearned
      ESOP shares
                                        
                                        
                                        (389,970
                                        )
                                        
                                        
                                        (260,275
                                        )Total
      Stockholders’ Equity
                                        
                                        
                                        68,189,849
                                        
                                        
                                        
                                        67,114,419Total
      Liabilities and Stockholders' Equity
                                        
                                        $
                                        815,042,534
                                        
                                        
                                        $
                                        716,684,910
 See
notes to consolidated financial statements
 
 19
 
 Tri-County
Financial Corporation
 
 CONSOLIDATED
STATEMENTS OF INCOME
 
 Years Ended December 31,2009
                    
                    
                    2008Interest
      and Dividend IncomeLoans,
      including fees
                    
                    $
                    32,685,178
                    
                    
                    $
                    31,869,492Taxable
      interest and dividends on investment securities
                    
                    
                    5,180,535
                    
                    
                    
                    5,304,606Interest
      on deposits with banks
                    
                    
                    21,640
                    
                    
                    
                    83,659Total
      Interest and Dividend Income
                    
                    
                    37,887,353
                    
                    
                    
                    37,257,757Interest
      ExpensesDeposits
                    
                    
                    12,230,667
                    
                    
                    
                    13,013,398Short-term
      borrowings
                    
                    
                    29,330
                    
                    
                    
                    156,183Long-term
      debt
                    
                    
                    3,906,131
                    
                    
                    
                    4,865,230Total
      Interest Expenses
                    
                    
                    16,166,128
                    
                    
                    
                    18,034,811Net
      Interest Income
                    
                    
                    21,721,225
                    
                    
                    
                    19,222,946Provision
      for loan losses
                    
                    
                    3,472,608
                    
                    
                    
                    1,300,826Net
      Interest Income After Provision For Loan Losses
                    
                    
                    18,248,617
                    
                    
                    
                    17,922,120Noninterest
      IncomeRecognition
      of other than temporary decline in value of investment
      securities
                    
                    
                    (538,614
                    )
                    
                    
                    (54,772
                    )Less:
      portion recorded as comprehensive income
                    
                    
                    271,870
                    
                    
                    
                    -Impairment
      loss on investment securities, net
                    
                    
                    (266,744
                    )
                    
                    
                    (54,772
                    )Loan
      appraisal, credit, and miscellaneous charges
                    
                    
                    688,101
                    
                    
                    
                    416,605Income
      from bank owned life insurance
                    
                    
                    417,110
                    
                    
                    
                    491,136Service
      charges
                    
                    
                    1,658,544
                    
                    
                    
                    1,665,700Gain
      on sale of loans held for sale
                    
                    
                    325,671
                    
                    
                    
                    -Loss
      on the sale of investment securities
                    
                    
                    (12,863
                    )
                    
                    
                    -Total
      Noninterest Income
                    
                    
                    2,809,819
                    
                    
                    
                    2,518,669Noninterest
      ExpensesSalary
      and employee benefits
                    
                    
                    8,607,141
                    
                    
                    
                    8,052,008Occupancy
      expense
                    
                    
                    1,779,497
                    
                    
                    
                    1,691,038Advertising
                    
                    
                    449,155
                    
                    
                    
                    557,782Data
      processing expense
                    
                    
                    914,250
                    
                    
                    
                    710,832Depreciation
      of furniture, fixtures, and equipment
                    
                    
                    613,205
                    
                    
                    
                    581,256Telephone
      communications
                    
                    
                    152,649
                    
                    
                    
                    83,469Office
      supplies
                    
                    
                    164,154
                    
                    
                    
                    162,096Professional
      fees
                    
                    
                    749,467
                    
                    
                    
                    720,512FDIC
      insurance
                    
                    
                    1,134,926
                    
                    
                    
                    274,282Other
                    
                    
                    2,015,234
                    
                    
                    
                    1,749,182Total
      Noninterest Expenses
                    
                    
                    16,579,678
                    
                    
                    
                    14,582,457Income
      before income taxes
                    
                    
                    4,478,758
                    
                    
                    
                    5,858,332Income
      tax expense
                    
                    
                    1,611,668
                    
                    
                    
                    2,043,000Net
      Income
                    
                    $
                    2,867,090
                    
                    
                    $
                    3,815,332Preferred
      stock dividends
                    
                    
                    846,930
                    
                    
                    
                    25,878Net
      Income Applicable to Common Shareholders
                    
                    $
                    2,020,160
                    
                    
                    $
                    3,789,454Earnings
      Per Common ShareBasic
                    
                    $
                    0.68
                    
                    
                    $
                    1.29Diluted
                    
                    $
                    0.68
                    
                    
                    $
                    1.24Cash
      dividend paid per common share
                    
                    $
                    0.40
                    
                    
                    $
                    0.40
  See
notes to consolidated financial statements
 
 20
 
 Tri-County
Financial Corporation
 
 CONSOLIDATED  STATEMENTS
OF CHANGES IN  STOCKHOLDERS' EQUITY
 For the
Years Ended December 31, 2009 and 2008
 
 AccumulatedOther
                              
                              
                              UnearnedPreferred
                              
                              
                              Common
                              
                              
                              Paid-in
                              
                              
                              Retained
                              
                              
                              Comprehensive
                              
                              
                              ESOPStock
                              
                              
                              Stock
                              
                              
                              Capital
                              
                              
                              Earnings
                              
                              
                              Income (Loss)
                              
                              
                              Shares
                              
                              
                              TotalBalance
      at January 1, 2008
                              
                              $
                              -
                              
                              
                              $
                              29,100
                              
                              
                              $
                              16,914,373
                              
                              
                              $
                              32,303,353
                              
                              
                              $
                              (73,097
                              )
                              
                              $
                              (326,653
                              )
                              
                              $
                              48,847,076Comprehensive
      IncomeNet
      Income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3,815,332
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              3,815,332Unrealized
      holding gains on investment securities net of tax of
    $156,062
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              302,945
                              
                              
                              
                              
                              
                              
                              
                              302,945Total
      Comprehensive Income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              4,118,277Cash
      dividend  $0.40 per share
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (1,184,324
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (1,184,324
                              )Excess
      of fair market value over cost of leveraged ESOP shares
      released
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              37,593
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              37,593Exercise
      of stock options
                              
                              
                              
                              
                              
                              
                              715
                              
                              
                              
                              773,082
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              773,797Proceeds
      of capital purchase program
                              
                              
                              16,317,000
                              
                              
                              
                              
                              
                              
                              
                              (777,000
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              15,540,000Net
      change in unearned ESOP shares
                              
                              
                              
                              
                              
                              
                              41
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              66,378
                              
                              
                              
                              66,419Repurchase
      of common stock
                              
                              
                              
                              
                              
                              
                              (436
                              )
                              
                              
                              (674,671
                              )
                              
                              
                              (338,795
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (1,013,902
                              )Cumulative
      effect of change in accounting principle recognizing post retirement
      cost
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (314,847
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (314,847
                              )Stock-based
      compensation
                              
                              
                              
                              
                              
                              
                              58
                              
                              
                              
                              140,030
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              140,088Tax
      effect of the ESOP dividend
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              52,362
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              52,362Tax
      effect of the exercise of
      stock-based compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              51,880
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              51,880Balance
      at December 31, 2008
                              
                              
                              16,317,000
                              
                              
                              
                              29,478
                              
                              
                              
                              16,517,649
                              
                              
                              
                              34,280,719
                              
                              
                              
                              229,848
                              
                              
                              
                              (260,275
                              )
                              
                              
                              67,114,419Comprehensive
      IncomeNet
      Income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,867,090
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,867,090Unrealized
      holding gains on investment securities net of tax of
    $120,577
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              234,060
                              
                              
                              
                              
                              
                              
                              
                              234,060Other
      than temporary impairment on securities held to maturity net of tax of
      $92,436
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (179,434
                              )
                              
                              
                              
                              
                              
                              
                              (179,434
                              )Total
      Comprehensive Income
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              2,921,716Cash
      dividend  $0.40 per share
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (1,186,907
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (1,186,907
                              )Preferred
      stock dividends (1)
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (766,944
                              )
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (766,944
                              )Exercise
      of stock options
                              
                              
                              
                              
                              
                              
                              174
                              
                              
                              
                              122,134
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              122,308Net
      change in unearned ESOP shares
                              
                              
                              
                              
                              
                              
                              24
                              
                              
                              
                              1
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (129,695
                              )
                              
                              
                              (129,670
                              )Stock-based
      compensation
                              
                              
                              
                              
                              
                              
                              84
                              
                              
                              
                              99,896
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              99,980Tax
      effect of the exercise of stock-based compensation
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              14,947
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              -
                              
                              
                              
                              14,947Balance
      at December 31, 2009
                              
                              $
                              16,317,000
                              
                              
                              $
                              29,760
                              
                              
                              $
                              16,754,627
                              
                              
                              $
                              35,193,958
                              
                              
                              $
                              284,474
                              
                              
                              $
                              (389,970
                              )
                              
                              $
                              68,189,849
 
 (1)
Excludes $80,016 of fourth quarter 2009 cumulative preferred dividends not paid
as of December 31, 2009.
 
 See
notes to consolidated financial statements
 
 21
 
 Tri-County
Financial Corporation
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For the
Years Ended December 31, 2009 and 2008
 
 2009
                    
                    
                    2008Cash
      Flows from Operating ActivitiesNet
      income
                    
                    $
                    2,867,090
                    
                    
                    $
                    3,815,332Adjustments
      to reconcile net income to net cash provided by operating
      activitiesProvision
      for loan losses
                    
                    
                    3,472,608
                    
                    
                    
                    1,300,826Loans
      originated for resale
                    
                    
                    (20,994,916
                    )
                    
                    
                    -Proceeds
      from sale of loans originated for sale
                    
                    
                    21,022,010
                    
                    
                    
                    -Gain
      on sale of loans held for sale
                    
                    
                    (325,671
                    )
                    
                    
                    -Loss
      on sales of investment securities
                    
                    
                    12,863
                    
                    
                    
                    -Other
      than temporary decline in market value of investment
      securities
                    
                    
                    266,744
                    
                    
                    
                    54,772Depreciation
      and amortization
                    
                    
                    1,188,060
                    
                    
                    
                    1,105,996Net
      amortization of premium/discount on mortgage backed
      securities  and investments
                    
                    
                    (204,963
                    )
                    
                    
                    (152,837
                    )Increase
      in cash surrender value of bank owned life insurance
                    
                    
                    (417,110
                    )
                    
                    
                    (401,998
                    )Deferred
      income tax benefit
                    
                    
                    (1,659,534
                    )
                    
                    
                    (664,830
                    )Excess
      tax benefits on stock-based compensation
                    
                    
                    -
                    
                    
                    
                    (8,865
                    )Decrease
      in accrued interest receivable
                    
                    
                    40,542
                    
                    
                    
                    181,756Increase
      (Decrease) in deferred loan fees
                    
                    
                    663,560
                    
                    
                    
                    (60,364
                    )(Increase)
      Decrease in accrued expenses and other liabilities
                    
                    
                    (233,394
                    )
                    
                    
                    738,459Increase
      in other assets
                    
                    
                    (3,523,305
                    )
                    
                    
                    (83,281
                    )Net
      Cash Provided by Operating Activities
                    
                    
                    2,174,584
                    
                    
                    
                    5,824,966Cash
      Flows from Investing ActivitiesPurchase
      of investment securities available for sale
                    
                    
                    (43,335,182
                    )
                    
                    
                    (5,010,353
                    )Proceeds
      from sale, redemption or principal payments of investment securities
      available for sale
                    
                    
                    4,060,261
                    
                    
                    
                    342,632Purchase
      of investment securities held to maturity
                    
                    
                    (8,377,442
                    )
                    
                    
                    (25,987,875
                    )Proceeds
      from maturities or principal payments of investment securities held to
      maturity
                    
                    
                    26,380,529
                    
                    
                    
                    10,110,386Net
      increase of FHLB and Federal Reserve stock
                    
                    
                    (482,500
                    )
                    
                    
                    (1,098,500
                    )Loans
      originated or acquired
                    
                    
                    (274,171,579
                    )
                    
                    
                    (236,486,198
                    )Principal
      collected on loans
                    
                    
                    195,795,216
                    
                    
                    
                    145,882,731Proceeds
      from disposal of premises and equipment
                    
                    
                    -
                    
                    
                    
                    9,841Purchase
      of premises and equipment
                    
                    
                    (939,751
                    )
                    
                    
                    (3,919,059
                    )Net
      Cash Used in Investing Activities
                    
                    
                    (101,070,448
                    )
                    
                    
                    (116,156,395
                    )
  22
  Tri-County
Financial Corporation
 
 CONSOLIDATED
STATEMENTS OF CASH FLOWS
 For the
Years Ended December 31, 2009 and 2008
 (continued)
 
 2009
                        
                        
                        2008Cash
      Flows from Financing ActivitiesNet
      increase in deposits
                        
                        $
                        115,251,223
                        
                        
                        $
                        80,173,551Proceeds
      from long-term borrowings
                        
                        
                        750,000
                        
                        
                        
                        24,000,000Payments
      on long-term borrowings
                        
                        
                        (30,043,801
                        )
                        
                        
                        (5,042,080
                        )Net
      increase (decrease) in short-term borrowings
                        
                        
                        11,558,163
                        
                        
                        
                        (32,956
                        )Exercise
      of stock options
                        
                        
                        222,288
                        
                        
                        
                        773,797Excess
      tax benefits on stock based compensation
                        
                        
                        14,947
                        
                        
                        
                        8,865Dividends
      paid
                        
                        
                        (1,953,851
                        )
                        
                        
                        (1,184,324
                        )Proceeds
      from Capital Purchase Program
                        
                        
                        -
                        
                        
                        
                        15,540,000Net
      change in unearned ESOP shares
                        
                        
                        (129,670
                        )
                        
                        
                        156,373Redemption
      of common stock
                        
                        
                        -
                        
                        
                        
                        (1,013,902
                        )Net
      Cash Provided by Financing Activities
                        
                        
                        95,669,299
                        
                        
                        
                        113,379,324(Decrease)
      Increase in Cash and Cash Equivalents
                        
                        
                        (3,226,565
                        )
                        
                        
                        3,047,895Cash
      and Cash Equivalents - January 1
                        
                        
                        14,474,532
                        
                        
                        
                        11,426,637Cash
      and Cash Equivalents - December 31
                        
                        $
                        11,247,967
                        
                        
                        $
                        14,474,532Supplemental
      Disclosures of Cash Flow InformationCash
      paid during the year for:Interest
                        
                        $
                        17,266,417
                        
                        
                        $
                        17,660,936Income
      taxes
                        
                        $
                        2,659,306
                        
                        
                        $
                        2,797,865Supplemental
      Schedule of Non-Cash Operating ActivitiesIssuance
      of common stock for payment of accrued compensation
                        
                        $
                        99,980
                        
                        
                        $
                        140,088Transfer
      of loans to OREO
                        
                        $
                        922,934
                        
                        
                        $
                        -
 
 See
notes to consolidated financial statements
 
 23
 
 Tri-County
Financial Corporation
 
 NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Principles
of Consolidation
 The
consolidated financial statements include the accounts of Tri-County Financial
Corporation and its wholly owned subsidiary Community Bank of Tri-County (the
“Bank”), and the Bank’s wholly owned subsidiary Community Mortgage Corporation
of Tri-County (collectively, the “Company”). All significant intercompany
balances and transactions have been eliminated in consolidation. The accounting
and reporting policies of the Company conform with accounting principles
generally accepted in the United States of America and to general practices
within the banking industry. The Company has evaluated subsequent events for
potential recognition and disclosure up to the date these consolidated
statements were issued.
 
 Nature
of Operations
 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.
 
 Use
of Estimates
 In
preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses, the valuation of foreclosed real estate, and
deferred tax assets.
 
 Significant
Group Concentrations of Credit Risk
 Most of
the Company’s activities are with customers located in the Southern Maryland
area comprising Calvert, Charles and St. Mary’s counties. Note 4 discusses the
types of securities held by the Company. Note 5 discusses the type of lending in
which the Company is engaged. The Company does not have any significant
concentration to any one customer or industry.
 
 Cash
and Cash Equivalents
 For
purposes of the consolidated statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months or less
when purchased to be cash equivalents.
 
 Securities
 Debt
securities that management has the positive intent and ability to hold to
maturity are classified as “held to maturity” and recorded at amortized cost.
Securities purchased and held principally for trading in the near term are
classified as “trading securities”. Securities not classified as held to
maturity or trading, including equity securities with readily determinable fair
values, are classified as “available for sale” and recorded at estimated fair
value, with unrealized gains and losses excluded from earnings and reported in
other comprehensive income.
 
 Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities. Declines in the estimated 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.
In estimating other than temporary impairment losses, management considers (1)
the length of time and the extent to which the fair value has been less than
cost, (2) the financial condition and near term prospects of the issuer and (3)
the intent and ability of the Company to retain its investment in the issuer for
a period of time sufficient to allow for any anticipated recovery in fair value.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method. Investment in Federal
Reserve Bank and Federal Home Loan Bank of Atlanta stock are recorded at cost
and are considered restricted as to marketability. The Bank is required to
maintain investments in the Federal Reserve Bank and Federal Home Loan Bank
based upon levels of borrowings.
 
 24
 
 Tri-County
Financial Corporation
 
 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. 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.
 
 Loans
Receivable
 The
Company originates real estate mortgages to cover construction and land
development loans, commercial and consumer loans to customers. A substantial
portion of the loan portfolio is comprised of loans throughout Southern
Maryland. The ability of the Company’s debtors to honor their contracts is
dependent upon the real estate and general economic conditions in this
area.
 
 Loans
that management has the intent and ability to hold for the foreseeable future,
or until maturity or payoff, are reported at their outstanding unpaid principal
balances, adjusted for the allowance for loan losses and any deferred fees or
costs on originated loans. Interest income is accrued on the unpaid principal
balance. Loan origination fees, net of certain direct origination costs, are
deferred and recognized as an adjustment of the related loan yield using the
interest method.
 
 The
accrual of interest on mortgage and commercial loans is discontinued at the time
the loan is 90 days delinquent unless the credit is well secured and in the
process of collection. Consumer loans are charged-off no later than 180 days
past due. In all cases, loans are placed on non-accrual or charged-off at an
earlier date if collection of principal or interest is considered
doubtful.
 
 All
interest accrued but not collected from loans that are placed on non-accrual or
charged-off is reversed against interest income. The interest on these loans is
accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
 
 Allowance
for Loan Losses
 The
allowance for loan losses is established as probable losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes that the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
 
 The
allowance for loan losses is evaluated on a regular basis by management and is
based upon management’s periodic review of the collectability of the loans in
light of historical experience, the composition and size of the loan portfolio,
adverse situations that may affect the borrower’s ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective, as it requires estimates that are
susceptible to significant revision as more information becomes
available.
 
 The
allowance for loan losses consists of a specific component and a general
component. The specific component relates to loans that are classified as
doubtful, substandard or special mention. For such loans that are also
classified as impaired, an allowance is established when the discounted cash
flows (or collateral value or observable market price) of the impaired loan is
lower than carrying value of that loan. The general component covers the
non-classified loans by loan category and is based on historical loss
experience, peer group comparisons, industry data and loss percentages used for
similarly graded loans adjusted for qualitative factors.
 
 25
 
 Tri-County
Financial Corporation
 
 A loan is
considered impaired when, based on current information and events, it is
probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower’s prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan by loan basis for commercial and construction loans by either the
present value of expected future cash flows discounted at the loan’s effective
interest rate, the loan’s observable market price or the fair value of the
collateral if the loan is collateral dependent.
 
 Large
groups of smaller homogeneous loans are collectively evaluated for impairment.
Accordingly, the Company does not separately identify individual consumer and
residential loans for impairment disclosures unless such loans are the subject
of a restructuring agreement.
 
 Servicing
 Servicing
assets are recognized as separate assets when rights are acquired through
purchase or through the sale of financial assets. Generally, purchased servicing
rights are capitalized at the cost to acquire the rights. For sales of mortgage
loans, a portion of the cost of originating the loan is allocated to the
servicing based on relative estimated fair value. Estimated fair value is based
on market prices for comparable mortgage servicing contracts, when available, or
alternatively, is based on a valuation model that calculates the present value
of estimated future net servicing. The valuation model incorporates assumptions
that market participants would use in estimating future net servicing income,
such as the cost to service, the discount rate, an inflation rate, ancillary
income, prepayment speeds and default rates and losses. Capitalized servicing
rights are reported in other assets and are amortized into noninterest income in
proportion to, and over the period of, the estimated future net servicing income
of the underlying financial assets.
 
 Servicing
assets are evaluated for impairment based upon the estimated fair value of the
rights as compared to amortized cost. Impairment is determined by stratifying
rights into tranches based on predominant risk characteristics, such as interest
rate, loan type and investor type. Impairment is recognized through a valuation
allowance for an individual tranche, to the extent that fair value is less than
the capitalized amount for the tranche. If the Company later determines that all
or a portion of the impairment no longer exists for a particular tranche, a
reduction of the allowance may be recorded as an increase to
income.
 
 Servicing
fee income is recorded for fees earned for servicing loans. The fees are based
on a contractual percentage of the outstanding principal, or a fixed amount per
loan, and recorded as income when earned. The amortization of mortgage servicing
rights is netted against loan servicing fee income.
 
 Premises
and Equipment
 Land is
carried at cost. Premises, improvements and equipment are carried at cost, less
accumulated depreciation and amortization, computed by the straight-line method
over the estimated useful lives of the assets, which are as
follows:
  Buildings
      and Improvements: 10 - 50 yearsFurniture
      and Equipment: 3 - 15 yearsAutomobiles:
      5 years
 
 Maintenance
and repairs are charged to expense as incurred while improvements that extend
the useful life of premises and equipment are capitalized.
 
 Foreclosed
Real Estate
 Assets
acquired through, or in lieu of, loan foreclosure are held for sale and are
initially recorded at the lower of cost or estimated fair value at the date of
foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management, and the assets are carried
at the lower of carrying amount or estimated fair value less the cost to sell.
Revenue and expenses from operations and changes in the valuation allowance are
included in noninterest expense.
 
 26
 
 Tri-County
Financial Corporation
 
 Transfers
of Financial Assets
 Transfers
of financial assets are accounted for as sales when control over the assets has
been surrendered. Control over transferred assets is deemed to be surrendered
when (1) the assets have been isolated from the Company, (2) the transferee
obtains the right (free of conditions that constrain it from taking advantage of
that right) to pledge or exchange the transferred assets, and (3) the Company
does not maintain effective control over the transferred assets through an
agreement to repurchase them before their maturity.
 
 Advertising
Costs
 The
Company expenses advertising costs as incurred.
 
 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.
 
 Off
Balance Sheet Credit Related Financial Instruments
 In the
ordinary course of business, the Company has entered into commitments to extend
credit, including commitments under commercial lines of credit, letters of
credit and standby letters of credit. Such financial instruments are recorded
when they are funded.
 
 Stock-Based
Compensation
 The
Company has stock option and incentive plans to attract and retain key personnel
in order to promote the success of the business.
 
 Compensation
cost for all stock-based awards is measured at fair value on date of grant and
recognized over the service period for awards expected to vest. Such value is
recognized as expense over the service period, net of estimated forfeitures. The
estimation of stock awards that ultimately vest requires judgment, and to the
extent actual results or updated estimates differ from our current estimates,
such amounts will be recorded as a cumulative adjustment in the period estimates
are revised. The Company considers many factors when estimating expected
forfeitures, including types of awards, employee class and historical
experience.
 
 The
Company and the Bank currently maintain incentive compensation plans which
provide for payments to be made in cash, stock options or other share-based
compensation. The Company has accrued the full amounts due under these plans,
but as of year end, it is not possible to identify the portion that will be paid
out in the form of share-based compensation.
 
 
 27
 
 Tri-County
Financial Corporation
 
 Earnings
Per Common Share
 Basic
earnings per common share represents income available to common stockholders
divided by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued.
Potential common shares that may be issued by the Company relate solely to
outstanding stock options and are determined using the treasury stock method. As
of December 31, 2009 and 2008, there were 253,359 and 102,524 options
respectively, which were excluded from the calculation as their effect would be
anti-dilutive.
 
 Years Ended December 31,2009
                            
                            
                            2008Net
      Income
                            
                            $
                            2,867,090
                            
                            
                            $
                            3,815,332Less:
      Dividends accrued on preferred stock
                            
                            
                            (846,930
                            )
                            
                            
                            (25,878
                            )Net
      income available to common shareholders
                            
                            $
                            2,020,160
                            
                            
                            $
                            3,789,454Average
      number of common shares outstanding
                            
                            
                            2,961,293
                            
                            
                            
                            2,943,002Effect
      of dilutive options
                            
                            
                            26,608
                            
                            
                            
                            110,688Average
      number of shares used to calculate diluted earnings per
    share
                            
                            
                            2,987,901
                            
                            
                            
                            3,053,690
 
 Comprehensive
Income
 Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income. Although certain changes in assets and liabilities,
such as unrealized gains and losses on available for sale securities, are
reported as a separate component of the equity section of the balance sheet,
such items, along with net income, are components of comprehensive
income.
 
 Reclassification
 Certain
reclassifications have been made in the consolidated financial statements for
2008 to conform to the classification presented in 2009.
 
 Recent
Accounting Pronouncements
 The SEC
issued Staff Accounting Bulletin No. 109 in November 2007, “Written Loan
Commitments Recorded at Fair Value through Earnings (“SAB 109”)”. Previously,
SAB 105, “Application of Accounting Principles to Loan Commitments”, stated that
in measuring the fair value of a derivative loan commitment, a company should
not incorporate the expected net future cash flows related to the associated
servicing of the loan. SAB 109 supersedes SAB 105 and indicates that the
expected net future cash flows related to the associated servicing of the loan
should be included in measuring fair value for all written loan commitments that
are accounted for at fair value through earnings. SAB 105 also indicated that
internally-developed intangible assets should not be recorded as part of the
fair value of a derivative loan commitment, and SAB 109 retains that view. SAB
109 is effective for derivative loan commitments issued or modified in fiscal
quarters beginning after December 15, 2007. The impact of SAB 109 did not have a
material impact on the Company’s consolidated financial statements.
 
 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.
 
 28
 
 Tri-County
Financial Corporation
 
 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.
 
 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.
 
 New
accounting 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.  The Company
does not anticipate that its adoption will have a material impact on the on the
Company’s consolidated financial statements.
 
 29
 
 Tri-County
Financial Corporation
 
 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 will become effective on January 1, 2010 for non-financial
assets and non-financial liabilities (see Note 2 - Fair Value
Measurements).
 
 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.
 
 New
accounting guidance (Accounting Standards Update 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.
 
 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 (see Note 2
- Fair Value Measurements).
 
 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.  The
Company does not anticipate that its adoption would have a material impact on
the Company’s consolidated financial statements.
 
 30
 
 Tri-County
Financial Corporation
 
 NOTE
2 - FAIR VALUE MEASUREMENTS
 
 Effective
January 1, 2008, the Company adopted FASB 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 on 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.
 
 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 process in active markets for identical assets or
liabilities that the entity has the ability to access at the measurement
date.
 
 Level 2
inputs - Inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. These might include
quoted prices for similar assets and liabilities in active markets, and inputs
other than quoted prices that are observable for the asset or liability, such as
interest rates and yield curves that are observable at commonly quoted
intervals.
 
 Level 3
inputs - Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entity’s own assumptions about the assumptions that
market participants would use in pricing the assets or liabilities.
 
 Following
is a description of valuation methodologies used for assets and liabilities
recorded at fair value:
  Investment
Securities Available for 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.
 
 31
 
 Tri-County
Financial Corporation
  Loans
 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 December 31, 2009, 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.
 
 Foreclosed
Assets
 Foreclosed
assets are adjusted for fair value upon transfer of the loans to foreclosed
assets. Subsequently, foreclosed assets are carried at the lower of carrying
value and fair value. Fair value is based upon independent market prices,
appraised value of the collateral or management’s estimation of the value of the
collateral. When the fair value of the collateral is based on an observable
market price or a current appraised value, the Company records the foreclosed
asset as nonrecurring Level 2. When an appraised value is not available or
management determines the fair value of the collateral is further impaired below
the appraised value and there is no observable market price, the Company records
the foreclosed asset at nonrecurring Level 3.
  Assets
and Liabilities Recorded at Fair Value on a Recurring Basis
 The table
below presents the recorded amount of assets as of December 31, 2009, measured
at fair value on a recurring basis.
  
 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 AssetAvailable
      for sale securities
                      
                      $
                      53,926,109
                      
                      
                      $
                      -
                      
                      
                      $
                      53,926,109
                      
                      
                      $
                      -
 
 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. GAAP. 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 December 31, 2009 are included in the table
below:
 
 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
                    
                    $
                    8,784,828
                    
                    
                    $
                    -
                    
                    
                    $
                    8,784,828
                    
                    
                    $
                    -Foreclosed
      real estate
                    
                    $
                    922,934
                    
                    
                    $
                    -
                    
                    
                    $
                    922,934
                    
                    
                    $
                    -
  32


Tri-County
Financial Corporation
 
 NOTE
3 - RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
 
 The Bank
is required to maintain average balances on hand or with the Federal Reserve
Bank. At December 31, 2009 and 2008, these reserve balances amounted to $477,000
and $443,000, respectively.
 
 NOTE
4 - SECURITIES
 
 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
                    
                    $
                    90,287,803
                    
                    
                    $
                    1,701,340
                    
                    
                    $
                    3,491,883
                    
                    
                    $
                    88,497,260
 
 December 31, 2008Amortized
                    
                    
                    Gross Unrealized
                    
                    
                    Gross Unrealized
                    
                    
                    EstimatedCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Fair ValueSecurities
      Available for SaleAsset-backed
      securities issued by GSEs
                    
                    $
                    10,214,278
                    
                    
                    $
                    298,224
                    
                    
                    $
                    7,544
                    
                    
                    $
                    10,504,958Corporate
      equity securities
                    
                    
                    156,054
                    
                    
                    
                    912
                    
                    
                    
                    237
                    
                    
                    
                    156,729Bond
      mutual funds
                    
                    
                    3,503,086
                    
                    
                    
                    56,901
                    
                    
                    
                    -
                    
                    
                    
                    3,559,987Total
      Securities Available for Sale
                    
                    $
                    13,873,418
                    
                    
                    $
                    356,037
                    
                    
                    $
                    7,781
                    
                    
                    $
                    14,221,674Securities
      Held to MaturityAsset-backed
      securities issued by:GSEs
                    
                    $
                    82,544,538
                    
                    
                    $
                    337,224
                    
                    
                    $
                    931,832
                    
                    
                    $
                    81,949,930Other
                    
                    
                    25,150,396
                    
                    
                    
                    -
                    
                    
                    
                    5,137,129
                    
                    
                    
                    20,013,267Total
      Debt Securities Held to Maturity
                    
                    
                    107,694,934
                    
                    
                    
                    337,224
                    
                    
                    
                    6,068,961
                    
                    
                    
                    101,963,197U.S.
      Government obligations
                    
                    
                    999,908
                    
                    
                    
                    92
                    
                    
                    
                    -
                    
                    
                    
                    1,000,000Other
      investments
                    
                    
                    17,439
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    17,439Total
      Securities Held to Maturity
                    
                    $
                    108,712,281
                    
                    
                    $
                    337,316
                    
                    
                    $
                    6,068,961
                    
                    
                    $
                    102,980,636
 
 At
December 31, 2009, certain asset-backed securities with a carrying value of
$3,805,279 were pledged to secure certain deposits.  At December 31,
2009, asset-backed securities with a carrying value of $45,129,000 were pledged
as collateral for advances from the Federal Home Loan Bank of
Atlanta.
 
 33
 
 Tri-County
Financial Corporation
 
 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 December 31, 2009, are as follows:
 
 Continuous unrealized losses existing forLess Than 12
                    
                    
                    More Than 12
                    
                    
                    Total
                      UnrealizedFair Value
                    
                    
                    Months
                    
                    
                    Months
                    
                    
                    LossesAsset-backed
      securities issued by GSEs
                    
                    $
                    13,743,520
                    
                    
                    $
                    24,758
                    
                    
                    $
                    5,870
                    
                    
                    $
                    30,628Mutual
      fund shares
                    
                    
                    147
                    
                    
                    
                    -
                    
                    
                    
                    163
                    
                    
                    
                    163$
                    13,743,667
                    
                    
                    $
                    24,758
                    
                    
                    $
                    6,033
                    
                    
                    $
                    30,791
 
 The
available for sale investment portfolio has a fair value of $53,926,109, of
which $13,743,667 of the securities have some unrealized losses from their
amortized cost. Of these securities, $13,743,520, or 99%, are mortgage-backed
securities issued by GSEs and $147 or less than 1% are short duration mutual
fund shares. 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 (approximately 0.20%). We believe that the losses in the
equity securities are temporary. Persistent losses may require a re-evaluation
of these losses. These factors coupled with the Company’s intention and ability
to hold these investments for a period of time sufficient to allow for any
anticipated recovery in fair value substantiates that the unrealized losses in
the available for sale portfolio are temporary.
 
 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 December 31, 2009, are as follows:
 
 Continuous unrealized losses existing forLess Than 12
                    
                    
                    More Than 12
                    
                    
                    Total
                      UnrealizedFair Value
                    
                    
                    Months
                    
                    
                    Months
                    
                    
                    LossesAsset-backed
      securities issued by GSEs
                    
                    $
                    17,153,823
                    
                    
                    $
                    16,595
                    
                    
                    $
                    121,324
                    
                    
                    $
                    137,919Asset-backed
      securities issued by other
                    
                    
                    14,125,514
                    
                    
                    
                    -
                    
                    
                    
                    3,352,069
                    
                    
                    
                    3,352,069$
                    31,279,338
                    
                    
                    $
                    16,595
                    
                    
                    $
                    3,473,393
                    
                    
                    $
                    3,489,988
 
 The held
to maturity investment portfolio has an estimated fair value of $88,497,260, of
which $31,279,338, or 35% of the securities, have some unrealized losses from
their amortized cost. Of these securities, $17,153,823, or 55%, are
mortgage-backed securities issued by GSEs and the remaining $14,125,514 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 an increase in interest
rates. The securities issued by GSEs are guaranteed by the issuer. They have an
average duration of less than one year.  The average unrealized loss
on GSEs issued held to maturity securities is 0.40%. 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 that absorb losses prior to the
tranches which the Company owns. The Company reviews credit support positions on
its securities regularly. These securities have an average life of less than
three years. More than 94% of the market value of the securities is rated AAA by
Standard & Poor’s, with the remainder rated at least B. Total unrealized
losses on the asset-backed securities issued by others are $3,352,069, or 18%,
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.
 
 34
 
 Tri-County
Financial Corporation
 
 During
the year ended December 31, 2009, the Company recorded a charge of $118,744
related to other-than-temporary impairment on Silverton Bank common
stock.  This charge was recorded in earnings as investment securities
losses and eliminates the cost basis. The Company recorded a charge $148,000
related to other-than-temporary impairment on a single CMO issue. The issue has
a par value of $1,151,000 with a carrying value of $732,000.
 
 Management
has the ability and intent to hold the securities with unrealized losses
classified as held to maturity until they mature, at which time the Company will
receive full value for the securities. Further, as of December 31, 2009,
management does not have the intent to sell any of the securities classified as
available for sale with unrealized losses and believes that it is more likely
than not that the Company will not have to sell any such securities before a
recovery of cost. The fair value is expected to recover as the bonds approach
their maturity or repricing date, or if market yields for such investments
decline. Management does not believe any of the securities are impaired due to
reasons of credit quality, except for the single CMO issue noted above, for
which an other-than-temporary charge was recorded in the amount of $148,000.
Accordingly, management believes that all other impairments are
temporary.
 
 The
amortized cost and estimated fair value of debt securities at December 31, 2009,
by contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because the issuers of the securities may have the right
to prepay obliga­tions without prepayment penalties.
 
 Available for Sale
                    
                    
                    Held to MaturityEstimated
                    
                    
                    
                    
                    
                    EstimatedAmortized
                    
                    
                    Fair
                    
                    
                    Amortized
                    
                    
                    FairCost
                    
                    
                    Value
                    
                    
                    Cost
                    
                    
                    ValueWithin
      one year
                    
                    $
                    3,568,050
                    
                    
                    $
                    3,654,120
                    
                    
                    $
                    5,247
                    
                    
                    $
                    5,247Over
      one year through five years
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Asset-backed
      SecuritiesWithin
      one year
                    
                    
                    24,888,224
                    
                    
                    
                    25,196,992
                    
                    
                    
                    41,955,218
                    
                    
                    
                    41,123,135Over
      one year through five years
                    
                    
                    18,874,546
                    
                    
                    
                    19,108,707
                    
                    
                    
                    38,934,434
                    
                    
                    
                    38,162,261Over
      five years through ten years
                    
                    
                    4,670,361
                    
                    
                    
                    4,728,302
                    
                    
                    
                    8,040,720
                    
                    
                    
                    7,881,251After
      ten years
                    
                    
                    1,184,726
                    
                    
                    
                    1,199,424
                    
                    
                    
                    1,352,184
                    
                    
                    
                    1,325,366Total
      Asset-backed Securities
                    
                    
                    49,617,857
                    
                    
                    
                    50,233,426
                    
                    
                    
                    90,282,556
                    
                    
                    
                    88,492,013$
                    53,185,907
                    
                    
                    $
                    53,887,547
                    
                    
                    $
                    90,287,803
                    
                    
                    $
                    88,497,260
 
 During
2009, sales of available for sale securities totaled $73,200 compared to no
sales in 2008. The 2009 sales pro­duced a net loss of $12,863. Asset-backed
securities are comprised of mortgage-backed securities as well as asset-backed
securities such as collateralized mortgage obligations and real estate mortgage
investment conduits.
 
 35
 
 Tri-County
Financial Corporation
 
 NOTE
5 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
 
 A summary
of the balances of loans is as follows:
 
 Years Ended December 31,2009
                      
                      
                      2008Commercial
      real estate
                      
                      $
                      292,987,963
                      
                      
                      $
                      236,409,990Residential
      first mortgages
                      
                      
                      116,225,733
                      
                      
                      
                      104,607,136Construction
      and land development
                      
                      
                      62,509,558
                      
                      
                      
                      57,564,710Home
      equity and second mortgage
                      
                      
                      25,133,155
                      
                      
                      
                      25,412,415Commercial
      loans
                      
                      
                      108,657,910
                      
                      
                      
                      101,935,520Consumer
      loans
                      
                      
                      1,607,765
                      
                      
                      
                      2,045,838Commercial
      equipment
                      
                      
                      17,916,655
                      
                      
                      
                      20,458,092625,038,739
                      
                      
                      
                      548,433,701Less:Deferred
      loan fees
                      
                      
                      974,449
                      
                      
                      
                      310,890Allowance
      for loan loss
                      
                      
                      7,471,314
                      
                      
                      
                      5,145,6738,445,763
                      
                      
                      
                      5,456,563$
                      616,592,976
                      
                      
                      $
                      542,977,138
 
 At
December 31, 2009, the Bank’s allowance for loan losses totaled $7,471,314 or
1.2% of loan balances as compared to $5,145,673 or 0.94% of loan balances at
December 31, 2008. 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.
 
 An
analysis of the allowance for loan losses follows:
 
 2009
                      
                      
                      2008Balance
      January 1,
                      
                      $
                      5,145,673
                      
                      
                      $
                      4,482,483Add:Provision
      charged to operations
                      
                      
                      3,472,608
                      
                      
                      
                      1,300,826Recoveries
                      
                      
                      100
                      
                      
                      
                      1,467Less:Charge-offs
                      
                      1,147,067
                      
                      
                      
                      639,103Balance,
      December 31
                      
                      $
                      7,471,314
                      
                      
                      $
                      5,145,673
 
 At
December 31, 2009 and 2008, impaired loans totaled $10,622,173 and $1,742,800,
respectively. Impaired loans include accruing loans that have been restructured
in the amount of $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 December 31, 2009 and 2008 were $1,837,345
and $222,700, respectively. If interest income had been recognized on impaired
loans at their stated rates during 2009 interest income would have been
increased by $461,149.  Approximately $107,000 of interest income was
recognized on average impaired loans of $6,623,500 during 2009 compared to
approximately $89,000 of interest income on average impaired loans of $2,057,200
for 2008.
 
 36
 
 Tri-County
Financial Corporation
 
 Loans on
which the recognition of interest has been discontinued, which were not
considered impaired, amounted to $10,340,310 and $3,193,200 at December 31, 2009
and 2008, respectively. If interest income had been recognized on non-accrual
loans at their stated rates during 2009 and 2008 interest income would have been
increased by $556,202 and $148,794, respectively. Income in the amount of
$160,817 and $164,571 was recognized on these loans in 2009 and 2008,
respectively.
 
 Included
in loans receivable at December 31, 2009 and 2008 was $5,809,065 and $4,796,390
due from officers and directors of the Bank. These loans are made in the
ordinary course of business at substantially the same terms and conditions as
those prevailing at the time for comparable transactions with persons not
affiliated with the Bank and are not considered to involve more than the normal
risk of collectability. For the years ended December 31, 2009 and 2008, all
loans to directors and officers of the Bank were performing according to the
original loan terms.
 
 Activity
in loans outstanding to officers and directors is summarized as
follows:
 
 2009
                        
                        
                        2008Balance,
      beginning of year
                        
                        $
                        4,796,390
                        
                        
                        $
                        5,189,612New
      loans made during year
                        
                        
                        1,351,315
                        
                        
                        
                        83,243Repayments
      made during year
                        
                        
                        (338,640
                        )
                        
                        
                        (476,465
                        )Balance,
      end of year
                        
                        $
                        5,809,065
                        
                        
                        $
                        4,796,390
 
 NOTE
6 - LOAN SERVICING
 
 Loans
serviced for others are not reflected in the accompanying balance sheets. The
unpaid principal balances of mortgages serviced for others were $37,204,292 and
$21,707,985 at December 31, 2009 and 2008, respectively.
 
 Servicing
loans for others generally consists of collecting mortgage payments, maintaining
escrow accounts, disbursing payments to investors and foreclosure
processing.  Loan servicing income is recorded on the accrual basis
and includes servicing fees from investors and certain charges collected from
borrowers, such as late payment fees.  The following table presents
the activity of the mortgage servicing rights.
 
 Year Ended December 31,2009
                      
                      
                      2008Balance
      at beginning of the year
                      
                      $
                      -
                      
                      
                      $
                      83,659Additions
                      
                      
                      152,519
                      
                      
                      
                      -Amortization
                      
                      
                      (19,660
                      )
                      
                      
                      (83,659
                      )$
                      132,859
                      
                      
                      $
                      -
 
 NOTE
7 - FORECLOSED REAL ESTATE
 
 Foreclosed
assets are presented net of an allowance for losses. An analysis of the activity
in foreclosed assets is as fol­lows:
 
 Year Ended December 31,2009
                      
                      
                      2008Balance
      at beginning of the year
                      
                      $
                      -
                      
                      
                      $
                      -Additions
      of underlying property
                      
                      
                      922,934
                      
                      
                      
                      -Balance
      at end of year
                      
                      $
                      922,934
                      
                      
                      $
                      -
 
 Expense
applicable to foreclosed assets included operating expenses of $148,156 for the
year ended December 31, 2009. There was no income or expenses for foreclosed
real estate in 2008.
 
 37
 
 Tri-County
Financial Corporation
 
 NOTE
8 - PREMISES AND EQUIPMENT
 
 A summary
of the cost and accumulated depreciation of premises and equipment
follows:
 
 2009
                      
                      
                      2008Land
                      
                      $
                      3,100,039
                      
                      
                      $
                      3,100,039Building
      and improvements
                      
                      
                      10,779,689
                      
                      
                      
                      10,424,873Furniture
      and equipment
                      
                      
                      4,081,595
                      
                      
                      
                      4,221,128Automobiles
                      
                      
                      214,849
                      
                      
                      
                      214,849Total
      cost
                      
                      
                      18,176,172
                      
                      
                      
                      17,960,889Less
      accumulated depreciation
                      
                      
                      6,188,482
                      
                      
                      
                      5,724,890Premises
      and equipment, net
                      
                      $
                      11,987,690
                      
                      
                      $
                      12,235,999
 
 Certain
bank facilities are leased under various operating leases. Rent expense was
$458,242 and $477,967 in 2009 and 2008, respectively. Future minimum rental
commitments under non-cancellable operating leases are as follows:
 2010
                                
                                $
                                463,5342011
                                
                                
                                312,6332012
                                
                                
                                316,8552013
                                
                                
                                264,4192014
                                
                                
                                277,030Thereafter
                                
                                
                                3,197,549Total
                                
                                $
                                4,832,020
 
 NOTE
9 - DEPOSITS
 
 Deposits
at December 31 consist of the following:
 
 2009
                      
                      
                      2008Noninterest-bearing
      demand
                      
                      $
                      70,001,444
                      
                      
                      $
                      50,642,273Interest-bearing:Demand
                      
                      
                      58,650,523
                      
                      
                      
                      40,615,427Money
      market deposits
                      
                      
                      102,491,488
                      
                      
                      
                      86,957,359Savings
                      
                      
                      28,017,418
                      
                      
                      
                      26,911,911Certificates
      of deposit
                      
                      
                      381,257,916
                      
                      
                      
                      320,040,596Total
      interest-bearing
                      
                      
                      570,417,345
                      
                      
                      
                      474,525,293Total
      Deposits
                      
                      $
                      640,418,789
                      
                      
                      $
                      525,167,566
 
 The
aggregate amount of certificates of deposit in denominations of $100,000 or more
at December 31, 2009, and 2008 was $192,650,086 and $115,667,914,
respectively.
 
 38
 
 Tri-County
Financial Corporation
 
 At
December 31, 2009, the scheduled maturities of certificates of deposit are as
follows:
 
 2010
                          
                          $
                          314,126,3862011
                          
                          
                          27,341,3092012
                          
                          
                          18,905,9432013
                          
                          
                          10,645,9982014
                          
                          
                          10,238,280$
                          381,257,916
 
 NOTE
10 - SHORT-TERM BORROWINGS AND LONG-TERM DEBT
 
 The
Bank’s long-term debt consists of advances from the Federal Home Loan Bank of
Atlanta. The Bank classifies debt based upon original maturity and does not
reclassify debt to short-term status during its life. These include fixed-rate,
fixed-rate con­vertible and variable-rate convertible advances. Rates and
maturities on these advances are as follows:
 
 Fixed-
                                          
                                          
                                          Fixed-Rate
                                          
                                          
                                          VariableRate
                                          
                                          
                                          Convertible
                                          
                                          
                                          Convertible2009Highest
      rate
                                          
                                          4.19%
                                          
                                          
                                          4.30%
                                          
                                          
                                          0.00%Lowest
      rate
                                          
                                          1.00%
                                          
                                          
                                          3.47%
                                          
                                          
                                          0.00%Weighted
      average rate
                                          
                                          3.71%
                                          
                                          
                                          3.88%
                                          
                                          
                                          0.00%Matures
      through
                                          
                                          2036
                                          
                                          
                                          2018
                                          
                                          
                                          20202008Highest
      rate
                                          
                                          5.15%
                                          
                                          
                                          6.25%
                                          
                                          
                                          0.04%Lowest
      rate
                                          
                                          1.00%
                                          
                                          
                                          3.27%
                                          
                                          
                                          0.04%Weighted
      average rate
                                          
                                          4.06%
                                          
                                          
                                          4.70%
                                          
                                          
                                          0.04%Matures
      through
                                          
                                          2036
                                          
                                          
                                          2014
                                          
                                          
                                          2020
 
 Average
rates of long-term debt and short-term borrowings were as follows:
 
 At or for the Year Ended December 31,(dollars in thousands)
                        
                        2009
                        
                        
                        2008Long-term
      debtLong-term
      debt outstanding at end of period
                        
                        $
                        75,670
                        
                        
                        $
                        104,963Weighted
      average rate on outstanding long-term debt
                        
                        
                        3.26
                        %
                        
                        
                        3.81
                        %Maximum
      outstanding long-term debt of any month end
                        
                        
                        100,692
                        
                        
                        
                        104,998Average
      outstanding long-term debt
                        
                        
                        94,745
                        
                        
                        
                        102,112Approximate
      average rate paid on long-term debt
                        
                        
                        3.70
                        %
                        
                        
                        4.09
                        %Short-term
      borrowingsShort-term
      borrowings outstanding at end of period
                        
                        $
                        13,081
                        
                        
                        $
                        1,522Weighted
      average rate on short-term borrowings
                        
                        
                        0.34
                        %
                        
                        
                        1.83
                        %Maximum
      outstanding short-term borrowings at anymonth
      end
                        
                        $
                        13,081
                        
                        
                        $
                        20,943Average
      outstanding short-term borrowings
                        
                        
                        1,421
                        
                        
                        
                        4,355Approximate
      average rate paid on short-term borrowings
                        
                        
                        2.06
                        %
                        
                        
                        3.59
                        %
 
 The
Bank’s fixed-rate debt generally consists of advances with monthly interest
payments and principal due at maturity.
 
 39
 
 Tri-County
Financial Corporation
 
 The
Bank’s fixed-rate convertible long-term debt is callable by the issuer, after an
initial period ranging from six months to five years. The instruments are
callable at the date ending the initial period. At December 31, 2009, the Bank
had $10,000,000 in fixed-rate convertible debt callable in 2013. All advances
have a prepayment penalty, determined based upon prevailing interest
rates.
 
 Variable
convertible advances have an initial variable rate based on a discount to LIBOR.
Our debt has a discount to LIBOR of 43 basis points. At December 31, 2009, the
Bank has $10,000,000 that will convert at the issuer’s option to a fixed-rate
advance at a rate of 4.0% for a term of ten years. The contractual maturities of
long-term debt are as follows:
 
 December 31, 2009Fixed-
                        
                        
                        Fixed-Rate
                        
                        
                        VariableRate
                        
                        
                        Convertible
                        
                        
                        Convertible
                        
                        
                        TotalDue
      in 2010
                        
                        $
                        10,000,000
                        
                        
                        $
                        -
                        
                        
                        $
                        -
                        
                        
                        $
                        10,000,000Due
      in 2011
                        
                        
                        20,000,000
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        20,000,000Due
      in 2012
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Due
      in 2013
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -Due
      in 2014
                        
                        
                        10,750,000
                        
                        
                        
                        10,000,000
                        
                        
                        
                        -
                        
                        
                        
                        20,750,000Thereafter
                        
                        
                        4,919,630
                        
                        
                        
                        10,000,000
                        
                        
                        
                        10,000,000
                        
                        
                        
                        24,919,630$
                        45,669,630
                        
                        
                        $
                        20,000,000
                        
                        
                        $
                        10,000,000
                        
                        
                        $
                        75,669,630
 
 From time
to time, the Bank also has daily advances outstanding, which are classified as
short-term borrowings. These advances are repayable at the Bank’s option at any
time and are re-priced daily. There was $12,500,000 outstanding as of December
31, 2009. There were no amounts outstanding at December 31, 2008.
 
 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 collateral values of the unpaid loan principal balances are established at
70% 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 $45,129,000 as additional
collateral for its advances at December 31, 2009.
 
 The Bank
is limited to total advances of up to 40% of assets or $325,000,000. At December
31, 2009, the Bank had filed collateral statements identifying collateral
sufficient to borrow $43,000,000 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. In addition, the Bank 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 $17,000,000 under
this agreement. In addition, the Bank has established short-term unsecured
credit facilities with other commercial banks totaling $12,000,000 at December
31, 2009. No amounts were outstanding under the Borrower in Custody or
commercial lines at December 31, 2009.
 
 Also, the
Bank had outstanding notes payable to the U.S. Treasury, which are federal
treasury tax and loan deposits accepted by the Bank and remitted on demand to
the Federal Reserve Bank. At December 31, 2009 and 2008, such borrowings were
$580,530 and $1,522,367, respectively. The Bank pays interest on these balances
at a slight discount to the federal funds rate. The notes are secured by
investment securities with an amortized cost of approximately $1,500,000 and
$1,600,000 at December 31, 2009 and 2008, respectively.
 
 40
 
 Tri-County
Financial Corporation
 
 NOTE
11 - INCOME TAXES
 
 Allocation
of federal and state income taxes between current and deferred portions is as
follows:
 
 2009
                      
                      
                      2008CurrentFederal
                      
                      $
                      2,463,419
                      
                      
                      $
                      2,088,612State
                      
                      
                      718,444
                      
                      
                      
                      619,2183,181,863
                      
                      
                      
                      2,707,830DeferredFederal
                      
                      
                      (1,357,027
                      )
                      
                      
                      (552,720
                      )State
                      
                      
                      (213,148
                      )
                      
                      
                      (112,110
                      )(1,570,175
                      )
                      
                      
                      (664,830
                      )Total
      Income Tax Expense
                      
                      $
                      1,611,688
                      
                      
                      $
                      2,043,000
 
 The
reasons for the differences between the statutory federal income tax rate and
theeffective tax
rates are summarized as follows:
 
 2009
                          
                          
                          2008Amount
                          
                          
                          Percent
                            of Pre
                            Tax
                            Income
                          
                          
                          Amount
                          
                          
                          Percent
                            of Pre
                            Tax
                            IncomeExpected
      income tax expense atfederal
      tax rate
                          
                          $
                          1,522,778
                          
                          
                          
                          34.00
                          %
                          
                          $
                          1,991,833
                          
                          
                          
                          34.00
                          %State
      taxes net of federal benefit
                          
                          
                          329,641
                          
                          
                          
                          7.36
                          %
                          
                          
                          340,735
                          
                          
                          
                          5.82
                          %Nondeductible
      expenses
                          
                          
                          16,032
                          
                          
                          
                          0.36
                          %
                          
                          
                          30,856
                          
                          
                          
                          0.53
                          %Nontaxable
      income
                          
                          
                          (272,036
                          )
                          
                          
                          (6.07
                          )%
                          
                          
                          (237,626
                          )
                          
                          
                          (4.06
                          )%Other
                          
                          
                          15,253
                          
                          
                          
                          0.34
                          %
                          
                          
                          (82,798
                          )
                          
                          
                          (1.41
                          )%$
                          1,611,668
                          
                          
                          
                          35.98
                          %
                          
                          $
                          2,043,000
                          
                          
                          
                          34.87
                          %
 
 The net
deferred tax assets in the accompanying balance sheets include the following
components:
 
 2009
                        
                        
                        2008Deferred
      Tax AssetsDeferred
      fees
                        
                        $
                        1,470
                        
                        
                        $
                        1,665Allowance
      for loan losses
                        
                        
                        2,947,433
                        
                        
                        
                        2,029,968Deferred
      compensation
                        
                        
                        1,351,433
                        
                        
                        
                        1,201,641Other
                        
                        
                        533,217
                        
                        
                        
                        95,6794,833,553
                        
                        
                        
                        3,328,953Deferred
      Tax LiabilitiesUnrealized
      gain on investment securities
                        
                        
                        146,548
                        
                        
                        
                        118,408FHLB
      stock dividends
                        
                        
                        156,182
                        
                        
                        
                        156,182Depreciation
                        
                        
                        166,634
                        
                        
                        
                        232,208469,364
                        
                        
                        
                        506,798$
                        4,364,189
                        
                        
                        $
                        2,822,155
 
 Retained
earnings at December 31, 2009 included approximately $1.2 million of bad debt
deductions allowed for federal income tax purposes (the “base year tax reserve”)
for which no deferred income tax has been recognized. If, in the future, this
portion of retained earnings is used for any purpose other than to absorb bad
debt losses, it would create income for tax purposes only and income taxes would
be imposed at the then prevailing rates. The unrecorded income tax liability on
the above amount was approximately $463,000 at December 31, 2009.  The
Company is no longer subject to U.S. Federal tax examinations by tax authorities
for years before 2006.
 
 41
 
 Tri-County
Financial Corporation
 
 NOTE
12 - COMMITMENTS AND CONTINGENCIES
 
 The Bank
is party to financial instruments with off-balance-sheet risk in the normal
course of business to meet the financing needs of its customers. These financial
instruments are commitments to extend credit. These instruments may, but do not
necessarily involve, to varying degrees, elements of credit and interest rate
risk in excess of the amount recognized on the balance sheets. The Bank’s
expo­sure to credit loss in the event of nonperformance by the other party
to the financial instrument is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments as it
does for on-balance-sheet loans receivable.
 
 As of
December 31, 2009 and 2008, in addition to the undisbursed portion of loans
receivable of $22,960,545 and $20,030,652, respectively, the Bank had
outstanding loan commitments approximating $12,168,100 and $26,795,510,
respectively.
 
 Standby
letters of credit written are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These guarantees are
issued primarily to support construction borrowing arrangements. The credit risk
involved in issu­ing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank holds cash or a
secured interest in real estate as collateral to support those commitments for
which collateral is deemed necessary. Standby letters of credit outstanding
amounted to $20,689,434 and $19,541,000 at December 31, 2009 and 2008,
respectively. In addition to the commitments noted above, customers had
approximately $82,307,000 and $90,543,000 available under lines of credit at
December 31, 2009 and 2008, respectively.
 
 NOTE
13 - STOCK OPTION AND INCENTIVE PLAN
 
 The
Company has stock option and incentive plans to attract and retain personnel and
provide incentive to employees to promote the success of the business. On
January 31, 2005, the Company’s 1995 Stock Option and Incentive Plan and 1995
Stock Option Plan for Non-Employee Directors each expired. All shares authorized
and available under this plan were awarded as of December 31, 2004. In May 2005,
the 2005 Equity Compensation Plan was approved by the shareholders. The exercise
price for options granted under this plan is set at the discretion of the
committee administering this plan, but is not less than the market value of the
shares as of the date of grant. An option’s maximum term is ten years and the
options vest at the discretion of the committee administering this plan. All
outstanding options were fully vested at December 31, 2009.
 
 2009
                      
                      
                      2008Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        Price
                      
                      
                      Shares
                      
                      
                      Weighted
                        Average
                        Exercise
                        PriceOutstanding
      at beginning of year
                      
                      
                      353,217
                      
                      
                      $
                      15.49
                      
                      
                      
                      428,619
                      
                      
                      $
                      14.72Granted
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Exercised
                      
                      
                      (22,959
                      )
                      
                      
                      7.97
                      
                      
                      
                      (71,454
                      )
                      
                      
                      10.83Expired
                      
                      
                      (1,013
                      )
                      
                      
                      7.88
                      
                      
                      
                      (1,136
                      )
                      
                      
                      7.20Forfeitures
                      
                      
                      (2
                      )
                      
                      
                      7.88
                      
                      
                      
                      (2,812
                      )
                      
                      
                      20.03Outstanding
      at end of year
                      
                      
                      329,243
                      
                      
                      $
                      16.04
                      
                      
                      
                      353,217
                      
                      
                      $
                      15.49
  42
 
 Tri-County
Financial Corporation
 
 Options
outstand­ing are all currently exercisable and are summarized as
follows:
 
 Number Outstanding
                                
                                Weighted Average
                                
                                Weighted AverageDecember 31, 2009
                                
                                Remaining Contractual Life
                                
                                Exercise Price24,861
                                
                                1
      years
                                
                                $
                                7.9032,076
                                
                                2
      years
                                
                                
                                7.9118,947
                                
                                3
      years
                                
                                
                                11.5662,880
                                
                                4
      years
                                
                                
                                12.9387,955
                                
                                5
      years
                                
                                
                                15.8980,813
                                
                                6
      years
                                
                                
                                22.2921,711
                                
                                8
      years
                                
                                
                                27.70329,243
                                
                                
                                
                                
                                16.04
 
 Stock
option based compensation expense totaled $36,481 and $0 in 2009 and 2008,
respectively.  Aggregate intrinsic value of outstanding stock options
and exercisable stock options was $222,607 at December 31,
2009.  Aggregate intrinsic value represents the difference between the
Company’s closing stock price on the last trading day of the period, which was
$11.75 at December 31, 2009, and the exercise price multiplied by the number of
options outstanding.
 
 The fair
value of the Company’s employee stock options granted is estimated on the date
of grant using the Black-Scholes option pricing model. There were no stock
options granted for 2009 and 2008, respectively.  The Company
estimates expected market price volatility and expected term of the options
based on historical data and other factors.
 
 In 2008,
the Company issued 7,263 shares of common stock as settlement of accrued
incentive bonuses to employees under the 2005 Equity Compensation Plan. The
total value of these shares was $140,088.
 
 NOTE
14 - EMPLOYEE BENEFIT PLANS
 
 The Bank
has an Employee Stock Ownership Plan (“ESOP”) that covers substantially all its
employees. The ESOP acquires stock of Tri-County Financial Corporation.
Unencumbered shares held by the ESOP are treated as outstanding in computing
earnings per share. Shares issued to the ESOP but pledged as collateral for
loans obtained to provide funds to acquire the shares are not treated as
outstanding in computing earnings per share. Dividends on ESOP shares are
recorded as a reduction of retained earnings. Contributions are made at the
dis­cretion of the Board of Directors. Expense recognized for the years
ended 2009 and 2008 totaled $24 and $36,841, respectively. As of December 31,
2009, the ESOP plan held 188,639 allocated and 22,941 unallocated shares with an
approxi­mate market value of $2,216,508 and $269,557,
respectively.
 
 The
Company also has a 401(k) plan. The Company matches a portion of the employee
contributions. This ratio is determined annu­ally by the Board of Directors.
In 2009 and 2008, the Company matched one-half of the employee’s first 8% of
deferral. All employees who have completed six months of service and have
reached the age of 21 are covered under this defined contribution plan.
Contributions are determined at the discretion of the Board of Directors. For
the years ended December 31, 2009 and 2008, the expense recorded for this plan
totaled $169,175 and $160,547, respectively.
 
 The Bank
has a separate nonqualified retirement plan for non-employee directors.
Directors are eligible for a maximum benefit of $3,500 a year for ten years
following retirement from the Board of Community Bank of Tri-County. The maximum
benefit is earned at 15 years of service as a non-employee director. Full
vesting occurs after two years of service. Expense recorded for this plan was
$8,336 and $10,012 for the years ended December 31, 2009 and 2008,
respectively.
 
 43
 
 Tri-County
Financial Corporation
 
 In
addition, the Bank has established a separate supplemental retirement plan for
certain key executives of the Bank. This plan pro­vides a retirement income
payment for 15 years from the date of the employee’s expected retirement date.
The payments are set at the discretion of the Board of Directors and vesting
occurs ratably from the date of employment to the expected retirement date.
Expense recorded for this plan totaled $371,000 and $396,000 for 2009 and 2008,
respectively.
 
 NOTE
15 - REGULATORY MATTERS
 
 The
Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agen­cies. Failure to meet
minimum capital requirements can initiate certain mandatory and possible
additional discretionary actions by reg­ulators that, if undertaken, could
have a direct material effect on the Company’s financial statements. Under
capital adequacy guide­lines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantita­tive measures of the Bank’s assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank’s capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weight­ings and other
factors.
 
 Quantitative
measures established by regulation to ensure capital adequacy require the
Company and the Bank to maintain minimum amounts and ratios (set forth in the
following table) of tangible and core capital (as defined in the regulations) to
total adjusted assets (as defined) and of risk-based capital (as defined) to
risk-weighted assets (as defined). Management believes, as of December 31, 2009,
that the Company and the Bank meet all capital adequacy requirements to which
they are subject.
 
 As of
December 31, 2009, the most recent notification from the Federal Reserve
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Company’s or the Bank’s
category. The Company’s and the Bank’s actual capital amounts and ratios for
2009 and 2008 are presented in the following tables.
 
 44
 
 Tri-County
Financial Corporation
 
 Actual
                                            
                                            
                                            Required for Capital
                                              Adequacy Purposes
                                            
                                            
                                            To be Considered
                                              Well Capitalized
                                              Under Prompt
                                              Corrective ActionAt
      December 31, 2009Total
      Capital (to risk weighted assets)The
      Company
                                            
                                            $
                                            87,416
                                            
                                            
                                            13.46%
                                            
                                            
                                            $
                                            51,973
                                            
                                            
                                            8.00%The
      Bank
                                            
                                            $
                                            85,028
                                            
                                            
                                            13.14%
                                            
                                            
                                            $
                                            51,787
                                            
                                            
                                            8.00%
                                            
                                            
                                            $
                                            64,734
                                            
                                            
                                            10.00%Tier
      1 Capital (to risk weighted assets)The
      Company
                                            
                                            $
                                            79,905
                                            
                                            
                                            12.30%
                                            
                                            
                                            $
                                            25,987
                                            
                                            
                                            4.00%The
      Bank
                                            
                                            $
                                            77,517
                                            
                                            
                                            11.97%
                                            
                                            
                                            $
                                            25,894
                                            
                                            
                                            4.00%
                                            
                                            
                                            $
                                            38,840
                                            
                                            
                                            6.00%Tier
      1 Capital (to average assets)The
      Company
                                            
                                            $
                                            79,905
                                            
                                            
                                            10.03%
                                            
                                            
                                            $
                                            31,880
                                            
                                            
                                            4.00%The
      Bank
                                            
                                            $
                                            77,517
                                            
                                            
                                            9.74%
                                            
                                            
                                            $
                                            31,840
                                            
                                            
                                            4.00%
                                            
                                            
                                            $
                                            39,800
                                            
                                            
                                            5.00%At
      December 31, 2008Total
      Capital (to risk weighted assets)The
      Company
                                            
                                            $
                                            84,072
                                            
                                            
                                            14.73%
                                            
                                            
                                            $
                                            45,668
                                            
                                            
                                            8.00%The
      Bank
                                            
                                            $
                                            82,194
                                            
                                            
                                            14.45%
                                            
                                            
                                            $
                                            45,507
                                            
                                            
                                            8.00%
                                            
                                            
                                            $
                                            56,884
                                            
                                            
                                            10.00%Tier
      1 Capital (to risk weighted assets)The
      Company
                                            
                                            $
                                            78,884
                                            
                                            
                                            13.82%
                                            
                                            
                                            $
                                            22,834
                                            
                                            
                                            4.00%The
      Bank
                                            
                                            $
                                            77,006
                                            
                                            
                                            13.54%
                                            
                                            
                                            $
                                            22,754
                                            
                                            
                                            4.00%
                                            
                                            
                                            $
                                            34,131
                                            
                                            
                                            6.00%Tier
      1 Capital (to average assets)The
      Company
                                            
                                            $
                                            78,884
                                            
                                            
                                            11.54%
                                            
                                            
                                            $
                                            27,342
                                            
                                            
                                            4.00%The
      Bank
                                            
                                            $
                                            77,006
                                            
                                            
                                            11.28%
                                            
                                            
                                            $
                                            27,302
                                            
                                            
                                            4.00%
                                            
                                            
                                            $
                                            34,128
                                            
                                            
                                            5.00%
  NOTE
16 - 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.
 
 45
 
 Tri-County
Financial Corporation
  December 31, 2009
                        
                        
                        December 31, 2008Estimated
                        
                        
                        
                        
                        
                        EstimatedCarrying
                        
                        
                        Fair
                        
                        
                        Carrying
                        
                        
                        FairAmount
                        
                        
                        Value
                        
                        
                        Amount
                        
                        
                        ValueAssetsCash
      and cash equivalents
                        
                        $
                        11,247,967
                        
                        
                        $
                        11,247,967
                        
                        
                        $
                        14,474,532
                        
                        
                        $
                        14,474,532Investment
      securities and stock in FHLB and FRB
                        
                        
                        151,149,412
                        
                        
                        
                        148,049,000
                        
                        
                        
                        129,386,955
                        
                        
                        
                        123,655,310Loans
      receivable, net
                        
                        
                        616,592,976
                        
                        
                        
                        610,998,000
                        
                        
                        
                        542,977,138
                        
                        
                        
                        585,899,804Foreclosed
      real estate
                        
                        
                        922,934
                        
                        
                        
                        922,934
                        
                        
                        
                        -
                        
                        
                        
                        -LiabilitiesSavings,
      NOW and money market accounts
                        
                        
                        259,160,873
                        
                        
                        
                        246,139,000
                        
                        
                        
                        205,126,970
                        
                        
                        
                        205,483,312Time
      certificates
                        
                        
                        381,257,916
                        
                        
                        
                        384,848,000
                        
                        
                        
                        320,040,596
                        
                        
                        
                        324,199,698Long-term
      debt and other borrowed funds
                        
                        
                        88,750,160
                        
                        
                        
                        83,381,000
                        
                        
                        
                        106,485,795
                        
                        
                        
                        107,628,766Guaranteed
      preferred beneficial interest in junior subordinated
      securities
                        
                        
                        12,000,000
                        
                        
                        
                        2,400,000
                        
                        
                        
                        12,000,000
                        
                        
                        
                        11,520,000
 
 At
December 31, 2009, the Company had outstanding loan commitments and standby
letters of credit of $12.2 million and $20.7 million, respectively. Based on the
short-term lives of these instruments, the Company does not believe that the
fair value of these instruments differs significantly from their carrying
values.
 
 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.
 
 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 that
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 Assets- Fair
value is based upon independent market prices, appraised value of the collateral
or management’s estimation of the value of the collateral.
 
 Deposits- The fair value of
checking accounts, saving accounts, and money market accounts was the amount
payable on demand at the reporting date.
 
 Time Certificates- The fair
value was determined using the discounted cash flow method. The discount rate
was equal to the rate cur­rently offered on similar products.
 
 Long-Term Debt and Other Borrowed
Funds- These were valued using the discounted cash flow method. The
discount rate was equal to the rate currently offered on similar
borrowings.
 
 Guaranteed Preferred Beneficial
Interest in Junior Subordinated Securities -These were valued using
discounted cash flows. The discount rate was equal to the rate currently offered
on similar borrowings.
 
 46
 
 Tri-County
Financial Corporation
 
 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 December 31, 2009 and 2008. 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.
 
 NOTE
17 - 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.
 
 Costs
associated with the issuance of the trust-preferred securities were less than
$10,000 and were expensed as period costs.
 
 NOTE
18 - 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, 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.
 
 47
 
 Tri-County
Financial Corporation
 
 At the
same time the Company issued its Series A Preferred Stock, it issued to the
Treasury warrants to purchase Fixed Rate Cumulative Perpetual Preferred Stock,
Series B Preferred Stock (“Preferred B”) in the amount of 5% of the Preferred A
shares or 770 shares with a par value of $777,000. The warrants had an exercise
price of $.01 per share. These Preferred B shares have the same rights,
preferences and privileges as the Series A Preferred Shares. The Series B
Preferred Shares have a dividend rate of 9%. These warrants were immediately
exercised.
 
 The Company believes that it is in
compliance with all terms of the Preferred Stock Purchase Agreement.
 
 NOTE
19 - CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY
 
 Balance
Sheet
 December 31,2009
                            
                            
                            2008AssetsCash
      - noninterest bearing
                            
                            $
                            863,305
                            
                            
                            $
                            447,077Cash
      - interest bearing
                            
                            
                            -
                            
                            
                            
                            157,554Investment
      securities available for sale
                            
                            
                            -
                            
                            
                            
                            40,701Investment
      in wholly owned subsidiaries
                            
                            
                            78,173,565
                            
                            
                            
                            77,608,281Other
      assets
                            
                            
                            1,955,554
                            
                            
                            
                            1,634,411Total
      Assets
                            
                            $
                            80,992,424
                            
                            
                            $
                            79,888,024Liabilities
      and Stockholders' EquityCurrent
      liabilities
                            
                            $
                            430,575
                            
                            
                            $
                            401,605Guaranteed
      preferred beneficial interest in junior subordinated
      debentures
                            
                            
                            12,372,000
                            
                            
                            
                            12,372,000Total
      Liabilities
                            
                            
                            12,802,575
                            
                            
                            
                            12,773,605Stockholders'
      equityPreferred
      Stock - Series A
                            
                            
                            15,540,000
                            
                            
                            
                            15,540,000Preferred
      Stock - Series B
                            
                            
                            777,000
                            
                            
                            
                            777,000Common
      stock
                            
                            
                            29,760
                            
                            
                            
                            29,478Surplus
                            
                            
                            16,754,627
                            
                            
                            
                            16,517,649Retained
      earnings
                            
                            
                            35,193,958
                            
                            
                            
                            34,280,719Total
      accumulated other comprehensive income
                            
                            
                            284,474
                            
                            
                            
                            229,848Unearned
      ESOP shares
                            
                            
                            (389,970
                            )
                            
                            
                            (260,275
                            )Total
      Stockholders’ Equity
                            
                            
                            68,189,849
                            
                            
                            
                            67,114,419Total
      Liabilities and Stockholders’ Equity
                            
                            $
                            80,992,424
                            
                            
                            $
                            79,888,024
  48
 
 Tri-County
Financial Corporation
 
 Condensed
Statements of Income
 Years Ended December 31,2009
                        
                        
                        2008Dividends
      from subsidiary
                        
                        $
                        2,950,000
                        
                        
                        $
                        2,500,000Interest
      income
                        
                        
                        29,284
                        
                        
                        
                        45,284Interest
      expense
                        
                        
                        402,914
                        
                        
                        
                        686,304Net
      Interest Income
                        
                        
                        2,576,370
                        
                        
                        
                        1,858,980Loss
      on sale of investment securities
                        
                        
                        (11,916
                        )
                        
                        
                        -Miscellaneous
      expenses
                        
                        
                        (513,795
                        )
                        
                        
                        (417,478
                        )Income
      before income taxes and equityin
      undistributed net income of subsidiary
                        
                        
                        2,050,659
                        
                        
                        
                        1,441,502Federal
      and state income tax benefit
                        
                        
                        305,775
                        
                        
                        
                        359,889Equity
      in undistributed net income of subsidiary
                        
                        
                        510,656
                        
                        
                        
                        2,013,942Net
      Income
                        
                        $
                        2,867,090
                        
                        
                        $
                        3,815,333
 
 Condensed
Statements of Cash Flows
 Years Ended December 31,2009
                          
                          
                          2008Cash
      Flows from Operating ActivitiesNet
      income
                          
                          $
                          2,867,090
                          
                          
                          $
                          3,815,333Adjustments
      to reconcile net income to net cashprovided
      by operating activitiesEquity
      in undistributed earnings of subsidiary
                          
                          
                          (510,656
                          )
                          
                          
                          (2,013,942
                          )Loss
      on sale of investment security
                          
                          
                          11,916
                          
                          
                          
                          -Increase
      in other assets
                          
                          
                          (252,150
                          )
                          
                          
                          (399,706
                          )Deferred
      income tax benefit
                          
                          
                          (68,991
                          )
                          
                          
                          (64,422
                          )Increase
      (Decrease) in current liabilities
                          
                          28,970
                          
                          
                          
                          (168,054
                          )Net
      Cash Provided by Operating Activities
                          
                          
                          2,076,179
                          
                          
                          
                          1,169,209Cash
      Flows from Investing ActivitiesRedemption
      (purchase) of investment securities available for sale
                          
                          28,785
                          
                          
                          
                          (1,486
                          )Net
      Cash Provided by (Used in) Investing Activities
                          
                          
                          28,785
                          
                          
                          
                          (1,486
                          )Cash
      Flows from Financing ActivitiesDividends
      paid
                          
                          
                          (1,953,851
                          )
                          
                          
                          (1,184,324
                          )Proceeds
      from private placement
                          
                          
                          -
                          
                          
                          
                          15,540,000Downstream
      of capital to subsidiary
                          
                          
                          -
                          
                          
                          
                          (15,440,088
                          )Exercise
      of stock options
                          
                          
                          122,308
                          
                          
                          
                          773,797Issuance
      of stock-based compensation
                          
                          
                          99,976
                          
                          
                          
                          140,088Excess
      tax benefits on stock-based compensation
                          
                          
                          14,947
                          
                          
                          
                          51,880Net
      change in ESOP loan
                          
                          
                          (129,670
                          )
                          
                          
                          156,373Redemption
      of common stock
                          
                          
                          -
                          
                          
                          
                          (1,013,903
                          )Net
      Cash Used in Financing Activities
                          
                          
                          (1,846,290
                          )
                          
                          
                          (976,177
                          )Increase
      in Cash
                          
                          
                          258,674
                          
                          
                          
                          191,546Cash
      at Beginning of Year
                          
                          
                          604,631
                          
                          
                          
                          413,085Cash
      at End of Year
                          
                          $
                          863,305
                          
                          
                          $
                          604,631
  49
 
 Tri-County
Financial Corporation
 
 NOTE
20 - QUARTERLY FINANCIAL COMPARISON
  2009
                                        
                                        
                                        2008Fourth
                                        
                                        
                                        Third
                                        
                                        
                                        Second
                                        
                                        
                                        First
                                        
                                        
                                        Fourth
                                        
                                        
                                        Third
                                        
                                        
                                        Second
                                        
                                        
                                        FirstQuarter
                                        
                                        
                                        Quarter
                                        
                                        
                                        Quarter
                                        
                                        
                                        Quarter
                                        
                                        
                                        Quarter
                                        
                                        
                                        Quarter
                                        
                                        
                                        Quarter
                                        
                                        
                                        QuarterInterest
      and dividend income
                                        
                                        $
                                        9,713,417
                                        
                                        
                                        $
                                        9,620,495
                                        
                                        
                                        $
                                        9,350,365
                                        
                                        
                                        $
                                        9,203,076
                                        
                                        
                                        $
                                        9,208,616
                                        
                                        
                                        $
                                        9,322,087
                                        
                                        
                                        $
                                        9,219,271
                                        
                                        
                                        $
                                        9,507,783Interest
      expense
                                        
                                        
                                        3,648,007
                                        
                                        
                                        
                                        4,078,019
                                        
                                        
                                        
                                        4,180,031
                                        
                                        
                                        
                                        4,260,071
                                        
                                        
                                        
                                        4,489,221
                                        
                                        
                                        
                                        4,493,215
                                        
                                        
                                        
                                        4,400,886
                                        
                                        
                                        
                                        4,651,489Net
      interest income
                                        
                                        
                                        6,065,410
                                        
                                        
                                        
                                        5,542,476
                                        
                                        
                                        
                                        5,170,334
                                        
                                        
                                        
                                        4,943,005
                                        
                                        
                                        
                                        4,719,395
                                        
                                        
                                        
                                        4,828,872
                                        
                                        
                                        
                                        4,818,385
                                        
                                        
                                        
                                        4,856,294Provision
      for loan loss
                                        
                                        
                                        1,494,680
                                        
                                        
                                        
                                        515,555
                                        
                                        
                                        
                                        929,488
                                        
                                        
                                        
                                        532,885
                                        
                                        
                                        
                                        683,459
                                        
                                        
                                        
                                        462,622
                                        
                                        
                                        
                                        (5,479
                                        )
                                        
                                        
                                        160,224Net
      interest income after provision
                                        
                                        
                                        4,570,730
                                        
                                        
                                        
                                        5,026,921
                                        
                                        
                                        
                                        4,240,846
                                        
                                        
                                        
                                        4,410,120
                                        
                                        
                                        
                                        4,035,936
                                        
                                        
                                        
                                        4,366,250
                                        
                                        
                                        
                                        4,823,864
                                        
                                        
                                        
                                        4,696,070Noninterest
      income
                                        
                                        
                                        773,244
                                        
                                        
                                        
                                        668,347
                                        
                                        
                                        
                                        781,771
                                        
                                        
                                        
                                        586,457
                                        
                                        
                                        
                                        540,325
                                        
                                        
                                        
                                        632,305
                                        
                                        
                                        
                                        758,588
                                        
                                        
                                        
                                        587,451Noninterest
      expense
                                        
                                        
                                        4,219,791
                                        
                                        
                                        
                                        4,267,052
                                        
                                        
                                        
                                        4,278,673
                                        
                                        
                                        
                                        3,814,162
                                        
                                        
                                        
                                        3,812,544
                                        
                                        
                                        
                                        3,624,150
                                        
                                        
                                        
                                        3,794,220
                                        
                                        
                                        
                                        3,351,543Income
      before income taxes
                                        
                                        
                                        1,124,183
                                        
                                        
                                        
                                        1,428,216
                                        
                                        
                                        
                                        743,944
                                        
                                        
                                        
                                        1,182,415
                                        
                                        
                                        
                                        763,717
                                        
                                        
                                        
                                        1,374,405
                                        
                                        
                                        
                                        1,788,232
                                        
                                        
                                        
                                        1,931,978Provision
      for income taxes
                                        
                                        
                                        416,723
                                        
                                        
                                        
                                        560,640
                                        
                                        
                                        
                                        221,730
                                        
                                        
                                        
                                        412,575
                                        
                                        
                                        
                                        275,329
                                        
                                        
                                        
                                        490,236
                                        
                                        
                                        
                                        661,698
                                        
                                        
                                        
                                        615,737Net
      income
                                        
                                        $
                                        707,460
                                        
                                        
                                        $
                                        867,576
                                        
                                        
                                        $
                                        522,214
                                        
                                        
                                        $
                                        769,840
                                        
                                        
                                        $
                                        488,388
                                        
                                        
                                        $
                                        884,169
                                        
                                        
                                        $
                                        1,126,534
                                        
                                        
                                        $
                                        1,316,241Earnings per common
      share1Basic
                                        
                                        $
                                        0.17
                                        
                                        
                                        $
                                        0.22
                                        
                                        
                                        $
                                        0.10
                                        
                                        
                                        $
                                        0.19
                                        
                                        
                                        $
                                        0.16
                                        
                                        
                                        $
                                        0.30
                                        
                                        
                                        $
                                        0.38
                                        
                                        
                                        $
                                        0.45Diluted
                                        
                                        $
                                        0.17
                                        
                                        
                                        $
                                        0.22
                                        
                                        
                                        $
                                        0.10
                                        
                                        
                                        $
                                        0.19
                                        
                                        
                                        $
                                        0.15
                                        
                                        
                                        $
                                        0.29
                                        
                                        
                                        $
                                        0.37
                                        
                                        
                                        $
                                        0.42
 
 1Earnings
per share are based upon quarterly results and may not be additive to the annual
earnings per share amounts.
 
 50