EXHIBIT 13
 ANNUAL REPORT TO STOCKHOLDERS




---



##### 



Forward-Looking Statements
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Overview
   Critical Accounting Policies
  1




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##### 



Allowance for Loan Losses
     Deferred Tax Assets
     2




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##### 



Comparison of Results of Operations For the Years Ended December 31, 2008 and 2007
 General.
 Net Interest Income.
   3




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##### 



2008
    
    
    2007Average
    
    
    
    
    
    
    
    
    
    
    AverageAverage
    
    
    
    
    
    
    Yield/
    
    
    Average
    
    
    
    
    
    
    Yield/dollars in thousands
    
    Balance
    
    
    Interest
    
    
    Cost
    
    
    Balance
    
    
    Interest
    
    
    CostAssetsInterest-earning assets:Loan portfolio (1)
    
    $
    491,075
    
    
    $
    31,869
    
    
    
    6.49
    %
    
    $
    438,276
    
    
    $
    33,048
    
    
    
    7.54
    %Investment securities, federal funds
sold and interest-bearing deposits
    
    
    122,674
    
    
    
    5,389
    
    
    
    4.39
    %
    
    
    119,101
    
    
    
    5,850
    
    
    
    4.91
    %Total interest-earning assets
    
    
    613,749
    
    
    
    37,258
    
    
    
    6.07
    %
    
    
    557,377
    
    
    
    38,898
    
    
    
    6.98
    %Cash and cash equivalents
    
    
    4,477
    
    
    
    
    
    
    
    
    
    
    
    3,004Other assets
    
    
    27,091
    
    
    
    
    
    
    
    
    
    
    
    22,505$
    645,317
    
    
    
    
    
    
    
    
    
    
    $
    582,886Liabilities and Stockholders EquityInterest-bearing liabilities:Savings
    
    $
    26,434
    
    
    $
    156
    
    
    
    0.59
    %
    
    $
    28,391
    
    
    $
    275
    
    
    
    0.97
    %Interest-bearing demand and money
market accounts
    
    
    132,522
    
    
    
    2,317
    
    
    
    1.75
    %
    
    
    137,001
    
    
    
    4,115
    
    
    
    3.00
    %Certificates of deposit
    
    
    268,363
    
    
    
    10,541
    
    
    
    3.93
    %
    
    
    222,769
    
    
    
    10,511
    
    
    
    4.72
    %Long-term debt
    
    
    102,113
    
    
    
    4,179
    
    
    
    4.09
    %
    
    
    86,993
    
    
    
    3,906
    
    
    
    4.49
    %Short-term debt
    
    
    4,355
    
    
    
    156
    
    
    
    3.59
    %
    
    
    2,901
    
    
    
    132
    
    
    
    4.55
    %Guaranteed preferred beneficial interest
in junior subordinated debentures
    
    
    12,000
    
    
    
    686
    
    
    
    5.72
    %
    
    
    12,000
    
    
    
    967
    
    
    
    8.06
    %Total Interest-Bearing Liabilities
    
    
    545,787
    
    
    
    18,035
    
    
    
    3.30
    %
    
    
    490,055
    
    
    
    19,906
    
    
    
    4.06
    %Noninterest-bearing demand deposits
    
    
    42,955
    
    
    
    
    
    
    
    
    
    
    
    45,969Other liabilities
    
    
    6,215
    
    
    
    
    
    
    
    
    
    
    
    6,398Stockholders equity
    
    
    50,360
    
    
    
    
    
    
    
    
    
    
    
    40,464Total Liabilities and Stockholders Equity
    
    $
    645,317
    
    
    
    
    
    
    
    
    
    
    $
    582,886Net interest income
    
    
    
    
    
    
    19,223
    
    
    
    
    
    
    
    
    
    
    
    18,992Interest rate spread
    
    
    
    
    
    
    
    
    
    
    2.77
    %
    
    
    
    
    
    
    
    
    
    
    2.92
    %Net yield on interest-earning assets
    
    
    
    
    
    
    
    
    
    
    3.13
    %
    
    
    
    
    
    
    
    
    
    
    3.41
    %Ratio of average interest-earning
assets to average interest bearing
liabilities
    
    
    
    
    
    
    
    
    
    
    112.45
    %
    
    
    
    
    
    
    
    
    
    
    113.74
    %
 
 1
    
    Average balance includes non-accrual loans 4




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##### 



Year ended December 31, 2008compared to year endedDecember 31, 2007Due toVolume
    
    
    Rate
    
    
    TotalInterest income:Loan portfolio (1)
    
    $
    3,427
    
    
    $
    (4,605
    )
    
    $
    (1,178
    )Investment securities, federal funds
sold and interest bearing deposits
    
    
    157
    
    
    
    (619
    )
    
    
    (462
    )Total interest-earning assets
    
    $
    3,584
    
    
    $
    (5,224
    )
    
    $
    (1,640
    )Interest-bearing liabilities:Savings
    
    $
    (12
    )
    
    $
    (108
    )
    
    $
    (119
    )Interest-bearing demand and money
market accounts
    
    
    (78
    )
    
    
    (1,720
    )
    
    
    (1,798
    )Certificates of deposit
    
    
    1,791
    
    
    
    (1,761
    )
    
    
    30Long-term debt
    
    
    619
    
    
    
    (346
    )
    
    
    273Short-term debt
    
    
    52
    
    
    
    (28
    )
    
    
    24Guaranteed preferred beneficial interest
in junior subordinated debentures
    
    
    
    
    
    
    (281
    )
    
    
    (281
    )Total interest-bearing liabilities
    
    $
    2,372
    
    
    $
    (4,243
    )
    
    $
    (1,871
    )Net change in net interest income
    
    $
    1,211
    
    
    $
    (981
    )
    
    $
    231
 
 1
    
    Average balance includes non-accrual loans Provision for Loan Losses.
 5




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##### 



Noninterest Income.
 Years Ended December 31,
    
    
    % change2008
    
    
    2007
    
    
    2008 vs. 2007Loan appraisal, credit, and miscellaneous charges
    
    $
    416,605
    
    
    $
    358,946
    
    
    
    16.06
    %Income from bank owned life insurance
    
    
    491,136
    
    
    
    361,527
    
    
    
    35.85
    %Service charges
    
    
    1,665,700
    
    
    
    1,436,290
    
    
    
    15.97
    %Recognition of other than temporary decline in value of investment
securities
    
    
    (54,772
    )
    
    
    
    
    
    
    N/ALoss on the sale of investment securities
    
    
    
    
    
    
    (27,335
    )
    
    
    (100.0
    %)Gain on sale of foreclosed property
    
    
    
    
    
    
    1,272,161
    
    
    
    (100.0
    %)Total noninterest income
    
    $
    2,518,669
    
    
    $
    3,401,589
    
    
    
    (25.96
    %)
  Noninterest Expenses.
 Years Ended December 31,
    
    
    % change2008
    
    
    2007
    
    
    2008 vs. 2007Noninterest expenseSalary and employee benefits
    
    $
    8,052,008
    
    
    $
    7,604,140
    
    
    
    5.89
    %Occupancy expense
    
    
    1,691,038
    
    
    
    1,340,820
    
    
    
    26.12
    %Advertising
    
    
    557,782
    
    
    
    469,995
    
    
    
    18.68
    %Data processing expense
    
    
    710,832
    
    
    
    833,726
    
    
    
    (14.74
    %)Depreciation of furniture, fixtures, and equipment
    
    
    581,256
    
    
    
    665,974
    
    
    
    (12.72
    %)Telephone communications
    
    
    83,469
    
    
    
    87,176
    
    
    
    (4.25
    %)ATM expenses
    
    
    336,198
    
    
    
    293,656
    
    
    
    14.49
    %Office supplies
    
    
    162,096
    
    
    
    161,538
    
    
    
    0.35
    %Professional fees
    
    
    720,512
    
    
    
    646,779
    
    
    
    11.40
    %FDIC insurance
    
    
    274,282
    
    
    
    49,786
    
    
    
    450.92
    %Other
    
    
    1,412,984
    
    
    
    1,305,763
    
    
    
    8.21
    %$
    14,582,457
    
    
    $
    13,459,353
    
    
    
    8.34
    %
  6




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##### 



Income Tax Expense.
 Comparison of Financial Condition at December 31, 2008 and 2007
 December 31,
    
    
    % change2008
    
    
    2007
    
    
    2008 vs. 2007ASSETSCash and due from banks
    
    $
    5,071,614
    
    
    $
    3,267,920
    
    
    
    55.19
    %Fed Funds sold
    
    
    989,754
    
    
    
    885,056
    
    
    
    11.83
    %Interest-bearing deposits with banks
    
    
    8,413,164
    
    
    
    7,273,661
    
    
    
    15.67
    %Securities available for sale, at fair value
    
    
    14,221,674
    
    
    
    9,144,069
    
    
    
    55.53
    %Securities held to maturity, at amortized cost
    
    
    108,712,281
    
    
    
    92,687,603
    
    
    
    17.29
    %Federal Home Loan Bank and Federal Reserve Bank stock- at cost
    
    
    6,453,000
    
    
    
    5,354,500
    
    
    
    20.52
    %Loans receivable  net of allowance for loan losses of
$5,145,673 and $4,482,483
    
    
    542,977,138
    
    
    
    453,614,133
    
    
    
    19.70
    %Premises and equipment, net
    
    
    12,235,999
    
    
    
    9,423,302
    
    
    
    29.85
    %Accrued interest receivable
    
    
    2,965,813
    
    
    
    3,147,569
    
    
    
    (5.77
    %)Investment in bank owned life insurance
    
    
    10,526,286
    
    
    
    10,124,288
    
    
    
    3.97
    %Other assets
    
    
    4,118,187
    
    
    
    3,483,733
    
    
    
    18.21
    %TOTAL ASSETS
    
    $
    716,684,910
    
    
    $
    598,405,834
    
    
    
    19.77
    %LIABILITIES AND STOCKHOLDERS EQUITYDepositsNon-interest-bearing deposits
    
    $
    50,642,273
    
    
    $
    48,041,571
    
    
    
    5.41
    %Interest-bearing deposits
    
    
    474,525,293
    
    
    
    396,952,444
    
    
    
    19.54
    %Total deposits
    
    
    525,167,566
    
    
    
    444,994,015
    
    
    
    18.02
    %Short-term borrowings
    
    
    1,522,367
    
    
    
    1,555,323
    
    
    
    (2.12
    %)Long-term debt
    
    
    104,963,428
    
    
    
    86,005,508
    
    
    
    22.04
    %Guaranteed preferred beneficial interest in juniorsubordinated debentures
    
    
    12,000,000
    
    
    
    12,000,000
    
    
    
    0.00
    %Accrued expenses and other liabilities
    
    
    5,917,130
    
    
    
    5,003,912
    
    
    
    18.25
    %Total Liabilities
    
    
    649,570,491
    
    
    
    549,558,758
    
    
    
    18.20
    %STOCKHOLDERS EQUITYFixed Rate Cumulative Perpetual Preferred Stock, Series A -
par value $1,000,
authorized 15,540, issued 15,540
    
    
    15,540,000
    
    
    
    
    
    
    naFixed Rate Cumulative Perpetual Preferred Stock, Series B -
par value $1,000,
authorized 777, issued 777
    
    
    777,000
    
    
    
    
    
    
    naCommon stock  par value $.01; authorized - 15,000,000 shares;
issued 2,947,759 and 2,909,974 shares, respectively
    
    
    29,478
    
    
    
    29,100
    
    
    
    1.30
    %Additional paid in capital
    
    
    16,517,649
    
    
    
    16,914,373
    
    
    
    (2.35
    %)Retained earnings
    
    
    34,280,719
    
    
    
    32,303,353
    
    
    
    6.12
    %Accumulated other comprehensive gain (loss)
    
    
    229,848
    
    
    
    (73,097
    )
    
    
    (414.44
    %)Unearned ESOP shares
    
    
    (260,275
    )
    
    
    (326,653
    )
    
    
    (20.32
    %)Total Stockholders Equity
    
    
    67,114,419
    
    
    
    48,847,076
    
    
    
    37.40
    %TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    716,684,910
    
    
    $
    598,405,834
    
    
    
    19.77
    %
 7




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Liquidity and Capital Resources
    8




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Off Balance Sheet Arrangements
   Contractual Obligations
  9




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Impact of Inflation and Changing Prices
  10




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##### 



Selected Financial Data
 Year Ended December 31,Dollars in thousands except per share data
    
    2008
    
    2007
    
    2006
    
    2005
    
    2004Operations Data:Net interest income
    
    $
    19,223
    
    
    $
    18,992
    
    
    $
    17,327
    
    
    $
    15,571
    
    
    $
    13,800Provision for loan losses
    
    
    1,301
    
    
    
    855
    
    
    
    406
    
    
    
    329
    
    
    
    453Noninterest income
    
    
    2,519
    
    
    
    3,402
    
    
    
    2,247
    
    
    
    1,641
    
    
    
    1,582Noninterest expense
    
    
    14,582
    
    
    
    13,459
    
    
    
    12,562
    
    
    
    10,851
    
    
    
    9,768Net income
    
    $
    3,815
    
    
    $
    5,106
    
    
    $
    4,441
    
    
    $
    3,979
    
    
    $
    3,720Share Data:Basic net income per common share
    
    $
    1.29
    
    
    $
    1.92
    
    
    $
    1.68
    
    
    $
    1.53
    
    
    $
    1.44Diluted net income per common share
    
    $
    1.24
    
    
    $
    1.79
    
    
    $
    1.58
    
    
    $
    1.44
    
    
    $
    1.38Cash dividends paid per common share
    
    $
    0.40
    
    
    $
    0.40
    
    
    $
    0.37
    
    
    $
    0.35
    
    
    $
    0.21Weighted average commonShares outstanding:Basic
    
    
    2,943,002
    
    
    
    2,664,036
    
    
    
    2,637,531
    
    
    
    2,597,806
    
    
    
    2,579,264Diluted
    
    
    3,053,690
    
    
    
    2,852,494
    
    
    
    2,815,985
    
    
    
    2,763,616
    
    
    
    2,697,030Financial Condition Data:Total assets
    
    $
    716,685
    
    
    $
    598,406
    
    
    $
    575,496
    
    
    $
    541,287
    
    
    $
    505,767Loans receivable, net
    
    
    542,977
    
    
    
    453,614
    
    
    
    422,480
    
    
    
    369,592
    
    
    
    289,325Total deposits
    
    
    525,168
    
    
    
    444,994
    
    
    
    418,013
    
    
    
    363,374
    
    
    
    266,755Long and short term debt
    
    
    106,486
    
    
    
    87,561
    
    
    
    102,614
    
    
    
    127,899
    
    
    
    198,235Total stockholders equity
    
    $
    67,114
    
    
    $
    48,847
    
    
    $
    37,729
    
    
    $
    34,578
    
    
    $
    31,124Performance Ratios:Return on average assets
    
    
    0.59
    %
    
    
    0.87
    %
    
    
    0.80
    %
    
    
    0.74
    %
    
    
    0.87
    %Return on average equity
    
    
    7.57
    %
    
    
    12.62
    %
    
    
    12.13
    %
    
    
    12.11
    %
    
    
    12.89
    %Net interest margin
    
    
    3.13
    %
    
    
    3.41
    %
    
    
    3.24
    %
    
    
    3.05
    %
    
    
    3.43
    %Efficiency ratio
    
    
    67.07
    %
    
    
    60.10
    %
    
    
    64.18
    %
    
    
    63.04
    %
    
    
    63.50
    %Dividend payout ratio
    
    
    31.04
    %
    
    
    20.80
    %
    
    
    21.91
    %
    
    
    23.39
    %
    
    
    14.56
    %Capital Ratios:Average equity to average
assets
    
    
    11.54
    %
    
    
    10.41
    %
    
    
    8.74
    %
    
    
    8.62
    %
    
    
    9.29
    %Leverage ratio
    
    
    11.54
    %
    
    
    10.41
    %
    
    
    8.74
    %
    
    
    8.62
    %
    
    
    9.29
    %Total risk-based capital ratio
    
    
    14.73
    %
    
    
    13.80
    %
    
    
    11.98
    %
    
    
    11.93
    %
    
    
    11.89
    %Asset Quality Ratios:Allowance for loan losses to
total loans
    
    
    0.94
    %
    
    
    0.98
    %
    
    
    0.89
    %
    
    
    0.91
    %
    
    
    1.04
    %Nonperforming loans to total loans
    
    
    0.90
    %
    
    
    0.09
    %
    
    
    0.25
    %
    
    
    0.16
    %
    
    
    0.23
    %Allowance for loan losses to
Nonperforming loans
    
    
    104.25
    %
    
    
    1082.71
    %
    
    
    361.59
    %
    
    
    572.96
    %
    
    
    452.97
    %Net charge-offs to average loans
    
    
    0.13
    %
    
    
    0.04
    %
    
    
    0.00
    %
    
    
    0.00
    %
    
    
    -0.01
    %
  11




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##### 



Market for the Registrants Common Stock and Related Security Holder Matters
 Market Information.
 High
    
    Low2007Fourth Quarter
    
    $
    26.50
    
    
    $
    22.50Third Quarter
    
    $
    27.70
    
    
    $
    25.71Second Quarter
    
    $
    60.00
    
    
    $
    25.15First Quarter
    
    $
    27.00
    
    
    $
    24.00
 High
    
    Low2008Fourth Quarter
    
    $
    18.75
    
    
    $
    16.15Third Quarter
    
    $
    24.00
    
    
    $
    17.85Second Quarter
    
    $
    28.00
    
    
    $
    22.00First Quarter
    
    $
    25.00
    
    
    $
    22.55
 Holders.
 Dividends.
   12




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##### 



13




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##### 



Tri-County Financial Corporation
 Report on Audits of Consolidated Financial Statements
 For the Years Ended December 31, 2008 and 2007
 14




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##### 



Table of contents
 Managements Report on Internal Control over Financial ReportingReport of Independent Registered Public Accounting Firm
    
    
    16Consolidated Financial Statements
    
    
    17Balance Sheets
    
    
    18Statements of Income
    
    
    19Statements of Changes in Stockholders Equity
    
    
    21Statements of Cash Flows
    
    
    22Notes to Consolidated Financial Statements
    
    
    24
 15




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##### 



Managements Report on Internal Control Over Financial Reporting
      16




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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    /s/  Stegman & Company 
 17




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##### 



TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
 December 31,2008
    
    
    2007ASSETSCash and due from banks
    
    $
    5,071,614
    
    
    $
    3,267,920Federal Funds sold
    
    
    989,754
    
    
    
    885,056Interest-bearing deposits with banks
    
    
    8,413,164
    
    
    
    7,273,661Securities available for sale, at fair value
    
    
    14,221,674
    
    
    
    9,144,069Securities held to maturity, at amortized cost
    
    
    108,712,281
    
    
    
    92,687,603Federal Home Loan Bank and Federal Reserve Bank stock- at cost
    
    
    6,453,000
    
    
    
    5,354,500Loans receivable  net of allowance for loan losses of $5,145,673 and $4,482,483
    
    
    542,977,138
    
    
    
    453,614,133Premises and equipment, net
    
    
    12,235,999
    
    
    
    9,423,302Accrued interest receivable
    
    
    2,965,813
    
    
    
    3,147,569Investment in bank owned life insurance
    
    
    10,526,286
    
    
    
    10,124,288Other assets
    
    
    4,118,187
    
    
    
    3,483,733TOTAL ASSETS
    
    $
    716,684,910
    
    
    $
    598,405,834LIABILITIES AND STOCKHOLDERS EQUITYDepositsNon-interest-bearing deposits
    
    $
    50,642,273
    
    
    $
    48,041,571Interest-bearing deposits
    
    
    474,525,293
    
    
    
    396,952,444Total deposits
    
    
    525,167,566
    
    
    
    444,994,015Short-term borrowings
    
    
    1,522,367
    
    
    
    1,555,323Long-term debt
    
    
    104,963,428
    
    
    
    86,005,508Guaranteed preferred beneficial interest in junior subordinated debentures
    
    
    12,000,000
    
    
    
    12,000,000Accrued expenses and other liabilities
    
    
    5,917,130
    
    
    
    5,003,912Total Liabilities
    
    
    649,570,491
    
    
    
    549,558,758STOCKHOLDERS EQUITYFixed Rate Cumulative Perpetual Preferred Stock, Series A  par value $1,000,
authorized 15,540, issued 15,540
    
    
    15,540,000
    
    
    
    Fixed Rate Cumulative Perpetual Preferred Stock, Series B  par value $1,000,
authorized 777, issued 777
    
    
    777,000
    
    
    
    Common stock  par value $.01; authorized - 15,000,000 shares;
issued 2,947,759 and 2,909,974 shares, respectively
    
    
    29,478
    
    
    
    29,100Additional paid in capital
    
    
    16,517,649
    
    
    
    16,914,373Retained earnings
    
    
    34,280,719
    
    
    
    32,303,353Accumulated other comprehensive gain (loss)
    
    
    229,848
    
    
    
    (73,097
    )Unearned ESOP shares
    
    
    (260,275
    )
    
    
    (326,653
    )Total Stockholders Equity
    
    
    67,114,419
    
    
    
    48,847,076TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    716,684,910
    
    
    $
    598,405,834
 See notes to consolidated financial statements
 18




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
 Consolidated Statements of Income
 Years Ended December 31,2008
    
    
    2007Interest and Dividend incomeLoans, including fees
    
    $
    31,869,492
    
    
    $
    33,047,979Taxable interest and dividends on investment securities
    
    
    5,304,606
    
    
    
    5,550,086Interest on deposits with banks
    
    
    83,659
    
    
    
    300,047Total interest and dividend income
    
    
    37,257,757
    
    
    
    38,898,112Interest ExpensesDeposits
    
    
    13,013,398
    
    
    
    14,900,672Short-term borrowings
    
    
    156,183
    
    
    
    131,884Long-term debt
    
    
    4,865,230
    
    
    
    4,873,656Total interest expenses
    
    
    18,034,811
    
    
    
    19,906,212Net interest income
    
    
    19,222,946
    
    
    
    18,991,900Provision for loan losses
    
    
    1,300,826
    
    
    
    854,739Net interest income after provision for loan losses
    
    
    17,922,120
    
    
    
    18,137,161Noninterest income:Loan appraisal, credit, and miscellaneous charges
    
    
    416,605
    
    
    
    358,946Income from bank owned life insurance
    
    
    491,136
    
    
    
    361,527Service charges and other income
    
    
    1,665,700
    
    
    
    1,436,290Recognition of other than temporary decline in value of investment securities
    
    
    (54,772
    )
    
    
    Loss on the sale of investment securities
    
    
    
    
    
    
    (27,335
    )Gain on sale of foreclosed property
    
    
    
    
    
    
    1,272,161Total noninterest income
    
    
    2,518,669
    
    
    
    3,401,589
 See notes to consolidated financial statements
 19




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
 Consolidated Statements of Income
 Years Ended December 31,2008
    
    
    2007Noninterest expensesSalary and employee benefits
    
    
    8,052,008
    
    
    
    7,604,140Occupancy expense
    
    
    1,691,038
    
    
    
    1,340,820Advertising
    
    
    557,782
    
    
    
    469,995Data processing expense
    
    
    710,832
    
    
    
    833,726Depreciation of furniture, fixtures, and equipment
    
    
    581,256
    
    
    
    665,974Telephone communications
    
    
    83,469
    
    
    
    87,176ATM expenses
    
    
    336,198
    
    
    
    293,656Office supplies
    
    
    162,096
    
    
    
    161,538Professional fees
    
    
    720,512
    
    
    
    646,779FDIC insurance
    
    
    274,282
    
    
    
    49,786Other
    
    
    1,412,984
    
    
    
    1,305,763Total noninterest expenses
    
    
    14,582,457
    
    
    
    13,459,353Income before income taxes
    
    
    5,858,332
    
    
    
    8,079,397Income tax expense
    
    
    2,043,000
    
    
    
    2,973,762Net income
    
    
    3,815,332
    
    
    
    5,105,635Other comprehensive income:Unrealized gain (losses) on securities available
for sale net of tax expense (benefit) of $137,440
and ($22,684), respectively.
    
    
    266,795
    
    
    
    (36,053
    )Reclassification adjustment for losses net of
tax of $18,622 and $6,122, respectively
    
    
    36,150
    
    
    
    16,778Comprehensive income
    
    $
    4,118,277
    
    
    $
    5,086,360Earnings per share:Basic
    
    $
    1.29
    
    
    $
    1.92Diluted
    
    $
    1.24
    
    
    $
    1.79Cash dividend paid
    
    $
    0.40
    
    
    $
    0.40
 See notes to consolidated financial statements
 20




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders Equity
 AccumulatedOther
    
    
    UnearnedPreferred
    
    
    Common
    
    
    Paid-in
    
    
    Retained
    
    
    Comprehensive
    
    
    ESOPStock
    
    
    Stock
    
    
    Capital
    
    
    Earnings
    
    
    Income (Loss)
    
    
    Shares
    
    
    TotalBalance at January 1, 2007
    
    $
    
    
    
    $
    26,423
    
    
    $
    9,499,946
    
    
    $
    28,353,792
    
    
    $
    (53,822
    )
    
    $
    (97,002
    )
    
    $
    37,729,337Comprehensive income:Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,105,635
    
    
    
    
    
    
    
    
    
    
    
    5,105,635Unrealized holding losses on investment securities
net of tax of $12,128
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,275
    )
    
    
    
    
    
    
    (19,275
    )Total Comprehensive Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,086,360Cash dividend  $0.40 per share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,062,064
    )
    
    
    
    
    
    
    
    
    
    
    (1,062,064
    )Excess of fair market value over cost of leveragedESOP shares released
    
    
    
    
    
    
    
    
    
    
    36,814
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,814Exercise of stock options
    
    
    
    
    
    
    103
    
    
    
    73,717
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    73,820Proceeds of private placement
    
    
    
    
    
    
    2,683
    
    
    
    7,039,011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,041,694Net change in unearned ESOP shares
    
    
    
    
    
    
    (72
    )
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    (229,651
    )
    
    
    (229,623
    )Repurchase of common stock
    
    
    
    
    
    
    (37
    )
    
    
    
    
    
    
    (94,010
    )
    
    
    
    
    
    
    
    
    
    
    (94,047
    )Stock Based Compensation
    
    
    
    
    
    
    
    
    
    
    264,785
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    264,785Balance at December 31, 2007
    
    
    
    
    
    
    29,100
    
    
    
    16,914,373
    
    
    
    32,303,353
    
    
    
    (73,097
    )
    
    
    (326,653
    )
    
    
    48,847,076Comprehensive income:Net 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 leveragedESOP 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
    )
    
    $
    67,114,419
 See notes to consolidated financial statements
 21




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    3,815,332
    
    
    $
    5,105,635Adjustments to reconcile net income to net
cash provided by operating activities:Provision for loan losses
    
    
    1,300,826
    
    
    
    854,739Gain on sale foreclosed real estate
    
    
    
    
    
    
    (1,272,161
    )Loss on sales of investment securities
    
    
    
    
    
    
    27,335Other than temporary decline in market value of investment securities
    
    
    54,772
    
    
    
    Depreciation and amortization
    
    
    1,105,996
    
    
    
    1,122,464Net amortization of premium/discount on mortgage backed securities and
investments
    
    
    (152,837
    )
    
    
    192,004Increase in cash surrender of bank owned life insurance
    
    
    (401,998
    )
    
    
    (361,527
    )Deferred income tax benefit
    
    
    (664,830
    )
    
    
    (392,194
    )Excess tax benefits on stock based compensation
    
    
    (8,865
    )
    
    
    Stock based compensation expense
    
    
    
    
    
    
    264,785Decrease (Increase) in accrued interest receivable
    
    
    181,756
    
    
    
    (310,156
    )Decrease in deferred loan fees
    
    
    (60,364
    )
    
    
    (119,081
    )Increase (Decrease) in accrued expenses and other liabilities
    
    
    738,459
    
    
    
    (135,725
    )Increase in other assets
    
    
    (83,281
    )
    
    
    (350,347
    )Net cash provided by operating activities
    
    
    5,824,966
    
    
    
    4,625,771CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investment securities available for sale
    
    
    (5,010,353
    )
    
    
    (309,253
    )Proceeds from sale, redemption or principal payments of investment securities
available for sale
    
    
    342,632
    
    
    
    408,313Purchase of investment securities held to maturity
    
    
    (25,987,875
    )
    
    
    (11,009,199
    )Proceeds from maturities or principal payments of investment securities held to maturity
    
    
    10,110,386
    
    
    
    15,936,450Net (increase) decrease of FHLB and Federal Reserve stock
    
    
    (1,098,500
    )
    
    
    745,900Loans originated or acquired
    
    
    (236,486,198
    )
    
    
    (194,267,624
    )Principal collected on loans
    
    
    145,882,731
    
    
    
    162,397,632Purchase of bank owned life insurance policies
    
    
    
    
    
    
    (1,000,000
    )Proceeds from disposal of premises and equipment
    
    
    9,841
    
    
    
    4,000Purchase of premises and equipment
    
    
    (3,919,059
    )
    
    
    (3,723,304
    )Proceeds of sale of foreclosed real estate
    
    
    
    
    
    
    1,733,045Net cash used in investing activities
    
    
    (116,156,395
    )
    
    
    (29,084,040
    )
 See notes to consolidated financial statements
 22




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
 2008
    
    
    2007CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    
    80,173,551
    
    
    
    26,980,613Proceeds from long-term borrowings
    
    
    24,000,000
    
    
    
    5,000,000Payments of long-term borrowings
    
    
    (5,042,080
    )
    
    
    (15,040,428
    )Net decrease in short-term borrowings
    
    
    (32,956
    )
    
    
    (5,012,379
    )Exercise of stock options
    
    
    773,797
    
    
    
    73,820Excess tax benefits on stock based compensation
    
    
    8,865
    
    
    
    Dividends paid
    
    
    (1,184,324
    )
    
    
    (1,062,064
    )Proceeds from Capital Purchase Program
    
    
    15,540,000
    
    
    
    Proceeds from private placement
    
    
    
    
    
    
    7,041,694Net change in unearned ESOP shares
    
    
    156,373
    
    
    
    (192,809
    )Redemption of common stock
    
    
    (1,013,902
    )
    
    
    (94,047
    )Net cash provided by financing activities
    
    
    113,679,324
    
    
    
    17,694,400INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    3,047,895
    
    
    
    (6,763,869
    )CASH AND CASH EQUIVALENTS  JANUARY 1
    
    
    11,426,637
    
    
    
    18,190,506CASH AND CASH EQUIVALENTS  DECEMBER 31
    
    $
    14,474,532
    
    
    $
    11,426,637SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the year for:Interest
    
    $
    17,660,936
    
    
    $
    19,679,622Income taxes
    
    $
    2,797,865
    
    
    $
    3,942,600SUPPLEMENTAL SCHEDULE OF NON-CASH OPERATING ACTIVITIES:Issuance of common stock for payment of accrued compensation
    
    $
    140,088
    
    
    $
    
 See notes to consolidated financial statements
 23




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Principles of Consolidation
  Nature of Operations
  Use of Estimates
  Significant Group Concentrations of Credit Risk
  Cash and Cash Equivalents
  Securities
   Loans Held for Sale
  24




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Loans Receivable
     Allowance for Loan Losses
     25




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Servicing
    Premises and Equipment
  
  Foreclosed Real Estate
  Transfers of Financial Assets
 Advertising Costs
  Income Taxes
  26




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Off Balance Sheet Credit Related Financial Instruments
  Stock-Based Compensation
    Earnings Per Common Share
  Years Ended December 31,2008
    
    
    2007Net Income
    
    $
    3,815,332
    
    
    $
    5,105,635Less: Dividends accrued on preferred stock
    
    
    (25,878
    )
    
    
    Net income available to common shareholders
    
    $
    3,789,454
    
    
    $
    5,105,635Average number of common shares outstanding
    
    
    2,943,002
    
    
    
    2,664,036Effect of dilutive options
    
    
    110,688
    
    
    
    188,458Average number of shares used to calculate
earnings per share outstanding
    
    
    3,053,690
    
    
    
    2,852,494
 Comprehensive Income
  27




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Recent Accounting Pronouncements
 Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements
 Fair Value Measurements
 Partial Deferral of the Effective Date
of Statement 157
 Determining the Fair Value of a Financial Asset
When the Market for That Asset is not active Fair Value Measurements Accounting Changes and Error Corrections
 The Fair Value Option for Financial Assets and
Financial Liabilities  Including an Amendment of FASB Statement No. 115
 ,
 Business Combinations
 28




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Non-controlling Interests in Consolidated Financial
Statements  an amendment of ARB No. 51
 Accounting for Transfers of Financial Assets
and Repurchase Financing Transactions
 Disclosures about Derivative Instruments and Hedging
Activities Accounting for
Derivative Instruments and Hedging Activities
 Determination of the Useful Life of
Intangible Assets , Goodwill and Other Intangible Assets
 The Hierarchy of Generally Accepted Accounting
Principles The Meaning of Present Fairly in
Conformity With Generally Accepted Accounting Principles
 Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating Securities
 29




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 2 -FAIR VALUE MEASUREMENTS
             30




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
     Quoted Pricesin Active
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Description of AssetAvailable-for-Sale Securities
    
    $
    14,221,674
    
    
    $
    
    
    
    $
    14,221,674
    
    
    $
    
   QuotedPrices inActive
    
    SignificantMarkets for
    
    Other
    
    SignificantIdentical
    
    Observable
    
    UnobservableAssets
    
    Inputs
    
    InputsFair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Description of AssetImpaired loans
    
    $
    1,520,100
    
    
    $
    
    
    
    $
    1,520,100
    
    
    $
    
 NOTE 3  RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
  31




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 4  SECURITIES
 December 31, 2008Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    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
 December 31, 2007Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Gains
        
    Losses
        
    Fair ValueSecurities available for saleAsset-backed securities issued by GSEs
    
    $
    5,722,921
    
    
    $
    21,970
    
    
    $
    241,443
    
    
    $
    5,503,448Corporate equity securities
    
    
    199,710
    
    
    
    51,073
    
    
    
    
    
    
    
    250,783Bond mutual funds
    
    
    3,332,190
    
    
    
    58,960
    
    
    
    1,312
    
    
    
    3,389,838Total securities available for sale
    
    $
    9,254,821
    
    
    $
    132,003
    
    
    $
    242,755
    
    
    $
    9,144,069Securities held-to-maturityAsset-backed securities issued by:GSEs
    
    $
    66,568,861
    
    
    $
    129,531
    
    
    $
    1,373,692
    
    
    $
    65,324,700Other
    
    
    25,282,946
    
    
    
    127,600
    
    
    
    251,912
    
    
    
    25,158,634Total debt securities held-to-maturity
    
    
    91,851,807
    
    
    
    257,131
    
    
    
    1,625,604
    
    
    
    90,483,334U.S. Government obligations
    
    
    798,635
    
    
    
    
    
    
    
    
    
    
    
    798,635Other investments
    
    
    37,161
    
    
    
    
    
    
    
    
    
    
    
    37,161Total securities held-to-maturity
    
    $
    92,687,603
    
    
    $
    257,131
    
    
    $
    1,625,604
    
    
    $
    91,319,130
  32




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Continuous unrealized losses existing forLess Than 12
    
    
    More Than 12
    
    
    Total unrealizedFair Value
    
    
    Months
    
    
    Months
    
    
    LossesAsset-backed securities issued by GSEs:
    
    $
    945,244
    
    
    $
    
    
    
    $
    7,544
    
    
    $
    7,544Corporate Equity Securities
    
    
    73
    
    
    
    237
    
    
    
    
    
    
    
    237$
    945,317
    
    
    $
    237
    
    
    $
    7,544
    
    
    $
    7,781
    Continuous unrealized losses existing forLess Than 12
    
    
    More Than 12
    
    
    Total unrealizedFair Value
    
    
    Months
    
    
    Months
    
    
    LossesAsset-backed securities issued by GSEs:
    
    $
    44,416,323
    
    
    $
    191,693
    
    
    $
    740,139
    
    
    $
    931,832Asset-backed securities issued by other
    
    
    20,013,266
    
    
    
    2,694,385
    
    
    
    2,442,744
    
    
    
    5,137,129$
    64,429,589
    
    
    $
    2,886,078
    
    
    $
    3,182,883
    
    
    $
    6,068,961
    33




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  Available for Sale
    
    
    Held to MaturityEstimated
    
    
    
    
    
    
    EstimatedAmortized
    
    
    Fair
    
    
    Amortized
    
    
    FairCost
    
    
    Value
    
    
    Cost
    
    
    ValueWithin one year
    
    $
    3,503,086
    
    
    $
    3,559,987
    
    
    $
    999,908
    
    
    $
    1,000,000Over one year through five years
    
    
    
    
    
    
    
    
    
    
    17,439
    
    
    
    17,439Asset Backed SecuritesWithin one year
    
    
    2,053,227
    
    
    
    2,085,074
    
    
    
    36,204,812
    
    
    
    34,301,736Over one year through five years
    
    
    5,145,743
    
    
    
    5,225,556
    
    
    
    54,646,007
    
    
    
    51,773,584Over five years through ten years
    
    
    2,444,650
    
    
    
    2,482,568
    
    
    
    15,458,584
    
    
    
    14,646,016After Ten Years
    
    
    570,658
    
    
    
    711,760
    
    
    
    1,385,531
    
    
    
    1,241,861Total Asset Backed Securities
    
    
    10,214,278
    
    
    
    10,504,958
    
    
    
    107,694,934
    
    
    
    101,963,197$
    13,717,364
    
    
    $
    14,064,945
    
    
    $
    108,712,281
    
    
    $
    102,980,636
  NOTE 5  LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
  2008
    
    
    2007Commercial real estate
    
    $
    236,409,990
    
    
    $
    190,483,998Residential first mortgages
    
    
    104,607,136
    
    
    
    90,931,572Construction and land development
    
    
    57,564,710
    
    
    
    50,577,491Home equity and second mortgage
    
    
    25,412,415
    
    
    
    24,649,581Commercial loans
    
    
    101,935,520
    
    
    
    75,247,410Consumer loans
    
    
    2,045,838
    
    
    
    2,464,594Commercial equipment
    
    
    20,458,092
    
    
    
    24,113,223548,433,701
    
    
    
    458,467,869Less:Deferred loan fees
    
    
    310,890
    
    
    
    371,253Allowance for loan loss
    
    
    5,145,673
    
    
    
    4,482,4835,456,563
    
    
    
    4,853,736$
    542,977,138
    
    
    $
    453,614,133
 34




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  2008
    
    
    2007Balance January 1,
    
    $
    4,482,483
    
    
    $
    3,783,721Add:Provision charged to operations
    
    
    1,300,826
    
    
    
    854,739Recoveries
    
    
    1,467
    
    
    
    194Less:Charge-offs
    
    
    639,103
    
    
    
    156,171Balance, December 31
    
    $
    5,145,673
    
    
    $
    4,482,483
     2008
    
    
    2007Balance, beginning of year
    
    $
    5,189,612
    
    
    $
    3,179,142New loans made during year
    
    
    83,243
    
    
    
    2,429,595Repayments made during year
    
    
    (476,465
    )
    
    
    (419,125
    )Balance, end of year
    
    $
    4,796,390
    
    
    $
    5,189,612
 NOTE 6  LOAN SERVICING
   35




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Year Ended December 31,2008
    
    
    2007Balance at beginning of the year
    
    $
    83,659
    
    
    $
    204,859Amortization
    
    
    (83,659
    )
    
    
    (121,200
    )$
    
    
    
    $
    83,659
 NOTE 7  FORECLOSED REAL ESTATE
  Year Ended December 31,2008
    
    
    2007Balance at beginning of the year
    
    $
    
    
    
    $
    671,740Disposal of underlying property
    
    
    
    
    
    
    (671,740
    )Balance at end of year
    
    $
    
    
    
    $
    
  Year Ended December 31,2008
    
    
    2007Net gain on sale of foreclosed real estate
    
    $
    
    
    
    $
    1,272,161Operating expenses
    
    
    
    
    
    
    $
    
    
    
    $
    1,276,161
 NOTE 8  PREMISES AND EQUIPMENT
  2008
    
    
    2007Land
    
    $
    3,100,039
    
    
    $
    3,073,767Building and improvements
    
    
    10,424,873
    
    
    
    7,838,083Furniture and equipment
    
    
    4,221,128
    
    
    
    3,374,160Automobiles
    
    
    214,849
    
    
    
    241,711Total cost
    
    
    17,960,889
    
    
    
    14,527,721Less accumulated depreciation
    
    
    5,724,890
    
    
    
    5,104,419Premises and equipment, net
    
    $
    12,235,999
    
    
    $
    9,423,302
  2009
    
    $
    459,5272010
    
    
    463,7042011
    
    
    312,5212012
    
    
    316,4592013
    
    
    264,419Thereafter
    
    
    3,474,577Total
    
    $
    5,291,207
 36




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 9  DEPOSITS
  2008
    
    
    2007Noninterest-bearing demand
    
    $
    50,642,273
    
    
    $
    48,041,571Interest-bearing:Demand
    
    
    40,615,427
    
    
    
    46,013,651Money market deposits
    
    
    86,957,359
    
    
    
    99,169,429Savings
    
    
    26,911,911
    
    
    
    25,674,548Certificates of deposit
    
    
    320,040,596
    
    
    
    226,094,816Total interest-bearing
    
    
    474,525,293
    
    
    
    396,952,444Total deposits
    
    $
    525,167,566
    
    
    $
    444,994,015
   2009
    
    $
    245,184,8762010
    
    
    48,011,2572011
    
    
    14,317,1992012
    
    
    2,675,0532013
    
    
    9,852,211$
    320,040,596
 NOTE 10  SHORT-TERM BORROWINGS AND LONG-TERM DEBT
  Fixed
    
    Fixed Rate
    
    VariableRate
    
    Convertible
    
    Convertible2008Highest 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
    
    
    
    20202007Highest rate
    
    
    5.15
    %
    
    
    6.25
    %
    
    
    4.43
    %Lowest rate
    
    
    1.00
    %
    
    
    3.27
    %
    
    
    4.43
    %Weighted average rate
    
    
    4.33
    %
    
    
    4.70
    %
    
    
    4.43
    %Matures through
    
    
    2036
    
    
    
    2014
    
    
    
    2020
 37




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  At or for the Year Ended December 31,(dollars in thousands)2008
    
    2007Long-term debtLong-term debt outstanding at end of period
    
    $
    104,963
    
    
    $
    86,005Weighted average rate on outstanding long-term debt
    
    
    3.81
    %
    
    
    4.45
    %Maximum outstanding long-term debt of any month end
    
    
    104,998
    
    
    
    96,042Average outstanding long-term debt
    
    
    102,112
    
    
    
    86,993Approximate average rate paid on long-term debt
    
    
    4.09
    %
    
    
    5.16
    %Short-term debtShort-term debt outstanding at end of period
    
    $
    1,522
    
    
    $
    1,555Weighted average rate on short-term debt
    
    
    1.83
    %
    
    
    3.58
    %Maximum outstanding short-term debt at any month end
    
    $
    20,943
    
    
    $
    5,555Average outstanding short-term debt
    
    
    4,355
    
    
    
    2,902Approximate average rate paid on short-term debt
    
    
    3.59
    %
    
    
    3.51
    %
   December 31, 2008Fixed
    
    
    Fixed Rate
    
    
    VariableRate
    
    
    Convertible
    
    
    Convertible
    
    
    TotalDue in 2009
    
    $
    30,000,000
    
    
    $
    
    
    
    $
    
    
    
    $
    30,000,000Due in 2010
    
    
    10,000,000
    
    
    
    10,000,000
    
    
    
    
    
    
    
    20,000,000Due in 2011
    
    
    10,000,000
    
    
    
    
    
    
    
    
    
    
    
    10,000,000Due in 2012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Due in 2013
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Thereafter
    
    
    4,963,428
    
    
    
    30,000,000
    
    
    
    10,000,000
    
    
    
    44,963,428$
    54,963,428
    
    
    $
    40,000,000
    
    
    $
    10,000,000
    
    
    $
    104,963,428
   38




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 11  INCOME TAXES
  2008
    
    
    2007CurrentFederal
    
    $
    2,088,612
    
    
    $
    2,681,047State
    
    
    619,218
    
    
    
    684,9092,707,830
    
    
    
    3,365,956DeferredFederal
    
    
    (552,720
    )
    
    
    (335,726
    )State
    
    
    (112,110
    )
    
    
    (56,468
    )(664,830
    )
    
    
    (392,194
    )Total Income Tax Expense
    
    $
    2,043,000
    
    
    $
    2,973,762
  2008
    
    
    2007Percent of
    
    
    
    
    
    
    Percent ofPre Tax
    
    
    
    
    
    
    Pre TaxAmount
    
    
    Income
    
    
    Amount
    
    
    IncomeExpected income tax expense at
federal tax rate
    
    $
    1,991,833
    
    
    
    34.00
    %
    
    $
    2,746,995
    
    
    
    34.00
    %State taxes net of federal benefit
    
    
    340,735
    
    
    
    5.82
    %
    
    
    414,771
    
    
    
    5.13
    %Nondeductible expenses
    
    
    30,856
    
    
    
    0.53
    %
    
    
    62,131
    
    
    
    0.77
    %Nontaxable income
    
    
    (237,626
    )
    
    
    -4.06
    %
    
    
    (221,942
    )
    
    
    -2.75
    %Other
    
    
    (82,798
    )
    
    
    -1.41
    %
    
    
    (28,193
    )
    
    
    -0.35
    %$
    2,043,000
    
    
    
    34.87
    %
    
    $
    2,973,762
    
    
    
    36.81
    %
  2008
    
    
    2007Deferred tax assets:Deferred fees
    
    $
    1,665
    
    
    $
    2,492Allowance for loan losses
    
    
    2,029,968
    
    
    
    1,701,537Deferred compensation
    
    
    1,297,320
    
    
    
    954,910Unrealized loss on investment
securities available for sale
    
    
    
    
    
    
    37,6563,328,953
    
    
    
    2,696,595Deferred tax liabilities:Unrealized gain on investment
securities available for sale
    
    
    118,408
    
    
    
    FHLB stock dividends
    
    
    156,182
    
    
    
    152,896Depreciation
    
    
    232,208
    
    
    
    230,309506,798
    
    
    
    383,205$
    2,822,155
    
    
    $
    2,313,390
 39




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 12  COMMITMENTS AND CONTINGENCIES
    NOTE 13  STOCK OPTION AND INCENTIVE PLAN
  2008
    
    
    2007Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at beginning of year
    
    
    428,619
    
    
    $
    14.72
    
    
    
    417,097
    
    
    $
    13.86Granted
    
    
    
    
    
    
    
    
    
    
    21,811
    
    
    
    27.70Exercised
    
    
    (71,454
    )
    
    
    10.83
    
    
    
    (10,289
    )
    
    
    7.17Expired
    
    
    (1,136
    )
    
    
    7.20
    
    
    
    Forfeitures
    
    
    (2,812
    )
    
    
    20.03
    
    
    
    Outstanding at end of year
    
    
    353,217
    
    
    
    15.49
    
    
    
    428,619
    
    
    
    14.72
 40




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  WeightedNumber Outstanding
    
    Weighted Average
    
    AverageDecember 31, 2008
    
    Remaining Contractual Life
    
    Exercise Price15,991
    
    1 years
    
    $
    7.8832,344
    
    2 years
    
    
    7.9032,076
    
    3 years
    
    
    7.9119,447
    
    4 years
    
    
    11.5662,880
    
    5 years
    
    
    12.9387,955
    
    6 years
    
    
    15.8980,813
    
    7 years
    
    
    22.2921,711
    
    9 years
    
    
    27.70353,217
    
    
    
    
    
    
    15.49
   2007Expected dividend yield
    
    
    1.32
    %Expected stock price volatility
    
    
    31.95Risk-free interest rate
    
    
    5.05Expected life of options
    
    
    10Weighted average fair value
    
    $
    12.14
  NOTE 14EMPLOYEE BENEFIT PLANS
  41




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
   
 NOTE 15REGULATORY MATTERS
    To be considered wellcapitalized underRequired for capital
    
    promptActual
    
    adequacy purposes
    
    corrective actionAt 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
    %
 42




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 To be considered wellcapitalized underRequired for capital
    
    promptActual
    
    adequacy purposes
    
    corrective actionAt December 31, 2007Total Capital (to risk weighted assets)The Company
    
    $
    65,620
    
    
    
    13.80
    %
    
    $
    38,051
    
    
    
    8.00
    %The Bank
    
    $
    64,410
    
    
    
    13.58
    %
    
    $
    37,954
    
    
    
    8.00
    %
    
    $
    47,443
    
    
    
    10.00
    %Tier 1 Capital (to risk weighted assets)The Company
    
    $
    61,077
    
    
    
    12.84
    %
    
    $
    19,026
    
    
    
    4.00
    %The Bank
    
    $
    59,867
    
    
    
    12.62
    %
    
    $
    18,977
    
    
    
    4.00
    %
    
    $
    28,466
    
    
    
    6.00
    %Tier 1 Capital (to average assets)The Company
    
    $
    61,077
    
    
    
    10.41
    %
    
    $
    23,458
    
    
    
    4.00
    %The Bank
    
    $
    59,867
    
    
    
    10.23
    %
    
    $
    23,418
    
    
    
    4.00
    %
    
    $
    29,272
    
    
    
    5.00
    %
 NOTE 16FAIR VALUE OF FINANCIAL INSTRUMENTS
  December 31, 2008
    
    December 31, 2007Estimated
    
    .
    
    EstimatedCarrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueAssets:Cash and cash equivalents
    
    $
    14,474,532
    
    
    $
    14,474,532
    
    
    $
    11,426,637
    
    
    $
    11,426,637Investment securities and stock in FHLB
and FRB
    
    
    129,038,699
    
    
    
    123,655,310
    
    
    
    107,296,924
    
    
    
    105,817,699Loans receivable, net
    
    
    542,977,138
    
    
    
    585,899,804
    
    
    
    453,614,133
    
    
    
    462,328,386Liabilities:Savings, NOW, and money market accounts
    
    
    205,126,970
    
    
    
    205,483,312
    
    
    
    218,899,199
    
    
    
    218,899,199Time certificates
    
    
    320,040,596
    
    
    
    324,199,698
    
    
    
    226,094,816
    
    
    
    226,973,013Long-term debt and other borrowed funds
    
    
    106,485,795
    
    
    
    107,628,766
    
    
    
    87,560,831
    
    
    
    87,129,375Guaranteed preferred beneficial
interest in junior subordinated
securities
    
    
    12,000,000
    
    
    
    11,520,000
    
    
    
    12,000,000
    
    
    
    12,000,000
  Valuation Methodology Cash and Cash Equivalents
 Investment Securities
 43




---



##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Loans Receivable
 Deposits
 Time Certificates
 Long-Term Debt and Other Borrowed Funds
 Guaranteed Preferred Beneficial Interest in Junior Subordinated Securities 
 Off-Balance Sheet Instruments
  NOTE 17  GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED
DEBENTURES
   44




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##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
  NOTE 18  PRIVATE PLACEMENTS
  NOTE 19  PREFERRED STOCK
   NOTE 20  CONDENSED FINANCIAL STATEMENTS  PARENT COMPANY ONLY
 Balance Sheet
 December 31,2008
    
    
    2007AssetsCash  noninterest bearing
    
    $
    447,077
    
    
    $
    256,965Cash  interest bearing
    
    
    157,554
    
    
    
    156,120Investment securities available for sale
    
    
    40,701
    
    
    
    39,215Investment in wholly owned subsidiaries
    
    
    77,608,281
    
    
    
    60,166,153Other assets
    
    
    1,634,411
    
    
    
    1,170,281Total assets
    
    $
    79,888,024
    
    
    $
    61,788,735Liabilities and Stockholders EquityCurrent liabilities
    
    $
    401,605
    
    
    $
    569,659Guaranteed preferred beneficial interest in
junior subordinated debentures
    
    
    12,372,000
    
    
    
    12,372,000Total liabilities
    
    
    12,773,605
    
    
    
    12,941,659Stockholders equityPreferred Stock  Series A
    
    
    15,540,000
    
    
    
    Preferred Stock  Series B
    
    
    777,000
    
    
    
    Common stock
    
    
    29,478
    
    
    
    29,100Surplus
    
    
    16,517,649
    
    
    
    16,914,373Retained earnings
    
    
    34,280,719
    
    
    
    32,303,353Total accumulated other comprehensive income
    
    
    229,848
    
    
    
    (73,097
    )Unearned ESOP shares
    
    
    (260,275
    )
    
    
    (326,653
    )Total stockholders equity
    
    
    67,114,419
    
    
    
    48,847,076Total liabilities and
stockholders equity
    
    $
    79,888,024
    
    
    $
    61,788,735
 45




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##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Condensed Statements of Income
 Years Ended December 31,2008
    
    
    2007Dividends from subsidiary
    
    $
    2,500,000
    
    
    $
    2,000,000Interest income
    
    
    45,284
    
    
    
    52,425Interest expense
    
    
    686,304
    
    
    
    967,079Net interest income
    
    
    1,858,980
    
    
    
    1,085,346Miscellaneous expenses
    
    
    (417,478
    )
    
    
    (961,945
    )Income before income taxes and equity
in undistributed net income of
subsidiary
    
    
    1,441,502
    
    
    
    123,401Federal and state income tax benefit
    
    
    359,889
    
    
    
    604,401Equity in undistributed net income of subsidiary
    
    
    2,013,942
    
    
    
    4,377,833NET INCOME
    
    $
    3,815,333
    
    
    $
    5,105,634
 Condensed Statements of Cash Flows
 Years Ended December 31,2008
    
    
    2007Cash Flows from Operating ActivitiesNet income
    
    $
    3,815,333
    
    
    $
    5,105,635Adjustments to reconcile net income to net cash
provided by
operating activitiesEquity in undistributed earnings of subsidiary
    
    
    (2,013,942
    )
    
    
    (4,377,833
    )Increase in other assets
    
    
    (399,706
    )
    
    
    (523,748
    )Deferred income tax benefit
    
    
    (64,422
    )
    
    
    (80,654
    )Decrease in current liabilities
    
    
    (168,054
    )
    
    
    127,115Net cash provided by operating activities
    
    
    1,169,209
    
    
    
    250,515Cash Flows from Investing ActivitiesPurchase of investment securities available for sale
    
    
    (1,486
    )
    
    
    (1,740
    )Net cash used by investing activities
    
    
    (1,486
    )
    
    
    (1,740
    )Cash Flows from Financing ActivitiesDividends paid
    
    
    (1,184,324
    )
    
    
    (1,062,064
    )Proceeds from private placement
    
    
    15,540,000
    
    
    
    7,041,694Downstream of capital to subsidiary
    
    
    (15,440,088
    )
    
    
    (6,822,297
    )Exercise of stock options
    
    
    773,797
    
    
    
    73,820Issuance of stock based compensation
    
    
    140,088
    
    
    
    264,785Excess tax benefits on stock based compensation
    
    
    51,880
    
    
    
    Net change in ESOP loan
    
    
    156,373
    
    
    
    (192,809
    )Redemption of common stock
    
    
    (1,013,903
    )
    
    
    (94,047
    )Net cash used in financing activities
    
    
    (976,177
    )
    
    
    (790,918
    )INCREASE (DECREASE) IN CASH
    
    
    191,546
    
    
    
    (542,143
    )CASH AT BEGINNING OF YEAR
    
    
    413,085
    
    
    
    955,228CASH AT END OF YEAR
    
    $
    604,631
    
    
    $
    413,085
 46




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##### 



TRI-COUNTY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 21QUARTERLY FINANCIAL COMPARISON
 2008
    
    2007Fourth
    
    Third
    
    Second
    
    First
    
    Fourth
    
    Third
    
    Second
    
    FirstQuarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    Quarter
    
    QuarterInterest and dividend income
    
    $
    9,208,616
    
    
    $
    9,322,087
    
    
    $
    9,219,271
    
    
    $
    9,507,783
    
    
    $
    9,694,195
    
    
    $
    9,941,838
    
    
    $
    9,737,887
    
    
    $
    9,524,192Interest Expense
    
    
    4,489,221
    
    
    
    4,493,215
    
    
    
    4,400,886
    
    
    
    4,651,489
    
    
    
    4,868,029
    
    
    
    5,118,104
    
    
    
    4,939,047
    
    
    
    4,981,032Net interest income
    
    
    4,719,395
    
    
    
    4,828,872
    
    
    
    4,818,385
    
    
    
    4,856,294
    
    
    
    4,826,166
    
    
    
    4,823,734
    
    
    
    4,798,840
    
    
    
    4,543,160Provision for loan loss
    
    
    683,459
    
    
    
    462,622
    
    
    
    (5,479
    )
    
    
    160,224
    
    
    
    195,451
    
    
    
    304,845
    
    
    
    97,917
    
    
    
    256,526Net interest income after provision
    
    
    4,035,936
    
    
    
    4,366,250
    
    
    
    4,823,864
    
    
    
    4,696,070
    
    
    
    4,630,715
    
    
    
    4,518,889
    
    
    
    4,700,923
    
    
    
    4,286,634Noninterest income
    
    
    540,325
    
    
    
    632,305
    
    
    
    758,588
    
    
    
    587,451
    
    
    
    537,401
    
    
    
    1,761,048
    
    
    
    552,447
    
    
    
    550,693Noninterest expense
    
    
    3,812,544
    
    
    
    3,624,150
    
    
    
    3,794,220
    
    
    
    3,351,543
    
    
    
    3,826,883
    
    
    
    3,228,407
    
    
    
    3,142,913
    
    
    
    3,261,150Income before income taxes
    
    
    763,717
    
    
    
    1,374,405
    
    
    
    1,788,232
    
    
    
    1,931,978
    
    
    
    1,341,233
    
    
    
    3,051,530
    
    
    
    2,110,457
    
    
    
    1,576,177Provision for income taxes
    
    
    275,329
    
    
    
    490,236
    
    
    
    661,698
    
    
    
    615,737
    
    
    
    472,972
    
    
    
    1,165,891
    
    
    
    768,341
    
    
    
    566,558Net income
    
    $
    488,388
    
    
    $
    884,169
    
    
    $
    1,126,534
    
    
    $
    1,316,241
    
    
    $
    868,261
    
    
    $
    1,885,639
    
    
    $
    1,342,116
    
    
    $
    1,009,619Earnings per common shareBasic
    
    $
    0.16
    
    
    $
    0.30
    
    
    $
    0.38
    
    
    $
    0.45
    
    
    $
    0.24
    
    
    $
    0.71
    
    
    $
    0.51
    
    
    $
    0.38Diluted
    
    $
    0.15
    
    
    $
    0.29
    
    
    $
    0.37
    
    
    $
    0.42
    
    
    $
    0.23
    
    
    $
    0.67
    
    
    $
    0.47
    
    
    $
    0.36
 
 12
    
    Earnings per share are based upon quarterly results and may not be
additive to the annual earnings per share amounts. 47