Edgar Filing: TRI COUNTY FINANCIAL CORP /MD/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2010

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to ______

Commission File Number 0-18279

Tri-County Financial Corporation

(Exact name of registrant as specified in its charter)

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

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

(301) 645-5601

(Registrant's telephone number, including area code)

Not applicable

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

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

Yes x Noo

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

oYes oNo

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

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

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x

As of October 27, 2010, the registrant had 2,990,520 shares of common stock outstanding.

TRI-COUNTY FINANCIAL CORPORATION

FORM 10-Q

INDEX

	Page

PART I - FINANCIAL INFORMATION

Item 1 – Financial Statements (Unaudited)

Consolidated Balance Sheets – September 30, 2010
and December 31, 2009	3

Consolidated Statements of Income -
Three and Nine Months Ended September 30, 2010 and 2009	4

Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 2010 and 2009	6

Notes to Consolidated Financial Statements	8

Item 2 – Management’s Discussion and Analysis of Financial Condition
and Results of Operations	20

Item 3 – Quantitative and Qualitative Disclosures about Market Risk	33

Item 4 – Controls and Procedures	33

PART II - OTHER INFORMATION

Item 1 – Legal Proceedings	34

Item 1A – Risk Factors	34

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	34

Item 3 – Defaults Upon Senior Securities	34

Item 4 – [Removed and Reserved]	34

Item 5 – Other Information	34

Item 6 – Exhibits	34

SIGNATURES	35

PART I FINANCIAL STATEMENTS

ITEM I. FINANCIAL STATEMENTS

TRI-COUNTY FINANCIAL CORPORATION

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

	September 30, 2010			December 31, 2009

Assets
Cash and due from banks	$	13,457,724		$	9,960,787
Federal funds sold		1,610,000			695,000
Interest-bearing deposits with banks		2,331,653			592,180
Securities available for sale, at fair value		40,349,413			53,926,109
Securities held to maturity, at amortized cost		138,835,921			90,287,803
Federal Home Loan Bank and Federal Reserve Bank stock - at cost		6,518,700			6,935,500
Loans receivable - net of allowance for loan losses of $8,168,158 and $7,471,314, respectively		623,875,637			616,592,976
Premises and equipment, net		12,184,353			11,987,690
Foreclosed real estate		11,621,846			922,934
Accrued interest receivable		2,929,221			2,925,271
Investment in bank owned life insurance		17,280,529			10,943,396
Other assets		9,536,980			9,272,888

Total Assets	$	880,531,977		$	815,042,534

Liabilities and Stockholders' Equity

Liabilities
Deposits
Non-interest-bearing deposits	$	68,234,357		$	70,001,444
Interest-bearing deposits		649,356,412			570,417,345
Total deposits		717,590,769			640,418,789
Short-term borrowings		3,783,207			13,080,530
Long-term debt		70,635,612			75,669,630
Guaranteed preferred beneficial interest in junior subordinated debentures		12,000,000			12,000,000
Accrued expenses and other liabilities		6,168,792			5,683,736

Total Liabilities		810,178,380			746,852,685

Stockholders' Equity
Fixed Rate Cumulative Perpetual Preferred Stock, Series A - par value $1,000; authorized 15,540; issued 15,540		15,540,000			15,540,000
Fixed Rate Cumulative Perpetual Preferred Stock, Series B - par value $1,000; authorized 777; issued 777		777,000			777,000
Common stock - par value $.01; authorized - 15,000,000 shares; issued 2,986,279 and 2,976,046 shares, respectively		29,863			29,760
Additional paid in capital		16,842,139			16,754,627
Retained earnings		36,962,411			35,193,958
Accumulated other comprehensive income		637,212			284,474
Unearned ESOP shares		(435,028	)		(389,970	)

Total Stockholders' Equity		70,353,597			68,189,849

Total Liabilities and Stockholders' Equity	$	880,531,977		$	815,042,534

See notes to consolidated financial statements

TRI-COUNTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
INTEREST AND DIVIDEND INCOME:
Loans, including fees	$	8,669,783	$	8,324,971	$	26,157,242	$	24,243,433
Taxable interest and dividends on investment securities		1,128,613		1,286,507		3,491,626		3,914,458
Interest on deposits with banks		7,089		9,017		13,236		16,045
Total interest and dividend income		9,805,485		9,620,495		29,662,104		28,173,936

INTEREST EXPENSES:
Deposits		2,702,183		3,076,512		8,213,306		9,375,353
Short-term borrowings		6,821		-		23,700		29,800
Long-term debt		663,943		1,001,507		1,944,698		3,112,968
Total interest expenses		3,372,947		4,078,019		10,181,704		12,518,121

NET INTEREST INCOME		6,432,538		5,542,476		19,480,400		15,655,815

PROVISION FOR LOAN LOSSES		1,121,203		515,555		2,784,007		1,977,928

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		5,311,335		5,026,921		16,696,393		13,677,887

TRI-COUNTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(continued)	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009
NONINTEREST INCOME:
Recognition of other than temporary decline
in value of investment securities	$	-	$	(458,530	)	$	-	$	(577,274	)
Less: Portion recorded as comprehensive income		-		410,530			-		410,530
Impairment loss on investment securities, net		-		(48,000	)		-		(166,744	)
Loan appraisal, credit, and miscellaneous charges		182,321		104,219			436,121		465,111
Gain on sale of asset		-		-			22,500		-
Loss on sale of investment securities		-		-			-		(12,863	)
Income from bank owned life insurance		126,219		96,105			337,133		297,578
Service charges		471,277		443,161			1,317,932		1,212,257
Gain on sale of loans held for sale		214,942		72,862			386,642		241,236
Total noninterest income		994,759		668,347			2,500,328		2,036,575

NONINTEREST EXPENSE:
Salary and employee benefits		2,450,743		2,284,641			7,212,098		6,536,475
Occupancy expense		403,892		399,648			1,297,934		1,270,396
Advertising		104,010		144,854			282,612		374,816
Data processing		269,500		245,974			764,317		682,594
Professional fees		143,839		166,110			588,072		526,018
Depreciation of furniture, fixtures, and equipment		138,729		154,777			400,672		453,882
Telephone communications		46,973		33,698			129,201		101,871
Office supplies		41,343		37,076			120,779		124,461
FDIC Insurance		318,762		242,332			1,065,527		875,943
Valuation allowance on foreclosed real estate		-		-			287,934		-
Other		519,634		557,942			1,426,321		1,413,431
Total noninterest expense		4,437,425		4,267,052			13,575,467		12,359,887

INCOME BEFORE INCOME TAXES		1,868,669		1,428,216			5,621,254		3,354,575
Income tax expense		669,335		560,640			2,021,412		1,194,945
NET INCOME		1,199,334		867,576			3,599,842		2,159,630
Preferred stock dividends		211,733		211,733			635,198		635,198
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	987,601	$	655,843		$	2,964,644	$	1,524,432

INCOME PER COMMON SHARE
Basic	$	0.33	$	0.22		$	0.99	$	0.52
Diluted	$	0.33	$	0.22		$	0.99	$	0.51

Dividends paid per common share	$	-	$	-		$	0.40	$	0.40

See notes to consolidated financial statements

TRI-COUNTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

	Nine Months Ended September 30,
	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	3,599,842		$	2,159,630

Adjustments to reconcile net income to net cash provided by operating activities:

Provision for loan losses		2,784,007			1,977,928
Depreciation and amortization		775,545			875,337
Loans originated for resale		(10,464,412	)		(19,238,916	)
Proceeds from sale of loans originated for sale		10,799,746			18,412,708
Gain on sale of loans held for sale		(386,642	)		(241,236	)
Gain on sale of asset		(22,500	)		-
Loss on sales of investment securities		-			12,863
Other than temporary decline in market value of investment securities		-			166,744
Net amortization of premium/discount on investment securities		(223,610	)		(134,621	)
Increase in foreclosed real estate valuation allowance		287,934			-
Increase in cash surrender of bank owned life insurance		(6,337,133	)		(297,578	)
Deferred income tax benefit		(816,555	)		(1,266,083	)
(Increase) decrease in accrued interest receivable		(3,950	)		7,054
(Increase) decrease in deferred loan fees		(16,236	)		349
Increase (decrease) in accounts payable, accrued expenses, other liabilities		485,056			(360,108	)
Decrease in other assets		82,815			347,374

Net cash provided by operating activities		543,907			2,421,445

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investment securities available for sale		(98,504	)		(35,245,124	)
Proceeds from redemption or principal payments of investment securities available for sale		14,401,001			2,117,244
Purchase of investment securities held to maturity		(82,113,950	)		(8,377,442	)
Proceeds from maturities or principal payments of investment securities held to maturity		33,598,091			21,101,505
Net decrease (increase) of FHLB and Federal Reserve stock		416,800			(482,500	)
Loans originated or acquired		(171,318,179	)		(190,835,961	)
Principal collected on loans		150,620,143			144,719,136
Purchase of premises and equipment		(972,208	)		(828,397	)
Proceeds from sale of assets		22,500			-

Net cash used in investing activities		(55,444,306	)		(67,831,539	)

TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009 (continued)
	Nine Months Ended September 30,
	2010			2009

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits	$	77,171,980		$	101,828,228
Proceeds from long-term borrowings		-			750,000
Payments of long-term borrowings		(5,034,018	)		(20,032,683	)
Net decrease in short-term borrowings		(9,297,323	)		(1,328,618	)
Exercise of stock options		31,858			162,143
Excess tax benefits on stock-based compensation		-			14,947
Dividends paid		(1,831,387	)		( 1,742,122	)
Net change in unearned ESOP shares		10,699			(44,183	)

Net cash provided by financing activities		61,051,809			79,607,712

INCREASE IN CASH AND CASH EQUIVALENTS	$	6,151,410		$	14,197,618

CASH AND CASH EQUIVALENTS - JANUARY 1		11,247,967			14,474,532

CASH AND CASH EQUIVALENTS - SEPTEMBER 30	$	17,399,377		$	28,672,150

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the nine months for:
Interest	$	10,370,713		$	13,566,054
Income taxes	$	3,398,891		$	1,776,676
Issuance of common stock for payment of compensation	$	-		$	99,980
Transfer from loans to foreclosed real estate	$	10,986,846		$	922,934

See notes to consolidated financial statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

BASIS OF PRESENTATION

General - The consolidated financial statements of Tri-County Financial Corporation (the “Company”) and its wholly owned subsidiary, Community Bank of Tri-County (the “Bank”) included herein are unaudited. However, they reflect all adjustments consisting only of normal recurring accruals that, in the opinion of management, are necessary to present fairly the Company’s financial condition, results of operations, and cash flows for the periods presented. Certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. The Company believes that the disclosures are adequate to make the information presented not misleading. The balances as of December 31, 2009 have been derived from audited financial statements. There have been no significant changes to the Company’s accounting policies as disclosed in the 2009 Annual Report. The results of operations for the three and nine months ended September 30, 2010 are not necessarily indicative of the results of operations to be expected for the remainder of the year or any other period. Certain previously reported amounts have been restated to conform to the 2010 presentation.

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

NATURE OF BUSINESS

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

FAIR VALUE MEASUREMENTS

The Company adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standard’s Codification (“ASC”) Topic 820, “Fair Value Measurements” and FASB ASC Topic 825, “The Fair Value Option for Financial Assets and Financial Liabilities” which provides a framework for measuring and disclosing fair value under generally accepted accounting principles. FASB ASC Topic 820 requires disclosures about the fair value of assets and liabilities recognized in the balance sheet in periods subsequent to initial recognition, whether the measurements are made on a recurring basis (for example, available for sale investment securities) or on a nonrecurring basis (for example, impaired loans).

FASB ASC Topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. FASB ASC Topic 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The Company utilizes fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or market accounting or write-downs of individual assets.

Under FASB ASC Topic 820, the Company groups assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value. These hierarchy levels are:

Level 1 inputs - Unadjusted quoted prices in active markets for identical assets or liabilities that the entity has the ability to access at the measurement date.

Level 2 inputs - Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs - Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

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

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

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

Securities Available for Sale

Investment securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the security’s credit rating, prepayment assumptions and other factors such as credit loss assumptions. Level 1 securities include those traded on an active exchange such as the New York Stock Exchange, Treasury securities that are traded by dealers or brokers in active over-the-counter markets and money market funds. Level 2 securities include mortgage backed securities issued by government sponsored entities (‘GSEs”), municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Loans Receivable

The Company does not record loans at fair value on a recurring basis, however, from time to time, a loan is considered impaired and an allowance for loan loss is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan are considered impaired. Management estimates the fair value of impaired loans using one of several methods, including the collateral value, market value of similar debt, enterprise value, liquidation value and discounted cash flows. Impaired loans not requiring a specific allowance represent loans for which the fair value of expected repayments or collateral exceed the recorded investment in such loans. At September 30, 2010, substantially all of the impaired loans were evaluated based upon the fair value of the collateral. In accordance with FASB ASC 820, impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the loan as nonrecurring Level 3.

Loans Held for Sale

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

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

Foreclosed Real Estate

Foreclosed real estate is adjusted for fair value upon transfer of the loans to foreclosed real estate. Subsequently, foreclosed real estate is carried at the lower of carrying value or fair value. Fair value is based upon independent market prices, appraised value of the collateral or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

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

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

			Fair Value Measurements
			At September 30, 2010
			Using:
	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Description of Asset
Securities available for sale:
Asset-backed securities issued by GSEs
CMOs	$	32,506,872	$	-	$	32,506,872	$	-
MBS		3,928,347		-		3,928,347		-
Corporate equity securities		37,357		-		37,357		-
Bond mutual funds		3,876,837		-		3,876,837		-
Total securities available for sale	$	40,349,413	$	-	$	40,349,413	$	-

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis:

The Company may be required from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of September 30, 2010 are included in the table below:

			Fair Value Measurements
			At September 30, 2010
			Using:
	Estimated Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Description of Asset
Impaired loans:
Commercial real estate	$	3,833,919	$	-	$	3,833,919	$	-
Residential construction		1,084,857		-		1,084,857		-
Commercial lines of credit		4,416,554		-		4,416,554		-
Total impaired loans	$	9,335,330	$	-	$	9,335,330	$	-

Foreclosed Real Estate	$	11,621,846	$	-	$	11,621,846	$	-

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.

EARNINGS PER COMMON SHARE

Basic earnings per common share are computed by dividing net income less dividends on preferred shares, by the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed by dividing net income less dividends on preferred shares, by the weighted average number of common shares outstanding during the period, including any potential dilutive common shares outstanding, such as options and warrants. As of September 30, 2010 and 2009, there were 253,359 and 216,804 shares, respectively, excluded from the diluted net income per share computation because the exercise price of the stock options were greater than the market price, and thus were anti-dilutive. Basic and diluted earnings per share have been computed based on weighted-average common and common equivalent shares outstanding as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Net Income	$	1,199,334		$	867,576		$	3,599,842		$	2,159,630
Less: Dividends payable on preferred stock		(211,733	)		(211,733	)		(635,198	)		(635,198	)
Net income available to common shareholders	$	987,601		$	655,843		$	2,964,644		$	1,524,432

Average number of common shares outstanding		2,986,279			2,965,332			2,983,187			2,958,336
Effect of dilutive options		19,892			27,802			19,431			31,708
Average number of shares used to calculate diluted earnings per share		3,006,171			2,993,134			3,002,618			2,990,044

COMPREHENSIVE INCOME

Comprehensive income is net income adjusted for net unrealized holding gains or losses and other than temporary impairment for the period.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2010		2009			2010		2009
Net Income	$	1,199,334	$	867,576		$	3,599,842	$	2,159,630
Other comprehensive income net of tax:
Other-than- temporary impairment on held to maturity securities		-		(270,950	)		-		(270,950	)
Net unrealized holding gains arising during period		146,121		100,808			352,738		93,196
Comprehensive income	$	1,345,455	$	697,434		$	3,952,580	$	1,981,876

STOCK-BASED COMPENSATION

The Company has stock-based incentive compensation plans to attract and retain key personnel in order to promote the success of the business. These plans are described in Note 13 to the consolidated financial statements included in our Annual Report to Stockholders for the year ended December 31, 2009. There was no stock-based compensation expense for the nine months ended September 30, 2010 compared to $31,702 for the nine months ended September 30, 2009. The Company and the Bank currently maintain incentive plans which provide for payments to be made in cash, stock, or stock options. The Company has accrued the full amounts due under these plans, but currently it is not possible to identify the portion that will be paid out in the form of stock–based compensation because such payments are subject to the future election of the recipient. A summary of the Company’s stock option plans as of September 30, 2010 and changes during the nine-month period then ended is presented below:

				Weighted				Weighted-Average
				Average		Aggregate		Contractual Life
				Exercise		Intrinsic		Remaining In
	Shares			Price		Value		Years

Outstanding at December 31, 2009		329,243		$	16.04	$	222,607
Granted at fair value		-			-
Exercised		(8,493	)		7.89		38,331
Expired		-			-
Forfeited		(1	)		7.90
Outstanding at September 30, 2010		320,749		$	16.26	$	539,187		1.6
Exercisable at September 30, 2010		320,749		$	16.26	$	539,187		1.6

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

	Number of Shares			Weighted Average Grant Date Fair Value

Nonvested at January 1, 2010		5,360		$	11.90
Granted		-			-
Vested		(2,640	)		11.90
Cancelled		-			-

Nonvested at September 30, 2010		2,720		$	11.90

GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURES

On June 15, 2005, Tri-County Capital Trust II (“Capital Trust II”), a Delaware business trust formed, funded and wholly owned by the Company, issued $5,000,000 of variable-rate capital in a private pooled transaction. The variable rate is based on the 90-day LIBOR rate plus 1.70%. The Trust used the proceeds from this issuance, along with the $155,000 for Capital Trust II’s common securities, to purchase $5,155,000 of the Company’s junior subordinated debentures. The interest rate on the debentures and the trust preferred securities is variable and adjusts quarterly. The Company has, through various contractual arrangements, fully and unconditionally guaranteed all of Capital Trust II’s obligations with respect to the capital securities. These capital securities qualify as Tier I capital and are presented in the Consolidated Balance Sheets as “Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures.” Both the capital securities of Capital Trust II and the junior subordinated debentures are scheduled to mature on June 15, 2035, unless called by the Company.

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.

PREFERRED STOCK

On December 19, 2008, the United States Department of the Treasury (“Treasury”), acting under the authority granted to it by the Troubled Asset Relief Program’s Capital Purchase Program purchased $15,540,000 of Fixed Rate Cumulative Perpetual Preferred Stock, Series A (“Series A Preferred Stock”) issued by the Company. The preferred stock has a perpetual life, has liquidation priority over the Company’s common shareholders, and is cumulative. The dividend rate is 5% for the first five years, rising to 9% thereafter. The Series A Preferred Stock may not be redeemed unless the Company has redeemed all Series B Preferred Stock (defined below), and has paid all dividends accumulated. As condition to the issuance of the Series A Preferred Stock the Company agreed to accept restrictions on the repurchase of its common stock, the payment of dividends and certain compensation practices.

At the same time the Company issued its Series A Preferred Stock, it issued to the Treasury a warrant to purchase Fixed Rate Cumulative Perpetual Preferred Stock, Series B Preferred Stock (“Series B Preferred Stock”) in the amount of 5% of the Series A Preferred Stock or 777 shares with a par value of $777,000. The warrant had an exercise price of $.01 per share. The Series B Preferred Stock has the same rights, preferences and privileges as the Series A Preferred Stock except, the Series B Preferred Stock has a dividend rate of 9%. This warrant was immediately exercised.

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

10.

SECURITIES

	September 30, 2010
	Amortized		Gross Unrealized		Gross Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available for sale
Asset-backed securities issued by GSEs	$	35,416,444	$	1,018,954	$	179	$	36,435,219
Corporate equity securities		37,310		328		281		37,357
Bond mutual funds		3,666,553		210,284		-		3,876,837
Total securities available for sale	$	39,120,307	$	1,229,566	$	460	$	40,349,413

Securities held to maturity
Asset-backed securities issued by:
GSEs	$	123,126,654	$	2,001,506	$	298,919	$	124,829,241
Other		14,954,177		136,933		2,000,906		13,090,204
Total debt securities held to maturity		138,080,831		2,138,439		2,299,825		137,919,445

U.S. Government obligations		754,003		-		-		754,003
Other investments		1,087		-		-		1,087
Total securities held to maturity	$	138,835,921	$	2,138,439	$	2,299,825	$	138,674,535

	December 31, 2009
	Amortized		Gross Unrealized		Gross Unrealized		Estimated
	Cost		Gains		Losses		Fair Value
Securities available for sale
Asset-backed securities issued by GSEs	$	49,617,856	$	646,198	$	30,628	$	50,233,426
Corporate equity securities		37,310		1,416		163		38,563
Bond mutual funds		3,568,050		86,070		-		3,654,120
Total securities available for sale	$	53,223,216	$	733,684	$	30,791	$	53,926,109

Securities held to maturity
Asset-backed securities issued by:
GSEs	$	71,276,709	$	1,689,252	$	137,919	$	72,828,042
Other		19,005,847		12,088		3,353,964		15,663,971
Total debt securities held to maturity		90,282,556		1,701,340		3,491,883		88,492,013

U.S. Government obligations		-		-		-		-
Other investments		5,247		-		-		5,247
Total securities held to maturity	$	90,287,803	$	1,701,340	$	3,491,883	$	88,497,260

At September 30, 2010, certain other securities with a carrying value of $26,630,294 were pledged to secure certain deposits. At September 30, 2010, securities with a carrying value of $33,888,256 were pledged as collateral for advances from the Federal Home Loan Bank of Atlanta.

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 September 30, 2010 are as follows:

	Less Than 12				More Than 12
	Months				Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Asset-backed securities issued by GSEs	$	1,522,997	$	179	$	-	$	-	$	1,522,997	$	179
Corporate Equity Securities		30		281		-		-		30		281
	$	1,523,027	$	460	$	-	$	-	$	1,523,027	$	460

The available for sale investment portfolio has a fair value of $40,349,413 of which $1,523,027 of the securities have some unrealized losses from their amortized cost. Of these securities, $1,522,997 are mortgage-backed securities issued by GSEs. The unrealized losses that exist in the asset-backed securities and mutual fund shares are the result of market changes in interest rates on similar instruments.

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

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

	Less Than 12				More Than 12
	Months				Months				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Asset-backed securities issued by GSEs	$	18,775,432	$	295,246	$	5,049,187	$	3,673	$	23,824,619	$	298,919
Asset-backed securities issued by others		-		-		9,719,123		2,000,906		9,719,123		2,000,906
	$	18,775,432	$	295,246	$	14,768,310	$	2,004,579	$	33,543,742	$	2,299,825

The held to maturity investment portfolio has an estimated fair value of $138,674,535 of which $33,543,742 or 24%, of the securities have unrealized losses from their amortized cost. Of these securities, $23,824,619 or 71%, are mortgage-backed securities issued by GSEs and the remaining $9,719,123 are asset-backed securities issued by others. As with the available for sale securities, we believe that the losses are the result of general perceptions of safety and credit worthiness of the entire sector and a general disruption of orderly markets in the asset class. Because our intention is not to sell the investments and it is not more likely than not that we will be required to sell the investments before recovery of their amortized cost basis, which may be maturity, management consider the unrealized losses in the held to maturity portfolio to be temporary.

The securities issued by GSEs are guaranteed by the issuer. The average unrealized loss on GSE issued held to maturity securities is small (less than 1%). We believe that the securities will either recover in market value or be paid off as agreed.

The asset-backed securities issued by others are mortgage-backed securities. All of the securities have credit support tranches which absorb losses prior to the tranches which the Company owns. The Company reviews credit support positions on its securities regularly. These securities have an average life of 2.3 years and an average duration of 1.6 years. Total unrealized losses are $2,000,906 or 17%, of $11,720,028 amortized cost on the asset-backed securities issued by others for securities with continuous unrealized losses. We believe that the securities will either recover in market value or be paid off as agreed.

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

Credit Rating	Amount
AAA	$	165,791,830
AA+		462,726
AA-		2,207,432
A-		1,183,040
BBB+		104,761
BBB-		888,230
B+		665,222
CCC+		3,212,809
Total	$	174,516,050

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

11.

FORECLOSED REAL ESTATE

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

	Nine Months Ended September 30,
	2010			2009
Balance at beginning of year	$	922,934		$	-
Additions to underlying property		10,986,846			922,934
Valuation allowance		(287,934	)		-
Balance at end of period	$	11,621,846		$	922,934

Expenses applicable to foreclosed assets include the following.

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
Valuation allowance	$	-	$	-	$	287,934	$	-
Operating expenses		51,461		43,575		101,389		55,698
	$	51,461	$	43,575	$	389,323	$	55,698

12.

NEW ACCOUNTING STANDARDS

FASB ASC TOPIC 310, “Receivables” - In April 2010, FASB issued ASU No. 2010-18, Effect of a Loan Modification When the Loan is Part of a Pool That is Accounted for as a Single Asset. Modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. ASU No. 2010-18 is effective for modifications of loans accounted for within pools for the first interim or annual period ending on or after July 15, 2010 and are to be applied prospectively although early application is permitted. The Company adopted this guidance effective July 1, 2010, and adoption did not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

ASU No. 2010-20 (ASC Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. In July 2010, FASB issued ASU No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires that more information be disclosed about the credit quality of a company’s loans and the allowance for loan losses held against those loans. A company will need to disaggregate new and existing disclosure based on how it develops its allowance for loan losses and how it manages credit exposures. Existing disclosures to be presented on a disaggregated basis include a roll-forward of the allowance for loan losses, the related recorded investment in such loans, the nonaccrual status of loans, and impaired loans. Additional disclosure is also required about the credit quality indicators of loans by class at the end of the reporting period, the aging of past due loans, information about troubled debt restructurings, and significant purchases and sales of loans during the reporting period by class. ASU 2010-20 requires certain disclosures as of the end of a reporting period effective for periods ending on or after December 15, 2010. Other required disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Company anticipates that adoption of these additional disclosures will not have a material effect on its financial position or results of operations.

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

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

13.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

	September 30, 2010				December 31, 2009
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Assets
Cash and cash equivalents	$	17,399,377	$	17,399,377	$	11,247,967	$	11,247,967
Investment securities and stock in FHLB and FRB		185,704,034		185,544,946		151,149,412		148,049,000
Loans receivable, net (including loans held for sale)		623,875,637		639,580,000		616,592,976		610,998,000
Foreclosed real estate		11,621,846		11,621,846		922,934		922,934

Liabilities
Savings, NOW, and money market accounts		276,373,479		276,373,479		259,160,873		246,139,000
Time certificates		441,217,290		449,260,000		381,257,916		384,848,000
Long-term debt and other borrowed funds		74,418,819		73,812,000		88,750,160		83,381,000
Guaranteed preferred beneficial interest in junior subordinated securities		12,000,000		2,400,000		12,000,000		2,400,000

At September 30, 2010, the Company had outstanding loan commitments and standby letters of credit of $22.2 million and $23.8 million, respectively. Based on the short-term lives of these instruments, the Company does not believe that the fair value of these instruments differs significantly from their carrying values.

Valuation Methodology

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

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

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

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

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

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

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

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

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

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

ITEM 2

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

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including: discussions of Tri-County Financial Corporation’s (the “Company”) goals, strategies and expected outcomes; estimates of risks and future costs; and reports of the Company’s ability to achieve its financial and other goals. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions. These forward-looking statements are subject to significant known and unknown risks and uncertainties because they are based upon future economic conditions, particularly interest rates, loan demand, competition within and without the banking industry, changes in laws and regulations applicable to the Company, changes in accounting principles, and various other matters. Additional factors that may affect our results are discussed in Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 (the “Form 10-K”) and Part II of the Quarterly Report on Form 10-Q for the quarter ended June 30, 2010, under “Item 1A. Risk Factors.” Because of these uncertainties, there can be no assurance that the actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by these forward-looking statements. The Company does not undertake – and specifically disclaims any obligation – to publicly release the result of any revisions that may be made to any forward-looking statement to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

GENERAL

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

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

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

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

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

SELECTED FINANCIAL DATA

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009

Condensed Income Statement
Interest and dividend income	$	9,805,485	$	9,620,495	$	29,662,104	$	28,173,936
Interest expense		3,372,947		4,078,019		10,181,704		12,518,121
Net interest income		6,432,538		5,542,476		19,480,400		15,655,815
Provision for loan loss		1,121,203		515,555		2,784,007		1,977,928
Noninterest income		994,759		668,347		2,500,328		2,036,575
Noninterest expense		4,437,425		4,267,052		13,575,467		12,359,887
Income before income taxes		1,868,669		1,428,216		5,621,254		3,354,575
Income taxes		669,335		560,640		2,021,412		1,194,945
Net income		1,199,334		867,576		3,599,842		2,159,630
Net income available to common shareholders		987,601		655,843		2,964,644		1,524,432

Per Common Share
Basic earnings	$	0.33	$	0.22	$	0.99	$	0.52
Diluted earnings	$	0.33	$	0.22	$	0.99	$	0.51
Book value	$	18.09	$	17.24	$	18.09	$	17.24

RESULTS OF OPERATIONS – NINE MONTHS ENDED SEPTEMBER 30, 2010

Net income for the nine-month period ended September 30, 2010 totaled $3,599,842 ($0.99 basic and diluted earnings per common share), compared to $2,159,630 ($0.52 basic and $0.51 diluted earnings per common share) for the same period in the prior year. Net income available to common shareholders for the nine-month period ended September 30, 2010 totaled $2,964,644 compared to $1,524,432 for the same period in the prior year. The increase of $1,440,212, or 66.69% for net income or 94.48% for net income available to common shareholders, was due to increases in net interest income of $3,824,585 and noninterest income of $463,753 offset by increases in the provision for loan losses of $806,079, noninterest expense of $1,215,580 and income taxes of $826,467.

	Nine Months Ended
	September 30,
	2010		2009		$ Change			% Change
Interest and dividend income	$	29,662,104	$	28,173,936	$	1,488,168			5.28	%
Interest expense		10,181,704		12,518,121		(2,336,417	)		(18.66	)%
Net interest income		19,480,400		15,655,815		3,824,585			24.43	%
Provision for loan losses		2,784,007		1,977,928		806,079			40.75	%

Interest and dividend income increased due to higher average balances in loans and investments, which were partially offset by lower interest rate yields on loans and investments. The growth of the loan portfolio by 14.90% since January 1, 2009 has resulted in an increase in interest income, while the Company has limited the effect of the lower interest rate environment on loan rates through pricing. The yield on interest-earning assets for the nine months ended September 30, 2010 was 5.12%, a decrease of 10 basis points since the first quarter of 2010. The decrease was primarily due to lower yields on investments as loan rates have marginally decreased from 5.72% to 5.71% since the first quarter.

Interest expense decreased due to lower interest rates paid on deposits and borrowings partially offset by higher average balances of deposits. The Company has been successful in increasing its core deposits and reducing its cost of funds in the low interest-rate environment over the last year. The cost of interest-bearing liabilities for the nine months ended September 30, 2010 was 1.97%, a decrease of 9 basis points since the first quarter of 2010 and a 69 basis points decrease from 2.66% for the nine months ended September 30, 2009. The Company’s net interest margin increased to 3.36% for the nine months ended September 30, 2010 from 2.95% for the nine months ended September 30, 2009.

The increase in the provision for loan losses was principally attributable to an increase in net charge-offs. Net charge-offs increased $1,755,470 up from $331,693 for the nine months ended September 30, 2009 to $2,087,163 for the nine months ended September 30, 2010. The Company’s allowance for loan losses increased from 1.20% of loan balances at December 31, 2009 to 1.29% of loan balances at September 30, 2010. The provision was adjusted for economic conditions that affected the loss factors used to compute the allowance as well as changes in the circumstances of specific impaired loans and increases in the level of delinquencies, charge-offs and nonperforming loans.

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

	Nine Months Ended
	September 30,
	2010		2009			$ Change			% Change
NONINTEREST INCOME:
Recognition of other than temporary decline
in value of investment securities	$	-	$	(577,274	)	$	577,274			(100.00	)%
Less: portion recorded as comprehensive income		-		410,530			(410,530	)		(100.00	)%
Impairment loss on investment securities, net		-		(166,744	)		166,744			(100.00	)%
Loan appraisal, credit, and miscellaneous charges		436,121		465,111			(28,990	)		(6.23	)%
Gain on sale of asset		22,500		-			22,500			n/a
Loss on sale investment securities		-		(12,863	)		12,863			(100.00	)%
Income from bank owned life insurance		337,133		297,578			39,555			13.29	%
Service charges		1,317,932		1,212,257			105,675			8.72	%
Gain on loans held for sale		386,642		241,236			145,406			60.28	%
Total noninterest income	$	2,500,328	$	2,036,575		$	463,753			22.77	%

Growth of noninterest income was primarily due to increases in service charge income related to the size and number of deposits and increases in per item charges on certain transactions and gains on the sale of loans held for sale. Additionally, noninterest income increased because the prior year noninterest income included investment security impairment charges taken of $166,744 for the nine months ended September 30, 2009 compared to no impairment charges for the nine months ended September 30, 2010.

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

	Nine Months Ended September 30,
	2010		2009		$ Change			% Change
NONINTEREST EXPENSE:
Salary and employee benefits	$	7,212,098	$	6,536,475	$	675,623			10.34	%
Occupancy		1,297,934		1,270,396		27,538			2.17	%
Advertising		282,612		374,816		(92,204	)		(24.60	)%
Data processing