10-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

(Mark One)

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

OR

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 No. 0-18279

TRI-COUNTY FINANCIAL CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

Maryland	52-1652138
(State or 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)

Registrant’s telephone number, including area code: (301) 645-5601

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.01 per share

(Title of Class)

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 þ No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Act). Yes o No þ

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $28 million based on the closing price at which the common stock, $0.01 par value, was sold on the last business day of the Company’s most recently completed second fiscal quarter. For purposes of this calculation only, the shares held by directors and executive officers of the registrant and by any stockholder beneficially owning more than 5% of the registrant’s outstanding common stock are deemed to be shares held by affiliates.

Number of shares of Common Stock outstanding as of March 25, 2005: 1,163,336

DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of the Annual Report to Stockholders for the fiscal year ended December 31, 2004. (Part II)

2.   Portions of Proxy Statement for 2005 Annual Meeting of Stockholders. (Part III)

INDEX

		Page
Part I
Item 1.	Business		2
Item 2.	Properties		24
Item 3.	Legal Proceedings		24
Item 4.	Submission of Matters to a Vote of Securities Holders		24
Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		25
Item 6.	Selected Financial Data		25
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation		25
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 8.	Financial Statements and Supplementary Data		25
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		25
Item 9A.	Controls and Procedures		25
Item 9B.	Other Information		26
Part III
Item 10.	Directors and Executive Officers of the Registrant		26
Item 11.	Executive Compensation		26
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		26
Item 13.	Certain Relationships and Related Transactions		27
Item 14.	Principal Accountant Fees and Services		27
Part IV
Item 15.	Exhibits and Financial Statement Schedules		28
EX-13 ANNUAL REPORT TO STOCKHOLDERS
EX-21 SUBSIDIARIES OF THE REGISTRANT
EX-23 CONSENT OF STEGMAN & COMPANY
EX-31.1 CERTIFICATION OF THE CEO
EX-31.2 CERTIFICATION OF THE CFO
EX-32 CERTIFICATIONS

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PART I

This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts, rather statements based on Tri-County Financial Corporation’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the market area in which Tri-County Financial Corporation operates, as well as nationwide, Tri-County Financial Corporation’s ability to control costs and expenses, competitive products and pricing, loan delinquency rates and changes in federal and state legislation and regulation. These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Tri-County Financial Corporation assumes no obligation to update any forward-looking statements.

Item 1. Business

Tri-County Financial Corporation (the “Company”) is a bank holding company organized in 1989 under the laws of the State of Maryland. It presently owns all the outstanding shares of capital stock of the Community Bank of Tri-County (the “Bank”), a Maryland-chartered commercial bank. The Bank was originally organized in 1950 as Tri-County Building and Loan Association of Waldorf, a mutual savings and loan association, and in 1986 converted to a federal stock savings bank and adopted the name Tri-County Federal Savings Bank. In 1997, the Bank converted to a Maryland-chartered commercial bank and adopted its current corporate title. The Company engages in no significant activity other than holding the stock of the Bank and operating 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 the southern Maryland counties of Charles, Calvert and St. Mary’s, (the “Tri-County area”) through its main office and seven branches located in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, and Lexington Park, Maryland. The Bank expects to open an office in Prince Frederick, Maryland in 2005. The Prince Frederick location is currently under construction. The Bank operates fifteen Automated Teller Machines (“ATMs”) including seven stand-alone locations in the Tri-County area. The Bank offers telephone and internet banking services. 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, including the acceptance of deposits, and the origination of loans to individuals, associations, partnerships and corporations. The Bank’s real estate financing consists of residential first and second mortgage loans, home equity lines of credit and commercial mortgage loans. Commercial lending consists of both secured and unsecured loans. The Bank is a member of the Federal Reserve and Federal Home Loan Bank (“FHLB”) Systems and its deposits are insured up to applicable limits by Savings Association Insurance Fund (“SAIF”) of the Federal Deposit Insurance Corporation (“FDIC”).

The Company’s executive offices are located at 3035 Leonardtown Road, Waldorf, Maryland. Its telephone number is (301) 645-5601.

Available Information

The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to such reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, are made available free of charge on its website, www.cbtc.com, as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission. Information on our website should not be considered a part of this Form 10-K.

Market Area

The Bank considers its principal lending and deposit market area to consist of the southern Maryland counties of Charles, Calvert and St. Mary’s. These counties have experienced significant population growth during the past decade due to their proximity to the rapidly growing Washington, D.C. and Baltimore metropolitan areas. Southern Maryland is generally considered to have more affordable housing than many other Washington and Baltimore area suburbs. In addition, the area has experienced rapid growth in businesses and federal facilities located in the area. Major federal facilities include the Patuxent Naval Air Station in St. Mary’s County. The Patuxent Naval Air

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Station has undergone significant expansion in the last several years and is projected to continue to expand for several more years.

Rapid growth in our market area has been constrained by certain government policies, as all three counties have attempted to limit growth in certain areas. These policies have created some uncertainty about zoning and land use regulations. In some cases, real estate development work has been delayed or cancelled as a result of these policies. Recently, Charles County introduced a user fee system which would involve upfront payments in real estate development, but would remove subsequent regulatory delays. This system has not had an appreciable effect on the pace of residential development. Future regulatory events may adversely affect the Bank’s loan growth.

Competition

The Bank faces strong competition in the attraction of deposits and in the origination of loans. Its most direct competition for deposits and loans comes from other banks, savings and loan associations, and federal and state credit unions located in its primary market area. There are currently 15 FDIC-insured depository institutions operating in the Tri-County area including subsidiaries of several regional and super-regional bank holding companies. According to statistics compiled by the FDIC, the Bank was ranked fourth in deposit market share in the Tri-County area as of June 30, 2004, the latest date for which such data is available. The Bank faces additional significant competition for investors’ funds from mutual funds, brokerage firms, and other financial institutions. The Bank competes for loans by providing competitive rates, flexibility of terms, and service. It competes for deposits by offering depositors a wide variety of account types, convenient office locations, and competitive rates. Other services offered include tax-deferred retirement programs, brokerage services, safe deposit boxes, and miscellaneous services. The Bank has used direct mail, billboard and newspaper advertising to increase its market share of deposits, loans and other services in its market area. It provides ongoing training for its staff in an attempt to ensure high quality service.

Lending Activities

General. The Bank offers a wide variety of consumer and commercial loans. The Bank’s lending activities include residential and commercial real estate loans, construction loans, land acquisition and development loans, equipment financing, and commercial and consumer loans. Most of the Bank’s customers are residents of, or businesses located in the southern Maryland area. The Bank’s primary market for commercial loans consists of small and medium sized businesses located in southern Maryland. The Bank believes that this market is responsive to the Bank’s ability to provide personal service and flexibility. The Bank attracts customers for its consumer lending products based upon its ability to offer service, flexibility, and competitive pricing, as well as by leveraging other banking relationships such as soliciting deposit customers for loans.

Residential First Mortgage Loans. Residential first mortgage loans made by the Bank are generally long-term loans, amortized on a monthly basis, with principal and interest due each month. The initial contractual loan payment period for residential loans typically ranges from 10 to 30 years. The Bank’s experience indicates that real estate loans remain outstanding for significantly shorter periods than their contractual terms. Borrowers may refinance or prepay loans at their option, without penalty. The Bank originates both fixed and adjustable-rate residential first mortgages.

The Bank offers fixed rate residential first mortgages on a variety of terms including loan periods from 10 to 30 years, and biweekly payment loans. Total fixed rate loan products in our residential first mortgage portfolio amounted to $43.7 million as of December 31, 2004. Fixed-rate loans may be packaged and sold to investors or retained in the Bank’s loan portfolio. Depending on market conditions, the Bank may elect to retain the right to service the loans sold for a payment based upon a percentage (generally 0.25% of the outstanding loan balance). These servicing rights may be sold to other qualified servicers. As of December 31, 2004, the Bank serviced $43 million in residential mortgage loans for others.

The Bank also offers mortgages which are adjustable on a one, three, and five-year basis generally with limitations on upward adjustments of two percentage points per repricing period and six percentage points over the life of the loan. The Bank primarily markets adjustable-rate loans with rate adjustments based upon a United States Treasury bill index. As of December 31, 2004, the Bank had $15.4 million in adjustable rate residential mortgage loans. The

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retention of adjustable-rate mortgage loans in the Bank’s loan portfolio helps reduce the negative effects of increases in interest rates on the Bank’s net interest income. Under certain conditions, however, the annual and lifetime limitations on interest rate adjustments may limit the increases in interest rates on these loans. There are also unquantifiable credit risks resulting from potential increased costs to the borrower as a result of repricing of adjustable-rate mortgage loans. During periods of rising interest rates, the risk of default on adjustable-rate mortgage loans may increase due to the upward adjustment of interest cost to the borrower. In addition, the initial interest rate on adjustable-rate loans is generally lower than that on a fixed-rate loan of similar credit quality and size.

The Bank makes residential first mortgage loans of up to 97% of appraised value or sales price of the property, whichever is less, to qualified owner-occupants upon the security of single-family homes. Non-owner occupied one to four family loans and loans secured by other than residential real estate are generally permitted to a maximum 80% loan-to-value of the appraised value depending on the overall strength of the application. The Bank currently requires that substantially all residential first mortgage loans with loan-to-value ratios in excess of 80% carry private mortgage insurance to lower the Bank’s exposure to approximately 80% of the value of the property. In certain cases, the borrower may elect to borrow amounts in excess of 80% loan-to-value in the form of a second mortgage. The second mortgage will generally have a higher interest rate and shorter repayment period than the first mortgage on the same property.

All improved real estate which serves as security for a loan made by the Bank must be insured, in the amount and by such companies as may be approved by the Bank, against fire, vandalism, malicious mischief and other hazards. Such insurance must be maintained through the entire term of the loan and in an amount not less than that amount necessary to pay the Bank’s indebtedness in full.

Commercial Real Estate and Other Non-Residential Real Estate Loans. The Bank has increased its emphasis on loans for the permanent financing of commercial and other improved real estate projects, including office buildings, retail locations, churches, and other special purpose buildings. As a result, commercial real estate loans increased to $136.3 million or 46.5% of the loan portfolio at December 31, 2004. The primary security on a commercial real estate loan is the real property and the leases which produce income for the real property. The Bank generally limits its exposure to a single borrower to 15% of the Bank’s capital and frequently participates with other lenders on larger projects. Loans secured by commercial real estate are generally limited to 80% of the lower of the appraised value or sales price and have an initial contractual loan payment period ranging from three to 20 years. Virtually all of the Bank’s commercial real estate loans, as well as its construction loans discussed below, are secured by real estate located in the Bank’s primary market area. At December 31, 2004, the largest outstanding commercial real estate loan was a $5.0 million participation loan, $3.3 million of which was owned by the Bank. This loan is secured by land and commercial office buildings. This loan was performing according to its terms at December 31, 2004.

Loans secured by commercial real estate are larger and involve greater risks than one to four family residential mortgage loans. Because payments on loans secured by such properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or the economy. As a result of the greater emphasis that the Bank places on commercial real estate loans, the Bank is increasingly exposed to the risks posed by this type of lending. To monitor cash flows on income properties, the Bank requires borrowers and loan guarantors, if any, to provide annual financial statements on multi-family or commercial real estate loans. In reaching a decision on whether to make a multi-family or commercial real estate loan, the Bank considers the net operating income of the property, the borrower’s expertise, credit history and profitability and the value of the underlying property. Environmental surveys are generally required for commercial real estate loans over $250,000.

Construction and Land Development Loans. The Bank offers construction loans to individuals and building contractors for the construction of one to four family dwellings and commercial buildings. Loans to individuals primarily consist of construction/permanent loans which have fixed rates, payable monthly for the construction period and are followed by a 30-year, fixed or adjustable-rate permanent loan. The Bank also provides construction and land development loans to home building and real estate development companies. Generally, these loans are secured by the real estate under construction as well as by guarantees of the principals involved. Draws are made upon satisfactory completion of predefined stages of construction or development. The Bank will lend up to the lower of 80% of the appraised value or purchase price.

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In addition, the Bank offers loans for the purpose of acquisition and development of land, as well as loans on undeveloped, subdivided lots for home building by individuals. Land acquisition and development loans, included in construction loans discussed above, totaled $12.4 million at December 31, 2004. Bank policy requires that zoning and permits must be in place prior to making development loans.

The Bank’s ability to originate all types of construction and development loans is heavily dependent on the continued demand for single-family housing construction in the Bank’s market areas. In the event the demand for new houses in the Bank’s market areas were to decline, the Bank may be forced to shift a portion of its lending emphasis. There can be no assurance of the Bank’s ability to continue growth and profitability in its construction lending activities in the event of such a decline.

Construction and land development loans are inherently riskier than providing financing on owner-occupied real estate. The Bank’s risk of loss is dependent on the accuracy of the initial estimate of the market value of the completed project as well as the accuracy of the cost estimates made to complete the project. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, the Bank may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, the Bank may be confronted, at or before the maturity of the loan, with a project having a value that is insufficient to assure full repayment. As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If the Bank is forced to foreclose on a project before or at completion due to a default, there can be no assurance that the Bank will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

Home Equity and Second Mortgage Loans. The Bank has maintained a growing level of home equity and second mortgage loans in recent years. Home equity loans, which totaled $19.3 million at December 31, 2004, are generally made in the form of lines of credit with minimum amounts of $5,000, have terms of up to 20 years, variable rates priced at prime or some margin above prime and require an 80% or 90% loan-to-value ratio (including any prior liens), depending on the specific loan program. Second mortgage loans which totaled $4.6 million at December 31, 2004 are fixed and variable-rate loans which have original terms between 5 and 15 years. Loan-to-value ratios of up to 80% or 95% are allowed depending on the specific loan program.

These products contain a higher risk of default than residential first mortgages as in the event of foreclosure, the first mortgage would need to be paid off prior to collection of the second. The Bank believes that its policies and procedures are sufficient to mitigate the additional risk.

Commercial Loans. The Bank offers commercial loans to its business customers. The Bank offers a variety of commercial loan services including term loans and lines of credit. Such loans are generally made for terms of five years or less. The Bank offers both fixed and adjustable loans under these product lines. This portion of our portfolio is growing rapidly in the last several years, growing from $15.0 million and 8.6% of the portfolio in 2000 to $39.1 million and 13.4% of the overall loan portfolio at December 31, 2004. When making commercial business loans, the Bank considers the financial statements of the borrower, the borrower’s payment history of both corporate and personal debt, the projected cash flow of the business, the viability of the industry in which the consumer operates, the value of the collateral and the borrower’s ability to service the debt from income. These loans are primarily secured by equipment, real property, accounts receivable, or other security as determined by the Bank. The higher interest rates and shorter loan terms available on commercial lending make these products attractive to the Bank. Commercial business loans, however, entail greater risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. In the case of business failure collateral would need to be liquidated to provide repayment for the loan. In many cases, the highly specialized nature of collateral equipment would make full recovery from the sale of collateral problematic. The Bank attempts to control these risks by establishing guidelines which will provide for over collateralization of the

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loans. At December 31, 2004, the largest outstanding commercial loan was $3.0 million, secured by land. This loan was performing according to its terms at December 31, 2004.

Consumer Loans. The Bank has developed a number of programs to serve the needs of its customers with primary emphasis upon direct loans secured by automobiles, boats, recreational vehicles and trucks. The Bank also makes home improvement loans and offers both secured and unsecured personal lines of credit. The higher interest rates and shorter loan terms available on consumer lending make these products attractive to the Bank. Consumer loans entail greater risk than residential mortgage loans, particularly in the case of consumer loans which are unsecured or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral may not provide an adequate source of repayment of the outstanding loan balance. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various Federal and state laws including Federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer loan borrower against an assignee such as the Bank, and a borrower may be able to assert against such assignee claims and defenses which it has against the seller of the underlying collateral.

Commercial Equipment Loans The Bank has also grown its commercial equipment financing. These loans consist primarily of fixed rate short term loans collateralized by customers’ equipment including trucks, cars, construction equipment, and other more specialized equipment. When making commercial equipment loans, the Bank considers the financial statements of the borrower, the borrower’s payment history of both corporate and personal debt, the projected cash flows of the business, the viability of the industry in which the consumer operates, the value of the collateral and the borrower’s ability to repay the loans from income. The higher interest rates and shorter loan terms available on commercial equipment lending make these products attractive to the Bank. These however entail greater risk than loans such as residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial loans may depend substantially on the success of the business itself. In the case of business failure collateral would need to be liquidated to provide repayment for the loan. In many cases, the highly specialized nature of collateral equipment would make full recovery from the sale of collateral problematic. The Bank attempts to control these risks by establishing guidelines which will provide for over collateralization of the loans.

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Loan Portfolio Analysis. Set forth below is selected data relating to the composition of the Bank’s loan portfolio by type of loan on the dates indicated.

	(Dollars In Thousands)
	At December 31,
	2004					2003					2002					2001					2000
	Amount		%			Amount		%			Amount		%			Amount		%			Amount		%
Real Estate Loans
Commercial	$	136,342		46.51	%	$	93,825		42.46	%	$	74,292		37.07	%	$	65,617		33.39	%	$	42,226		24.16	%
Residential first mortgage		59,087		20.16	%		42,971		19.45	%		48,976		24.44	%		61,430		31.26	%		67,975		38.89	%
Construction and land development		17,598		6.00	%		19,599		8.87	%		14,579		7.27	%		18,136		9.23	%		17,301		9.90	%
Home equity and second mortgage		23,925		8.16	%		19,562		8.85	%		19,007		9.48	%		18,580		9.46	%		18,637		10.66	%
Commercial loans		39,137		13.35	%		30,436		13.77	%		29,947		14.94	%		18,539		9.44	%		15,047		8.61	%
Consumer loans		3,462		1.18	%		4,097		1.85	%		4,623		2.31	%		5,092		2.59	%		5,512		3.15	%
Commercial equipment		13,596		4.64	%		10,473		4.74	%		9,007		4.49	%		9,095		4.63	%		8,098		4.63	%
Total loans		293,147		100.00	%		220,963		100.00	%		200,431		100.00	%		196,489		100.00	%		174,796		100.00	%
Less: Deferred loan fees		764					650					668					757					776
Loan loss reserve		3,058					2,573					2,314					2,282					1,930
Loans receivable, net	$	289,325				$	217,740				$	197,449				$	193,450				$	172,090

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Loan Originations, Purchases and Sales. The Bank solicits loan applications through its branch network, directly through referrals from customers and through marketing by commercial and residential mortgage loan officers. Loans are processed and approved according to guidelines deemed appropriate for each product type. Loan requirements such as income verification, collateral appraisal and credit reports vary by loan type. Loan processing functions are generally centralized except for small consumer loans.

Loan Approvals, Procedures and Authority. Loan approval authority is established by Board policy and delegated as deemed necessary and appropriate. Loan approval authorities vary by individual with the President having approval authority up to $750,000, Senior Vice Presidents up to $400,000, and Business Development officers up to $150,000. Authorities may be combined up to $1,000,000. For residential mortgage loans, the residential loan underwriter may approve loans up to the conforming loan limit of $307,000. Selected branch personnel may approve secured loans up to $75,000, and unsecured loans up to $50,000. A loan committee consisting of the President and two members of the Board ratify all commercial real estate loans and approve all loans in excess of $1,000,000. Depending on the loan and collateral type, conditions for protecting the Bank’s collateral are specified in the loan documents. Typically these conditions might include requirements to maintain hazard and title insurance, pay property taxes, and other conditions.

Depending on market conditions, mortgage loans may be originated primarily with the intent to sell to third parties such as Fannie Mae or Freddie Mac. During 2004, the Bank sold $496 thousand of mortgage loans generating $21 thousand in income. In order to comply with internal and regulatory limits on loans to one borrower, the Bank routinely sells portions of commercial and commercial real estate loans to other lenders. The Bank also routinely buys portions of loans, or participation certificates from other lenders. The Bank only purchases loans or portions of loans after reviewing loan documents, underwriting support, and other procedures as necessary. The Bank purchased $14.4 million in participations in 2004. Purchased loans are subject to the same regulatory and internal policy requirements as other loans in the Bank’s portfolio.

Loans to One Borrower. Under Maryland law, the maximum amount which the Bank is permitted to lend to any one borrower and their related interests may generally not exceed 10% of the Bank’s unimpaired capital and surplus which is defined to include the Bank’s capital, surplus, retained earnings and 50% of its reserve for possible loan losses. Under this authority, the Bank would have been permitted to lend up to $3.9 million to any one borrower at December 31, 2004. By interpretive ruling of the Commissioner of Financial Regulation, Maryland banks have the option of lending up to the amount that would be permissible for a national bank which is generally 15% of unimpaired capital and surplus (defined to include a bank’s total capital for regulatory capital purposes plus any loan loss allowances not included in regulatory capital). Under this formula, the Bank would have been permitted to lend up to $6.1 million to any one borrower at December 31, 2004. At December 31, 2004, the largest amount outstanding to any one borrower and their related interests was $6.0 million.

Loan Commitments. The Bank does not normally negotiate standby commitments for the construction and purchase of real estate. Conventional loan commitments are granted for a one-month period. The total amount of the Bank’s outstanding commitments to originate loans at December 31, 2004 was approximately $578 thousand, excluding undisbursed portions of loans in process. It has been the Bank’s experience that few commitments expire unfunded.

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Maturity of Loan Portfolio. The following table sets forth certain information at December 31, 2004 regarding the dollar amount of loans maturing in the Bank’s portfolio based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less.

	(Dollars in Thousands)
	Due within 1		Due after 1 through		Due more than
	year after		5 years from		5 years from
	December 31, 2004		December 31, 2004		December 31, 2004
Real Estate Loans
Commercial	$	32,787	$	18,148	$	85,407
Residential first mortgage		3,022		11,647		44,418
Construction and land development		6,330		11,268		—
Home equity and second mortgage		19,792		1,819		2,314
Commercial loans		16,330		22,807		—
Consumer loans		405		2,552		505
Commercial equipment		209		10,791		2,596
Total loans	$	78,875	$	79,032	$	135,240

The following table sets forth the dollar amount of all loans due after one year from December 31, 2004 which have predetermined interest rates and have floating or adjustable interest rates.

	(Dollars in Thousands)
			Floating or
	Fixed Rates		Adjustable Rates		Total
Real Estate Loans
Commercial	$	10,112	$	93,443	$	103,555
Residential first mortgage		41,333		14,732		56,065
Construction and land development		—		11,268		11,268
Home equity and second mortgage		3,886		247		4,133
Commercial loans		—		22,807		22,807
Consumer loans		2,945		112		3,057
Commercial equipment		13,387		—		13,387
	$	71,663	$	142,609	$	214,272

Delinquencies. The Bank’s collection procedures provide that when a loan is 15 days delinquent, the borrower is contacted by mail and payment is requested. If the delinquency continues, subsequent efforts will be made to contact the delinquent borrower and obtain payment. If these efforts prove unsuccessful, the Bank will pursue appropriate legal action including repossession of the collateral and other actions as deemed necessary. In certain instances, the Bank will attempt to modify the loan or grant a limited moratorium on loan payments to enable the borrower to reorganize his financial affairs.

Non-Performing Assets and Asset Classification. Loans are reviewed on a regular basis and are placed on a non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. Residential mortgage loans are placed on non-accrual status when either principal or interest is 90 days or more past due unless they are adequately secured and there is reasonable assurance of full collection of principal and interest. Consumer loans generally are charged off when the loan becomes more than 120 days delinquent. Commercial business and real estate loans are placed on non-accrual status when the loan is 90 days or more past due or when the loan’s condition puts the timely repayment of principal and interest in doubt. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments are either applied to the outstanding principal balance or recorded as interest income, depending on management’s assessment of the ultimate collectibility of the loan.

9

Foreclosed Real Estate

Real estate acquired by the Bank as a result of foreclosure or by deed in lieu of foreclosure is classified as foreclosed real estate until such time as it is sold. When such property is acquired, it is recorded at its fair market value. Subsequent to foreclosure, the property is carried at the lower of cost or fair value less selling costs. Additional write-downs as well as carrying expenses of the foreclosed properties are charged to expenses in the current period. The Bank had foreclosed real estate with a carrying value of approximately $476 thousand at December 31, 2004.

Foreclosed real estate is recorded net of a valuation allowance. The allowance is adjusted as circumstances require. These adjustments in the allowance include changes in the value of the property as well as the sale or disposal of the foreclosed property. There is currently one property in foreclosed real estate. This property, with a carrying value of $476 thousand at December 31, 2004, is related to a development project. This project was acquired in July 2001 by deed in lieu of foreclosure. The project is being developed in two phases. Preliminary approvals have been obtained for phase 1 and this portion of the project was sold in 2002. Phase 2 is under contract to sell and will be sold when preliminary approval from Charles County is granted. Total sales price for Phase 2 is expected to be $1.7 million. Under the terms of the agreement, the buyer is responsible for all development costs associated with both phases. The sales agreement provides for a minimal ($25 thousand) payment to the Bank should the buyer decide to not complete its purchase of Phase 2. The Bank did not provide financing for the sales agreement or subsequent development work. Based upon these facts and circumstances the Bank recognized the sale of Phase 1 for accounting purposes. The Bank determined that no sales recognition on the agreement to sell Phase 2 is appropriate at this time. The amount of the remaining allowance and total carrying value of Phase 2 is periodically evaluated for possible impairment. Other properties in the foreclosed real estate section of the balance sheet consist of various properties currently being marketed by the Bank.

10

Delinquent and Nonaccrual Loans

The following table sets forth information with respect to the Bank’s non-performing loans for the dates indicated. At the dates shown, the Bank had no impaired loans within the meaning of Statement of Financial Accounting Standards No. 114 and 118.

	(Dollars in Thousands)
	At December 31,
	2004		2003		2002		2001		2000
Restructured Loans	$	—	$	—	$	—	$	—	$	—
Accruing loans which are contractually past past due 90 days or more:
Real Estate Loans
Commercial		—		—		—		—		—
Residential first mortgage		—		—		—		—		—
Construction and land development		—		—		—		—		—
Home equity and second mortgage		—		—		—		25		102
Commercial loans		—		—		—		—		—
Consumer loans		—		—		—		—		—
Commercial equipment		—		—		—		—		—
Total		—		—		—		25		102
Loans accounted for on a nonaccrual basis:
Real Estate Loans
Commercial		—		—		—		—		—
Residential first mortgage		273		275		278		134		—
Construction and land development		—		—		—		—		—
Home equity and second mortgage		—		—		49		—		—
Commercial loans		393		103		269		—		—
Consumer loans		9		1		1		70		7
Commercial equipment		—		—		—		—		—
Total		675		379		597		204		7
Total non-performing loans	$	675	$	379	$	597	$	229	$	109

For a detailed discussion of foreclosed real estate at December 31, 2004 see the “Foreclosed Real Estate” section discussed previously. During the year ended December 31, 2004 gross interest income of $44 thousand would have been recorded on loans accounted for on a non-accrual basis if the loans had been current throughout the period. During 2004, the Company recognized $22 thousand in interest on these loans.

At December 31, 2004, there were no loans outstanding not reflected in the above table as to which known information about possible credit problems of borrowers caused management to have serious doubts as to the ability of such borrowers to comply with present loan repayment terms.

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The following table sets forth an analysis of activity in the Bank’s allowance for loan losses for the periods indicated.

	(Dollars in Thousands)
	At December 31,
	2004			2003			2002			2001			2000
Balance at beginning of period	$	2,573		$	2,314		$	2,282		$	1,930		$	1,653
Charge-offs:
Real Estate Loans
Commercial		—			—			—			—			—
Residential first mortgage		—			—			—			—			56
Construction and land development		—			—			36			—			—
Home equity and second mortgage		—			—			21			—			—
Commercial loans		1			35			59			—			33
Consumer loans		3			2			15			39			6
Commercial equipment		13			24			—			—			—
Total Charge-offs:		17			61			131			39			95
Recoveries:
Real Estate Loans
Commercial		—			—			—			—			—
Residential first mortgage		33			—			—			—			—
Construction and land development		—			—			—			—			—
Home equity and second mortgage		—			—			—			—			—
Commercial loans		—			—			—			—			—
Consumer loans		9			—			3			31			—
Commercial equipment		7			2			—			—			12
Total Recoveries		49			2			3			31			12
Net charge-offs		(32	)		58			128			8			83
Provision for Possible Loan Losses		453			317			160			360			360
Balance at End of Period	$	3,058		$	2,573		$	2,314		$	2,282		$	1,930
Ratio of net charge-offs to average loans outstanding during the year		-0.01	%		0.03	%		0.06	%		0.00	%		0.05	%

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The following table allocates the allowance for loan losses by loan category at the dates indicated. The allocation of the allowance to each category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.

	At December 31,
	2004					2003					2002
			Percent of					Percent of					Percent of
			Loans in					Loans in					Loans in
			Each					Each					Each
			Category to					Category to					Category to
	Amount		Total Loans			Amount		Total Loans			Amount		Total Loans
Real Estate Loans
Commercial	$	1,909		46.51	%	$	1,409		42.46	%	$	1,077		37.07	%
Residential first mortgage		59		20.16	%		64		19.45	%		118		24.44	%
Construction and land development		132		6.00	%		281		8.87	%		211		7.27	%
Home equity and second mortgage		120		8.16	%		244		8.85	%		276		9.48	%
Commercial loans		530		13.35	%		381		13.77	%		434		14.94	%
Consumer loans		138		1.18	%		63		1.85	%		68		2.31	%
Commercial equipment		170		4.64	%		131		4.74	%		130		4.49	%
Total allowance for loan losses	$	3,058		100.00	%	$	2,573		100.00	%	$	2,314		100.00	%

	At December 31,
	2001					2000
			Percent of					Percent of
			Loans in Each					Loans in Each
			Category to					Category to
	Amount		Total Loans			Amount		Total Loans
Real Estate Loans
Commercial	$	923		33.39	%	$	645		24.16	%
Residential first mortgage		160		31.26	%		192		38.89	%
Construction and land development		355		9.23	%		285		9.90	%
Home equity and second mortgage		373		9.46	%		394		10.66	%
Commercial loans		186		9.44	%		138		8.61	%
Consumer loans		102		2.59	%		111		3.15	%
Commercial equipment		183		4.63	%		165		4.63	%
Total allowance for loan losses	$	2,282		100.00	%	$	1,930		100.00	%

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The Bank closely monitors the loan payment activity of all its loans. A loan loss provision is provided by a regular accrual. The Bank periodically reviews the adequacy of the allowance for loan losses based on an analysis of the loan portfolio, the Bank’s historical loss experience, economic conditions in the Bank’s market area, and a review of selected individual loans. Loan losses are charged off against the allowance when the uncollectibility is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Bank believes it has established its existing allowance for loan losses in accordance with generally accepted accounting principles and is in compliance with appropriate regulatory guidelines. However, the establishment of the level of the allowance for loan losses is highly subjective and dependent on incomplete information as to the ultimate disposition of loans. Accordingly, there can be no assurance that actual losses may not vary from the amounts estimated or that the Bank’s regulators will not require the Bank to significantly increase or decrease its allowance for loan losses, thereby affecting the Bank’s financial condition and earnings. For a more complete discussion of the allowance for loan losses, see the sectioned captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in the Company’s 2004 Annual Report to Shareholders.

Investment Activities

The Bank maintains a portfolio of investment securities to provide liquidity as well as a source of earnings. The Bank’s investment securities portfolio consists primarily of mortgage-backed and other securities issued by U.S. Government-sponsored enterprises (“GSEs”) including Freddie Mac and Fannie Mae. The Bank also has smaller holdings of privately issued mortgage-backed securities, U.S. Treasury obligations, and other equity and debt securities. As a member of the Federal Reserve and FHLB Systems, the Bank is also required to invest in the stock of the Federal Reserve Bank of Richmond and FHLB of Atlanta, respectively. During 2004, the Company sold $7 million of guaranteed subordinated debentures to outside investors and invested the proceeds in the Bank as additional capital. The Bank in turn used the proceeds along with additional borrowings to purchase investment securities.

The following table sets forth the carrying value of the Company’s investment securities portfolio and FHLB of Atlanta and Federal Reserve Bank stock at the dates indicated. At December 31, 2004, their market value was $181 million.

	(Dollars in thousands)
	At December 31,
	2004		2003		2002
Asset-backed securities:
Freddie Mac and Fannie Mae	$	155,678	$	84,764	$	29,200
Other		16,535		7,284		7,930
Total asset-backed securities		172,213		92,048		37,130
Freddie Mac and Fannie Mae stock		766		756		734
Bond mutual funds		630		2,838		3,962
Treasury bills		300		300		300
Other Investments		1,781		3,954		2,542
Total investment securities		175,690		99,895		44,668
FHLB and Federal Reserve Bank stock		6,144		4,777		2,737
Total investment securities and FHLB and Federal Reserve Bank stock	$	181,834	$	104,672	$	47,405

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The maturities and weighted average yields for investment securities available for sale and held to maturity at December 31, 2004 are shown below.

	(Dollars in thousands)
						After One					After Five
	One Year or Less					Through Five Years					Through Ten Years					After Ten Years
	Carrying		Average			Carrying		Average			Carrying		Average			Carrying		Average
	Value		Yield			Value		Yield			Value		Yield			Value		Yield
Investment securities available for sale:
Corporate equity securities	$	766		4.13	%	$	—				$	—				$	—
Asset-backed securities		5,664		4.90	%		3,435		5.25	%		1,576		4.80	%		878		4.56	%
Mutual funds		630		2.23	%		—		—			—		—			—		—
Total investment securities available for sale	$	7,060		3.75	%	$	3,435		5.25	%	$	1,576		4.80	%	$	878		4.56	%
Investment securities held-to- maturity:
Asset-backed securities	$	26,788		3.80	%	$	97,134		4.50	%	$	27,509		4.48	%	$	9,229		4.50	%
Treasury bills		300		1.22	%		—					—					—
Other investments		1,177		4.50	%		604		3.81	%		—		—			—		—
Total investment securities held-to-maturity	$	28,265		3.17	%	$	97,738		4.16	%	$	27,509		4.48	%	$	9,229		4.50	%

The Bank’s investment policy provides that securities that will be held for indefinite periods of time, including securities that will be used as part of the Bank’s asset/liability management strategy and that may be sold in response to changes in interest rates, prepayments and similar factors, are classified as available for sale and accounted for at fair value. Management’s intent is to hold securities reported at amortized cost to maturity. Certain of the Company’s securities are issued by private issuers (defined as an issuer which is not a government or a government sponsored entity). Listed below are the Company’s investments in certain of these issuers which aggregate to more than 10% of the Company’s equity. All of these investments are in CMO’s which are rated AAA by Moodys. For further information regarding the Company’s investment securities, see Note 3 of Notes to Consolidated Financial Statements.

Issuer	Book Value		Rating
Wells Fargo	$	10,477,241	AAA
Morgan Stanley	$	8,650,074	AAA
Bear Stearns	$	4,154,003	AAA
Master Alternative Loans Trust	$	5,989,742	AAA
First Horizon	$	3,955,335	AAA
Credit Suisse First Boston	$	3,354,075	AAA
Citigroup	$	5,830,774	AAA
Countrywide	$	5,515,513	AAA

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Deposits and Other Sources of Funds

General. The funds needed by the Bank to make loans are primarily generated by deposit accounts solicited from the communities surrounding its main office and seven branches in the southern Maryland area. Total deposits were $266.8 million as of December 31, 2004. The Bank uses borrowings from the FHLB of Atlanta, reverse repurchase agreements, and other sources to supplement funding from deposits.

Deposits. The Bank’s deposit products include savings, money market, demand deposit, IRA, SEP, Christmas clubs and time deposit accounts. Variations in service charges, terms and interest rates are used to target specific markets. Ancillary products and services for deposit customers include safe deposit boxes, travelers checks, night depositories, automated clearinghouse transactions, wire transfers, ATMs, and online and telephone banking. The Bank is a member of JEANIE, Cirrus and STAR ATM networks. The Bank has occasionally used deposit brokers to obtain funds. At December 31, 2004, no brokered deposits were held.

The following table sets forth for the periods indicated the average balances outstanding and average interest rates for each major category of deposits.

	(Dollars in thousands)
	2004					2003					2002
	Average		Average			Average		Average			Average		Average
	Balance		Rate			Balance		Rate			Balance		Rate
Savings	$	37,776		0.81	%	$	32,772		0.21	%	$	23,334		0.86	%
Interest-bearing demand and money market accounts		85,212		0.89	%		67,346		0.66	%		73,668		0.47	%
Certificates of deposit		93,267		2.46	%		82,248		2.75	%		70,885		4.10	%
Total interest-bearing deposits		216,255		1.49	%		182,366		1.57	%		167,887		2.06	%
Noninterest-bearing demand deposits		32,909					30,277					21,631
	$	249,164		1.29	%	$	212,643		1.35	%	$	189,518		1.82	%

The following table indicates the amount of the Bank’s certificates of deposit and other time deposits of more than $100,000 by time remaining until maturity as of December 31, 2004.

	(Dollars in thousands)
	Certificates
Maturity Period	of Deposit
Three months or less	$	9,486
Three through six months		1,943
Six through twelve months		9,995
Over twelve months		10,844
	$	32,268

Borrowings. Deposits are the primary source of funds for the Bank’s lending and investment activities and for its general business purposes. The Bank uses advances from the FHLB of Atlanta to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB are secured by the Bank’s stock in the FHLB, a portion of the Bank’s residential mortgage loans and its eligible investments. Generally the Bank’s ability to borrow from the FHLB of Atlanta is limited by its available collateral and also by an overall limitation of

16

40% of assets. In addition to advances the Bank uses reverse repurchase agreements to enhance its funding. Other short-term debt consists of notes payable to the U.S. Treasury on Treasury, Tax and Loan accounts. Long-term borrowings consist of adjustable-rate advances with rates based upon LIBOR, fixed-rate advances and convertible advances. Information about borrowings for the years indicated is as follows:

	(Dollars in thousands)
	At or for the
	Year Ended December 31,
	2004			2003			2002
Long-term debt outstanding at end of period	$	82,931		$	63,051		$	48,170
Weighted average rate on outstanding long-term debt		4.20	%		4.55	%		4.99	%
Short-term debt outstanding at end of period		115,304			31,191			752
Weighted average rate on outstanding short-term debt		2.53	%		1.15	%		0.89	%
Maximum outstanding short-term debt at any month end		122,693			40,000			6,500
Average outstanding short-term debt		64,736			7,568			680
Approximate average rate paid on short term debt		1.80	%		1.26	%		1.04	%

For more information regarding the Bank’s borrowings, see Note 9 of Notes to Consolidated Financial Statements.

Subsidiary Activities

Under the Maryland Financial Institutions Code, commercial banks may invest in service corporations and in other subsidiaries that offer the public a financial, fiduciary or insurance service. In April 1997, the Bank formed a wholly owned subsidiary, Community Mortgage Corporation of Tri-County, to offer mortgage banking, brokerage, and other services to the public. This corporation was inactive until 2001. At that time, the Bank transferred a property which was acquired by deed in lieu of foreclosure to this subsidiary in order to complete development of this parcel. In August 1999, the Bank formed a wholly owned subsidiary, Tri-County Investment Corporation to hold and manage a portion of the Bank’s investment portfolio.

The Company has one subsidiary other than the Bank. In July 2004, Tri-County Capital Trust I was established as a statutory trust under Delaware law as a wholly owned subsidiary of the Company for the purpose of issuing trust preferred securities. Tri-County Capital Trust issued $7.0 million of trust preferred securities on July 22, 2004.

SUPERVISION AND REGULATION

Regulation of the Company

General. The Company is a public company registered with the Securities and Exchange Commission (the “SEC”) and, as the sole shareholder of the Bank, it is a bank holding company and registered as such with the Board of Governors of the Federal Reserve System (the “FRB”). Bank holding companies are subject to comprehensive regulation by the FRB under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the regulations of the FRB. As a public company the Company is required to file annual, quarterly and current reports with the SEC, and as a bank holding company, the Company is required to file with the FRB annual reports and such additional information as the FRB may require, and is subject to regular examinations by the FRB. The FRB also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. The following discussion summarizes certain of the regulations applicable to the Company but does not purport to be a complete description of such regulations and is qualified in its entirety by reference to the actual laws and regulations involved.

Under the BHCA, a bank holding company must obtain FRB approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares);

17

(ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.

Effective September 29, 1995, the Riegle-Neal Interstate Banking and Branching Efficiency of 1994 (the “Riegle-Neal Act”) authorized the FRB to approve an application of an adequately capitalized and adequately managed bank holding company to acquire control of, or acquire all or substantially all of the assets of, a bank located in a state other than such holding company’s home state, without regard to whether the transaction is prohibited by the laws of any state. The FRB may not approve the acquisition of a bank that has not been in existence for the minimum time period (not exceeding five years) specified by the statutory law of the host state. The Riegle-Neal Act also prohibits the FRB from approving such an application if the applicant (and its depository institution affiliates) controls or would control more than 10% of the insured deposits in the United States or 30% or more of the deposits in the target bank’s home state or in any state in which the target bank maintains a branch. The Riegle-Neal Act does not affect the authority of states to limit the percentage of total insured deposits in the state which may be held or controlled by a bank or bank holding company to the extent such limitation does not discriminate against out-of-state banks or bank holding companies. Individual states may also waive the 30% state-wide concentration limit contained in the Riegle-Neal Act. Under Maryland law, a bank holding company is prohibited from acquiring control of any bank if the bank holding company would control more than 30% of the total deposits of all depository institutions in the State of Maryland unless waived by the Commissioner of Financial Regulation.

Additionally, the federal banking agencies are authorized to approve interstate bank merger transactions without regard to whether such transaction is prohibited by the law of any state, unless the home state of one of the banks opted out of the Riegle-Neal Act by adopting a law after the date of enactment of the Riegle-Neal Act and prior to June 1, 1997 which applies equally to all out-of-state banks and expressly prohibits merger transactions involving out-of-state banks. The State of Maryland did not pass such a law during this period. Interstate acquisitions of branches will be permitted only if the law of the state in which the branch is located permits such acquisitions. Interstate mergers and branch acquisitions will also be subject to the nationwide and statewide insured deposit concentration amounts described above.

The BHCA also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the FRB includes, among other things, operating a savings institution, mortgage company, finance company, credit card company or factoring company; performing certain data processing operations; providing certain investment and financial advice; underwriting and acting as an insurance agent for certain types of credit-related insurance; leasing property on a full-payout, non-operating basis; selling money orders, travelers’ checks and United States Savings Bonds; real estate and personal property appraising; providing tax planning and preparation services; and, subject to certain limitations, providing securities brokerage services for customers.

Effective with the enactment of the Gramm-Leach-Bliley Act (the “G-L-B Act”) on November 12, 1999, bank holding companies whose financial institution subsidiaries are well capitalized and well managed and have satisfactory Community Reinvestment Act records can elect to become “financial holding companies” which are permitted to engage in a broader range of financial activities than are permitted to bank holding companies. Financial holding companies are authorized to engage in, directly or indirectly, financial activities. A financial activity is an activity that is: (i) financial in nature; (ii) incidental to an activity that is financial in nature; or (iii) complementary to a financial activity and that does not pose a safety and soundness risk. The G-L-B Act includes a list of activities that are deemed to be financial in nature. Other activities also may be decided by the FRB to be financial in nature or incidental thereto if they meet specified criteria. A financial holding company that intends to engage in a new activity to acquire a company to engage in such an activity is required to give prior notice to the FRB. If the activity is not either specified in the G-L-B Act as being a financial activity or one that the FRB has determined by rule or regulation to be financial in nature, the prior approval of the FRB is required.

The Maryland Financial Institutions Code prohibits a bank holding company from acquiring more than 5% of any class of voting stock of a bank or bank holding company without the approval of the Commissioner of Financial

18

Regulation, except as otherwise expressly permitted by federal law or in certain other limited situations. The Maryland Financial Institutions Code additionally prohibits any person from acquiring voting stock in a bank or bank holding company without 60 days’ prior notice to the Commissioner if such acquisition will give the person control of 25% or more of the voting stock of the bank or bank holding company or will affect the power to direct or to cause the direction of the policy or management of the bank or bank holding company. Any doubt whether the stock acquisition will affect the power to direct or cause the direction of policy or management shall be resolved in favor of reporting to the Commissioner. The Commissioner may deny approval of the acquisition if the Commissioner determines it to be anti-competitive or to threaten the safety or soundness of a banking institution. Voting stock acquired in violation of this statute may not be voted for five years.

Dividends. The FRB has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the FRB’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the FRB pursuant to FDICIA (“Federal Deposit Insurance Corporation Improvement Act”), the FRB may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized”.

Stock Repurchases. Bank holding companies are required to give the FRB prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the their consolidated retained earnings. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, FRB order, or any condition imposed by, or written agreement with, the FRB.

Capital Requirements. The FRB has established capital requirements, similar to the capital requirements for state member banks, for bank holding companies with consolidated assets of $150 million or more. As of December 31, 2004, the Company’s levels of consolidated regulatory capital exceeded the FRB’s minimum requirements.

Sarbanes-Oxley Act of 2002 and Related Regulations. The Sarbanes-Oxley Act of 2002 (“SOX”) contains provisions addressing corporate and accounting fraud which both amended the Securities Exchange Act of 1934, as amended (the “Act”) and directed the SEC to promulgate rules. SOX provided for the establishment of a new Public Company Accounting Oversight Board (“PCAOB”), to enforce auditing, quality control and independence standards for firms that audit public reporting companies and will be funded by fees from all public reporting companies. It is unlawful for any person that is not a registered public accounting firm (“RPAF”) to audit a public reporting company. Under the Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company’s chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The SEC has prescribed rules requiring inclusion of an internal control report and assessment by management in the annual report to shareholders. SOX requires the RPAF that issues the audit report to attest to and report on management’s assessment of the Company’s internal controls. In addition, SOX requires that each financial report required to be prepared in accordance with (or reconciled to) generally accepted accounting principles and filed with the SEC reflect all material correcting adjustments that are identified by a RPAF in accordance with generally accepted accounting principles and the rules and regulations of the SEC. SOX requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement.

SOX also increases the oversight and authority of audit committees of publicly traded companies. SOX imposed higher standards for auditor independence and restricts provisions of consulting services by auditing firms to companies they audit. Any non-audit services (subject to a 5% de minimis exception) being provided to an audit client require pre-approval by the Company’s audit committee members. Audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, all public reporting companies must disclose whether at least one member of the committee is an audit committee “financial expert” (as such terms is defined by the SEC rules) and if not, why not.

19

Due to SOX, longer prison terms will be applied to corporate executives who violate federal securities laws, the period during which certain types of suits can be brought against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company’s financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from trading during retirement plan “blackout” periods, and loans to company executives are restricted. In addition, a provision directs that civil penalties levied by the SEC as a result of any judicial or administrative action under the Act be deposited in a fund for the benefit of harmed investors.

Currently the Company estimates that compliance with the provisions of the Act and the related rules will cost between $200 thousand and $300 thousand on a pretax basis. This is only an estimate and may increase as initial SOX compliance activities are completed.

Regulation of the Bank

General. The Bank is a Maryland commercial bank and its deposit accounts are insured by the SAIF of the FDIC. The Bank is a member of the Federal Reserve and FHLB Systems. The Bank is subject to supervision, examination and regulation by Commissioner of Financial Regulation of the State of Maryland (the “Commissioner”) and the FRB and to Maryland and federal statutory and regulatory provisions governing such matters as capital standards, mergers and establishment of branch offices. The FDIC, as deposit insurer, has certain secondary examination and supervisory authority. The Bank is required to file reports with the Commissioner and the FRB concerning its activities and financial condition and will be required to obtain regulatory approvals prior to entering into certain transactions, including mergers with, or acquisitions of, other depository institutions.

As an institution with federally insured deposits, the Bank is subject to various regulations promulgated by the FRB, including Regulation B (Equal Credit Opportunity), Regulation D (Reserve Requirements), Regulation E (Electronic Fund Transfers), Regulation P (Privacy), Regulation W (Transactions Between Member Banks and Their Affiliates), Regulation Z (Truth in Lending), Regulation CC (Availability of Funds and Collection of Checks) and Regulation DD (Truth in Savings).

The system of regulation and supervision applicable to the Bank establishes a comprehensive framework for the operations of the Bank and is intended primarily for the protection of the FDIC and the depositors of the Bank. Changes in the regulatory framework could have a material effect on the Bank and its respective operations that in turn, could have a material effect on the Company. The following discussion summarizes certain of the regulations applicable to the Banks but does not purport to be a complete description of such regulations and is qualified in its entirety by reference to the actual laws and regulations involved.

Capital Adequacy. The FRB has established guidelines with respect to the maintenance of appropriate levels of capital by bank holding companies and state member banks, respectively. The regulations impose two sets of capital adequacy requirements: minimum leverage rules, which require bank holding companies and member banks to maintain a specified minimum ratio of capital to total assets, and risk-based capital rules, which require the maintenance of specified minimum ratios of capital to “risk-weighted” assets.

The regulations of the FRB require bank holding companies and state member banks, respectively, to maintain a minimum leverage ratio of “Tier 1 capital” (as defined in the risk-based capital guidelines discussed in the following paragraphs) to total assets of 3.0%. Although setting a minimum 3.0% leverage ratio, the capital regulations state that only the strongest bank holding companies and banks, with composite examination ratings of 1 under the rating system used by the federal bank regulators, would be permitted to operate at or near such minimum level of capital. All other bank holding companies and banks are expected to maintain a leverage ratio of at least 4%. Any bank or bank holding company experiencing or anticipating significant growth would be expected to maintain capital well above the minimum levels. In addition, the FRB has indicated that whenever appropriate, and in particular when a bank holding company is undertaking expansion, seeking to engage in new activities or otherwise facing unusual or abnormal risks, it will consider, on a case-by-case basis, the level of an organization’s ratio of tangible Tier 1 capital (after deducting all intangibles) to total assets in making an overall assessment of capital.

The risk-based capital rules of the FRB require bank holding companies and state member banks, respectively, to maintain minimum regulatory capital levels based upon a weighting of their assets and off-balance sheet obligations

20

according to risk. Risk-based capital is composed of two elements: Tier 1 capital and Tier 2 capital. Tier 1 capital consists primarily of common stockholders’ equity, certain perpetual preferred stock (which must be noncumulative in the case of banks), and minority interests in the equity accounts of consolidated subsidiaries; less all intangible assets, except for certain servicing assets, purchased credit card relationships, deferred tax assets and credit enhancing interest-only strips. Tier 2 capital elements include, subject to certain limitations, the allowance for losses on loans and leases; perpetual preferred stock that does not qualify as Tier 1 capital and long-term preferred stock with an original maturity of at least 20 years from issuance; hybrid capital instruments, including perpetual debt and mandatory convertible securities, subordinated debt and intermediate-term preferred stock and up to 45% of unrealized gains on available for sale equity securities with readily determinable market values.

The risk-based capital regulations assign balance sheet assets and credit equivalent amounts of off-balance sheet obligations to one of four broad risk categories based principally on the degree of credit risk associated with the obligor. The assets and off-balance sheet items in the four risk categories are weighted at 0%, 20%, 50% and 100%. These computations result in the total risk-weighted assets. The risk-based capital regulations require all banks and bank holding companies to maintain a minimum ratio of total capital (Tier 1 capital plus Tier 2 capital) to total risk-weighted assets of 8%, with at least 4% as Tier 1 capital. For the purpose of calculating these ratios: (i) Tier 2 capital is limited to no more than 100% of Tier 1 capital; and (ii) the aggregate amount of certain types of Tier 2 capital is limited. In addition, the risk-based capital regulations limit the allowance for loan losses includable as capital to 1.25% of total risk-weighted assets.

FRB regulations and guidelines additionally specify that state member banks with significant exposure to declines in the economic value of their capital due to changes in interest rates may be required to maintain higher risk-based capital ratios.

The FRB has issued regulations which classify state member banks by capital levels and which authorize the FRB to take various prompt corrective actions to resolve the problems of any bank that fails to satisfy the capital standards. Under such regulations, a well capitalized bank is one that is not subject to any regulatory order or directive to meet any specific capital level and that has or exceeds the following capital levels: a total risk-based capital ratio of 10%, a Tier 1 risk-based capital ratio of 6%, and a leverage ratio of 5%. An adequately capitalized bank is one that does not qualify as well capitalized but meets or exceeds the following capital requirements: a total risk-based capital ratio of 8%, a Tier 1 risk-based capital ratio of 4%, and a leverage ratio of either (i) 4% or (ii) 3% if the bank has the highest composite examination rating. A bank not meeting these criteria is treated as undercapitalized, significantly undercapitalized, or critically undercapitalized depending on the extent to which the bank’s capital levels are below these standards. A state member bank that falls within any of the three undercapitalized categories established by the prompt corrective action regulation will be subject to severe regulatory sanctions. As of December 31, 2004, the Bank was well capitalized as defined by the FRB’s regulations.

Branching. Maryland law provides that, with the approval of the Commissioner, Maryland banks may establish branches within the State of Maryland without geographic restriction and may establish branches in other states by any means permitted by the laws of such state or by federal law. The Riegle-Neal Act authorizes the FRB to approve interstate branching de novo by state banks, only in states which specifically allow for such branching. The Riegle-Neal Act also required the appropriate federal banking agencies to prescribe regulations which prohibit any out-of-state bank from using the interstate branching authority primarily for the purpose of deposit production. These regulations include guidelines to ensure that interstate branches operated by an out-of-state bank in a host state are reasonably helping to meet the credit needs of the communities which they serve.

Dividend Limitations. Pursuant to the Maryland Financial Institutions Code, Maryland banks may only pay dividends from undivided profits or, with the prior approval of the Commissioner, their surplus in excess of 100% of required capital stock. The Maryland Financial Institutions Code further restricts the payment of dividends by prohibiting a Maryland bank from declaring a dividend on its shares of common stock until its surplus fund equals the amount of required capital stock or, if the surplus fund does not equal the amount of capital stock, in an amount in excess of 90% of net earnings.

Without the approval of the FRB, a state member bank may not declare or pay a dividend if the total of all dividends declared during the year exceeds its net income during the current calendar year and retained net income for the prior two years. The Bank is further prohibited from making a capital distribution if it would not be adequately

21

capitalized thereafter. In addition, the Bank may not make a capital distribution that would reduce its net worth below the amount required to maintain the liquidation account established for the benefit of its depositors at the time of its conversion to stock form.

Deposit Insurance. The Bank is required to pay semi-annual assessments based on a percentage of its insured deposits to the FDIC for insurance of its deposits by the Savings Association Insurance Fund (“SAIF”). Under the Federal Deposit Insurance Act, the FDIC is required to set semi-annual assessments for SAIF-insured institutions to maintain the designated reserve ratio of the SAIF at 1.25% of estimated insured deposits or at a higher percentage of estimated insured deposits that the FDIC determines to be justified for that year by circumstances raising a significant risk of substantial future losses to the SAIF. In the event that the SAIF should fail to meet its statutory reserve ratio, the FDIC would be required to set semi-annual assessment rates for SAIF members that are sufficient to increase the reserve ratio to 1.25% within one year or in accordance with such other schedule that the FDIC adopts by regulation to restore the reserve ratio in not more than 15 years.

Under the risk-based deposit insurance assessment system adopted by the FDIC, the assessment rate for an insured depository institution depends on the assessment risk classification assigned to the institution by the FDIC, which is determined by the institution’s capital level and supervisory evaluations. Based on the data reported to regulators for the date closest to the last day of the fourth month preceding the semi-annual assessment period, institutions are assigned to one of three capital groups — “well capitalized, adequately capitalized or undercapitalized.” Within each capital group, institutions are assigned to one of three subgroups on the basis of supervisory evaluations by the institution’s primary supervisory authority and such other information as the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance fund. Under the current assessment schedule, well capitalized banks with the best supervisory ratings are not required to pay any premium for deposit insurance. All SAIF-insured banks, however, are required to pay assessments to the FDIC to help fund interest payments on certain bonds issued by the Financing Corporation, an agency established by the federal government to finance takeovers of insolvent thrifts.

Transactions with Affiliates. A state member bank or its subsidiaries may not engage in “covered transactions” with any one affiliate in an amount greater than 10% of such bank’s capital stock and surplus, and for all such transactions with all affiliates a state member bank is limited to an amount equal to 20% of capital stock and surplus. All such transactions must also be on terms substantially the same, or at least as favorable, to the bank or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar other types of transactions. An affiliate of a state member bank is any company or entity which controls or is under common control with the state member bank and, for purposes of the aggregate limit on transactions with affiliates, any subsidiary that would be deemed a financial subsidiary of a national bank. In a holding company context, the parent holding company of a state member bank (such as the Company) and any companies which are controlled by such parent holding company are affiliates of the state member bank. The BHCA further prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain limited exceptions.

Loans to Directors, Executive Officers and Principal Stockholders. Loans to directors, executive officers and principal stockholders of a state member bank must be made on substantially the same terms as those prevailing for comparable transactions with persons who are not executive officers, directors, principal stockholders or employees of the bank unless the loan is made pursuant to a compensation or benefit plan that is widely available to employees and does not favor insiders. Loans to any executive officer, director and principal stockholder together with all other outstanding loans to such person and affiliated interests generally may not exceed 15% of the bank’s unimpaired capital and surplus and all loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Loans to directors, executive officers and principal stockholders, and their respective affiliates, in excess of the greater of $25,000 or 5% of capital and surplus or any loans aggregates $500,000 or more must be approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. State member banks are prohibited from paying the overdrafts of any of their executive officers or directors unless payment is made pursuant to a written, pre-authorized interest-bearing extension of credit plan that specifies a method of repayment or transfer of funds from another account at the bank. In addition, loans

22

to executive officers may not be made on terms more favorable than those afforded other borrowers and are restricted as to type, amount and terms of credit.

U.S.A. Patriot Act. The Patriot Act is intended to strengthen U.S. law enforcement’s and the intelligence communities’ abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations including standards for verifying client identification at account opening, and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Personnel

As of December 31, 2004, the Bank had 98 full-time employees and 4 part-time employees. The employees are not represented by a collective bargaining agreement. The Bank believes its employee relations are good.

Executive Officers of the Registrant

The executive officers of the Company are as follows:

Michael L. Middleton (57 years old) is President and Chief Executive Officer of the Company and the Bank. He joined the Bank in 1973 and served in various management positions until 1979 when he became president of the Bank. Mr. Middleton is a Certified Public Accountant and holds a Masters of Business Administration. As President and Chief Executive Officer of the Bank, Mr. Middleton is responsible for the overall operation of the Bank pursuant to the policies and procedures established by the Board of Directors. From 1996 to 2004, Mr. Middleton served on the Board of Directors of the Federal Home Loan Bank of Atlanta, and served as Chairman from 2003 to 2004. Mr. Middleton also served as Federal Home Loan Bank of Atlanta representative to the Council of Federal Home Loan Banks. Mr. Middleton currently serves on the board of the Baltimore Branch of the Federal Reserve Bank of Richmond.

C. Marie Brown (62 years old) has been employed with the Bank since 1972 and has served as Chief Operating Officer since 1999. Prior to her appointment as Chief Operating Officer, Ms. Brown served as Senior Vice President of the Bank. She is a supporter of the Handicapped and Retarded Citizens of Charles County, a member of the Zonta Club of Charles County and serves on various administrative committees of the Hughesville Baptist Church.

H. Beaman Smith (59 years old) was the Treasurer of the Company in 1998 and became Secretary-Treasurer in January 1999 and has been the president of Accoware, a computer software company, since 1989. Mr. Smith is a Vice President of Fry Plumbing Company of Washington, D.C and a director of the Maryland 4-H Foundation.

Gregory C. Cockerham (50 years old) joined the Bank in November 1988 and has served as Chief Lending Officer since 1996. Prior to his appointment as Senior Vice President, Mr. Cockerham served as Vice President of the Bank. Mr. Cockerham has been in banking for 28 years. He is a Paul Harris Fellow with the Rotary Club of Charles County and serves on various civic boards in the County.

William J. Pasenelli (46 years old) joined the Bank as Chief Financial Officer in April 2000. Prior to joining the Bank, Mr. Pasenelli had been Chief Financial Officer of Acacia Federal Savings Bank, Annandale, Virginia since 1987. Mr. Pasenelli is a member of the American Institute of Certified Public Accountants, the DC Institute of Certified Public Accountants, and other civic groups.

23

Item 2. Properties

The following table sets forth the location of the Bank’s offices, as well as certain additional information relating to these offices as of December 31, 2004.

	Year
	Facility		Leased	Approximate
Office	Commenced		or	Square
Location	Operation		Owned	Footage
Main Office
3035 Leonardtown Road		1974	Owned		16,500
Waldorf, Maryland
Branch Offices
22730 Three Notch Rd.		1992	Owned		2,500
Lexington Park, Maryland
25395 Point Lookout Rd.		1961	Owned		2,500
Leonardtown, Maryland
101 Drury Drive		2001	Owned		2,645
La Plata, Maryland
10321 Southern Md. Blvd.		1991	Leased		1,400
Dunkirk, Maryland
8010 Matthews Road		1996	Owned		2,500
Bryans Road, Maryland
20 St. Patrick’s Drive		1998	Leased (Land)		2,840
Waldorf, Maryland			Owned (Building)
30165 Three Notch Road		2001	Leased (Land)		2,500
Charlotte Hall, Maryland			Owned (Building)

Item 3. Legal Proceedings

Neither the Company, the Bank, or any subsidiary is engaged in any legal proceedings of a material nature at the present time. From time to time the Bank is a party to legal proceedings in the ordinary course of business.

Item 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 2004.

24

PART II

Item 5. Market for Registrant’s Common Equity, Related Security Holder Matters and Issuer Purchases of Equity Securities

The information contained under the section captioned “Market for the Registrant’s Common Stock, and Related Security Holder Matters” in the Company’s Annual Report to Stockholders for the fiscal year ended December 31, 2004 (the “Annual Report”) filed as Exhibit 13 hereto is incorporated herein by reference.

The Company did not repurchase any shares of its common stock during the quarter ended December 31, 2004.

Item 6. Selected Financial Data

The information contained under the section captioned “Selected Financial Data” of the Annual Report is incorporated herein by reference.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The information contained in the section captioned “Management’s Discussion and Analysis of Financial Condition” of the Annual Report is incorporated herein by reference.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Not applicable since the registrant qualified as a small business issuer.

Item 8. Financial Statements and Supplementary Data

The Consolidated Financial Statements, Notes to Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm in the Annual Report are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

Item 9A. Controls and Procedures

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

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Item 9B. Other Information

None.

PART III

Item 10. Directors and Executive Officers of the Registrant

For information concerning the Company’s directors, the identification of the Audit Committee and the audit committee financial expert, the information contained under the section captioned “Proposal I — Election of Directors” in the Company’s definitive proxy statement for the Company’s 2004 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated herein by reference. For information concerning the executive officers of the Company, see “Item 1 – Business – Executive Officers” under Part I of this Annual Report, which is incorporated herein by reference.

For information regarding compliance with Section 16(a) of the Exchange Act, the information contained under the section captioned “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement is incorporated herein by reference.

The Company has adopted a Code of Ethics that applies to the Company’s principal executive officer, principal financial officer, principal accounting officer and Controller, as well as all of its officer directors and employees, which is included herewith as Exhibit 14.

Item 11. Executive Compensation

The information contained under the section captioned “Proposal I — Election of Directors — Executive Compensation, and “— Directors’ Compensation” in the Proxy Statement is incorporated herein by reference.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     (a) Security Ownership of Certain Owners

     The information required by this item is incorporated herein by reference to the sections captioned “Proposal I — Election of Directors” and “Voting Securities and Principal Holders Thereof” in the Proxy Statement.

     (b) Security Ownership of Management

     Information required by this item is incorporated herein by reference to the section captioned “Proposal I — Election of Directors” in the Proxy Statement.

     (c) Changes in Control

     Management of the Company knows of no arrangements, including any pledge by any person of securities of the Company, the operation of which may at a subsequent date result in a change in control of the registrant.

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     (d) Equity Compensation Plan Information

     The Company has adopted a variety of compensation plans pursuant to which equity may be awarded to participants including the Company’s 1995 Stock Option and Incentive Plan and the 1995 Stock Option Plan for. Non-Employee Directors. The Bank’s Executive Incentive Compensation Plan provides for grants of options under the 1995 Stock Option and Incentive Plan if certain performance criteria are met. The following table sets forth certain information with respect to the Company’s Equity Compensation Plans as of December 31, 2004.

					(c)
					Number of securities
	(a)				remaining available
	Number of securities to be		(b)		for future issuance
	issued		Weighted-average exercise		under equity compensation
	upon exercise of outstanding		price of outstanding		plans (excluding securities
Plan Category	options, warrants, and rights		options, warrants, and rights		reflected in column (a)
Equity compensation plans approved by security holders		144,881	$	23.55		—
Equity compensation plans not approved by security holders (1)		34,400	$	26.55		—
Total		179,281	$	24.12		—

(1)

Consists of the 1995 Stock Option Plan for Non-Employee Directors which provides grants of non-incentive options to directors who are not employees of the Company or its subsidiaries. Options are granted under the plan at an exercise price equal to their fair market value at the date of grant and have a term of ten years. Options are generally exercisable while an optionee serves as a director or within one year thereafter.

(2)

The 1995 Stock Option and Incentive Plan and 1995 Stock Option Plan for Non-Employee Directors each provide for a proportionate adjustment to the number of shares reserved thereunder in the event of a stock split, stock dividend reclassification, recapitalization or similar event.

Item 13. Certain Relationships and Related Transactions

The information required by this item is incorporated herein by reference to the section captioned “Transactions with the Company and the Bank” in the Proxy Statement.

Item 14. Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference to the section captioned “Independent Auditors” in the Proxy Statement.

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PART IV

Item 15. Exhibits and Financial Statement Schedules

     (a) List of Documents Filed as Part of this Report

     (1) Financial Statements. The following consolidated financial statements are incorporated by reference from Item 7 hereof:

Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2004 and 2003
Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements

     (2) Financial Statement Schedules. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements and related notes thereto.

     (3) Exhibits. The following is a list of exhibits filed as part of this Annual Report on Form 10-K and is also the Exhibit Index.

No.		Description
	3.1	Articles of Incorporation of Tri-County Financial Corporation (1)
	3.2	Amended and Restated Bylaws of Tri-County Financial Corporation (2)
	10.1	Tri-County Financial Corporation 1995 Stock Option and Incentive Plan, as amended (3)
	10.2	Tri-County Financial Corporation 1995 Stock Option Plan for Non-Employee Directors, as amended (4)
	10.3	Employment Agreements with C. Marie Brown, as amended, and Gregory C. Cockerham (2)
	10.4	Restated Employment Agreement with Michael L. Middleton (5)
	10.5	Guaranty Agreements with Michael L. Middleton, C. Marie Brown and Gregory C. Cockerham (3)
	10.6	Executive Incentive Compensation Plan (3)
	10.7	Executive Compensation Plan 2003 Amendment (5)
	10.8	Employment Agreement with William J. Pasenelli (3)
	10.9	Retirement Plan for Directors (3)
	10.10	Split Dollar Agreements with Michael L. Middleton and C. Marie Brown (3)
	10.11	Guaranty Agreement with William J. Pasenelli (2)
	10.12	Split Dollar Agreement with William J. Pasenelli (2)
	10.13	Salary Continuation Agreement with Michael L. Middleton (5)
	10.14	Salary Continuation Agreement with C. Marie Brown (5)
	10.15	Salary Continuation Agreement with Gregory C. Cockerham (5)
	10.16	Salary Continuation Agreement with William J. Pasenelli (5)
	13	Annual Report to Stockholders for fiscal year ended December 31, 2004
	14	Code of Ethics (6)
	21	Subsidiaries of the Registrant
	23	Consent of Stegman & Company
	31.1	Rule 13a-14a Certification of Chief Executive Officer
	31.2	Rule 13a-14a Certification of Chief Financial Officer
	32	Certification pursuant to 18 U.S.C. Section 1350

28

(1)	Incorporated by reference to the Registrant’s Registration Statement on Form S-4 (No. 33-31287).
(2)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
(3)	Incorporated by reference to the Registrant’s Form 10-K for the fiscal year ended December 31, 2000.
(4)	Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (File No. 333-70800).
(5)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001.
(6)	Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2003.
(b)	Exhibits. The exhibits required by Item 601 of Regulation S-K are either filed as part of this Annual Report on Form 10-K or incorporated by reference herein.
(c)	Financial Statements and Schedules Excluded From Annual Report. There are no other financial statements and financial statement schedules which were excluded from the Annual Report pursuant to Rule 14a-3(b)(1) which are required to be included herein.

29

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	TRI-COUNTY FINANCIAL CORPORATION
Date: March 29, 2005	By:	/s/  Michael L. Middleton
		Michael L. Middleton
		President and Chief Executive Officer
		(Duly Authorized Representative)

Pursuant to the requirement of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

By:	/s/  Michael L. Middleton	By:	/s/  William J. Pasenelli
	Michael L. Middleton		William J. Pasenelli
	(Director, President and Chief		(Chief Financial and Accounting Officer)
	Executive Officer)
Date: March 29, 2005		Date: March 29, 2005
By:	/s/  C. Marie Brown	By:	/s/  Herbert N. Redmond, Jr.
	C. Marie Brown		Herbert N. Redmond, Jr.
	(Director and Chief Operating Officer)		(Director)
Date: March 29, 2005		Date: March 29, 2005
By:	/s/  H. Beaman Smith	By:	/s/  A. Joseph Slater
	H. Beaman Smith		A. Joseph Slater
	(Director and Secretary/Treasurer)		(Director)
Date: March 29, 2005		Date: March 29, 2005
By:	/s/  Louis P. Jenkins, Jr.	By:	/s/  James R. Shepherd
	Louis P. Jenkins, Jr.		James R. Shepherd
	(Director)		(Director)
Date: March 29, 2005		Date: March 29, 2005

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EX-13

                                                                               .
                                                                               .
                                                                               .

                                                                      Exhibit 13

SELECTED FINANCIAL DATA



                                                                     YEAR ENDED DECEMBER 31,
                                         -------------------------------------------------------------------------------
                                                           (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
                                            2004             2003             2002             2001             2000
                                         -----------      -----------      -----------      -----------      -----------
                                                                                              
OPERATIONS DATA:
Net Interest Income                      $    13,800      $    10,469      $    10,745      $     9,757      $     8,862
Provision for Loan Losses                        453              317              160              360              360
Noninterest Income                             1,582            1,755            1,847            1,402            1,373
Noninterest Expense                            9,768            8,428            9,398            6,995            6,332
Net Income                                     3,720            2,446            1,968            2,486            2,336
SHARE DATA:
Basic Net Income Per Common Share        $      3.24      $      2.16      $      1.72      $      2.16      $      1.99
Diluted Net Income Per Common Share      $      3.10      $      2.05      $      1.63      $      2.07      $      1.90
Cash Dividends Paid Per Common Share     $      0.47      $      0.37      $      0.33      $      0.27      $      0.20
Weighted Average Common
   Shares  Outstanding:
        Basic                              1,146,339        1,131,066        1,142,126        1,150,391        1,176,908
        Diluted                            1,198,680        1,194,032        1,206,183        1,198,181        1,231,709
FINANCIAL CONDITION DATA:
Total Assets                             $   505,767      $   351,730      $   282,128      $   261,957      $   248,339
Loans Receivable, Net                        289,325          217,740          197,449          193,450          172,090
Total Investment Securities                  175,690           99,895           44,667           43,963           58,575
Total Deposits                               266,755          227,555          203,025          183,117          167,806
Long and Short-Term Debt                     198,235           94,242           48,922           50,463           54,951
Total Stockholders' Equity                    31,124           27,912           26,873           25,586           23,430
PERFORMANCE RATIOS:
Return on Average Assets                        0.88%            0.78%            0.72%            0.97%            1.00%
Return on Average Equity                       12.89%            8.99%            7.50%           10.09%           10.65%
Net Interest Margin                             3.43%            3.55%            4.20%            4.00%            3.98%
Efficiency Ratio                               70.80%           68.95%           74.73%           62.68%           61.86%
Dividend Payout Ratio                          14.56%           17.27%           20.04%           12.44%           10.13%

CAPITAL RATIOS:
Average Equity to Average
  Assets                                        9.29%            8.04%            9.53%            9.64%            9.37%
Leverage Ratio                                  9.29%            8.04%            9.53%            9.64%            9.61%
Total Risk-Based Capital Ratio                 11.89%           12.20%           13.77%           14.08%           13.53%
Tier 1 Risk-Based Capital Ratio                11.01%           11.17%           12.63%           12.81%           12.50%

ASSET QUALITY RATIOS:
Allowance for Loan Losses to
  Total Loans                                   1.04%            1.16%            1.15%            1.16%            1.10%
Nonperforming Loans to Total Loans              0.23%            0.17%            0.30%            0.12%            0.06%
Allowance for Loan Losses to
  Nonperforming Loans                         452.97%          678.30%          387.60%          996.07%        1,770.55%
Net Charge-offs to Average Loans               (0.01%)           0.03%            0.06%            0.01%            0.05%


All per share amounts have been adjusted for the 3 for 2 stock split which was
declared in December 2004.

                                        1



FORWARD-LOOKING STATEMENTS

When used in this discussion and elsewhere in this Annual Report, the words or
phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "project" or similar expressions are intended to
identify "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Tri County Financial Corporation (the
"Company") cautions readers not to place undue reliance on any such
forward-looking statements, which speak only as of the date made, and to advise
readers that various factors, including regional and national economic
conditions, unfavorable judicial decisions, substantial changes in levels of
market interest rates, credit and other risks of lending and investment
activities and competitive and regulatory factors could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected.

The Company does not undertake and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrence of anticipated or
unanticipated events or circumstances after the date of such statements.

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

OVERVIEW

Since its conversion to a commercial bank charter in 1997, the Community Bank of
Tri County (the "Bank") has sought to increase total assets as well as certain
targeted loan types. The Bank feels that its ability to offer fast, flexible and
local decision-making in the commercial, commercial real estate, and consumer
loan areas will continue to attract significant new loans and enhance asset
growth. The Bank's local focus and targeted marketing is also directed towards
increasing its balances of consumer and business transaction deposit accounts.
The Bank believes that increases in these account types will lessen the Bank's
dependence on time deposits such as certificates of deposit to fund loan growth.
Although management believes that the strategy outlined above will increase
financial performance over time, we recognize that products such as commercial
lending and transaction accounts will also increase the Bank's noninterest
expense. We also recognize that certain lending and deposit products also
increase the possibility of losses from credit and other risks.

CRITICAL ACCOUNTING POLICIES

The Company's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America and the
general practices of the United States banking industry. Application of these
principles requires management to make estimates, assumptions, and judgments
that affect the amounts reported in the financial statements and accompanying
notes. These estimates assumptions and judgments are based on information
available as of the date of the financial statements; accordingly, as this
information changes, the financial statements could reflect different estimates,
assumptions, and judgments. Certain policies inherently have a greater reliance
on the use of estimates, assumptions and judgments and as such have a greater
possibility of producing results that could be materially different than
originally reported. The Company considers its determination of the allowance
for loan losses and the valuation allowance on its foreclosed real estate to be
critical accounting policies. Estimates, assumptions, and judgments are
necessary when assets and liabilities are required to be recorded at fair value,
when a decline in the value of an asset not carried on the financial statements
at fair value warrants an impairment write-down or valuation reserve to be
established, or when an asset or liability needs to be recorded contingent upon
a future event. Carrying assets and liabilities at fair value inherently results
in more financial statement volatility. The fair values and the information used
to record valuation adjustments for certain assets and liabilities are based
either on quoted market prices or are provided by other third-party sources,
when available. When these sources are not available, management makes estimates
based upon what it considers to be the best available information.

The allowance for loan losses is an estimate of the losses that may be sustained
in the loan portfolio. The allowance is based on two principles of accounting:
(a) Statement on Financial Accounting Standards ("SFAS") No. 5, "Accounting for
Contingencies", which requires that losses be accrued when they are

                                        2



probable of occurring and are estimable and (b) SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan", which requires that losses be accrued when
it is probable that the Company will not collect all principal and interest
payments according to the contractual terms of the loan. The loss, if any, is
determined by the difference between the loan balance and the value of
collateral, the present value of expected future cash flows, or values
observable in the secondary markets.

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

In establishing the general component of the allowance, management analyzes
non-classified and non-impaired loans in the portfolio including changes in the
amount and type of loans. Management also examines the Bank's history of
write-offs and recoveries within each loan category. The state of the local and
national economy is also considered. Based upon these factors the Bank's loan
portfolio is categorized and a loss factor is applied to each category. These
loss factors may be higher or lower than the Bank's actual recent average losses
in any particular loan category, particularly in loan categories where the Bank
is rapidly increasing the size of its portfolio. Based upon these factors, the
Bank will adjust the loan loss allowance by increasing or decreasing the
provision for loan losses.

Management has significant discretion in making the judgments inherent in the
determination of the provision and allowance for loan losses, including in
connection with the valuation of collateral, a borrower's prospects of
repayment, and in establishing allowance factors on the general component of the
allowance. Changes in allowance factors will have a direct impact on the amount
of the provision, and a corresponding effect on net income. Errors in
management's perception and assessment of the global factors and their impact on
the portfolio could result in the allowance not being adequate to cover losses
in the portfolio, and may result in additional provisions or charge-offs. For
additional information regarding the allowance for loan losses, refer to Notes 1
and 4 to the Consolidated Financial Statements and the discussion under the
caption "Provision for Loan Losses" below.

In addition to the loan loss allowance, the Company also maintains a valuation
allowance on its foreclosed real estate. As with the allowance for loan losses
the valuation allowance on foreclosed real estate is based on SFAS No. 5,
"Accounting for Contingencies," as well as SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets." These statements require that the
Company establish a valuation allowance when it has determined that the carrying
amount of a foreclosed asset exceeds its fair value. Fair value of a foreclosed
asset is measured by the cash flows expected to be realized from its subsequent
disposition. These cash flows should be reduced for the costs of selling or
otherwise disposing of the asset.

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

In December 2004, the Company declared a 3 for 2 stock split in the form of a
stock dividend. All per share numbers in the following discussion reflect
retroactive application of this stock split.

                                        3



COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003
AND 2002

GENERAL. For the year ended December 31, 2004, the Company reported consolidated
net income of $3,719,834 ($3.24 basic and $3.10 diluted earnings per share)
compared to consolidated net income of $2,445,898 ($2.16 basic and $2.05 diluted
earnings per share) for the year ended December 31, 2003, and consolidated net
income of $1,967,821 ($1.72 basic and $1.63 diluted earnings per share) for the
year ended December 31, 2002. The increase in net income for 2004 was primarily
attributable to an increase in net interest income which was partially offset by
increases in the provision for loan loss and noninterest expenses and a decline
in noninterest income in 2004. In 2004, the Bank used funds from the issuance of
$7 million of trust preferred securities and wholesale borrowing to purchase
certain securities. The Bank also substantially increased its loan portfolio and
lower cost deposit balances. These changes led to the large increases in net
interest income for the year ended December 31, 2004. Noninterest income
declined mainly through a decline in the amount of sales of loans to third
parties. These declines were partially offset by increases in service charges.
Provision for loan losses increased in 2004 due to increases in the loan
portfolio. Noninterest expenses increased primarily due to increases in
personnel, occupancy, data processing, and advertising. Income tax expenses
increased by $408,562 or 39.57% in 2004.

For the year ended December 31, 2003, net interest income was $10,468,526
compared to $10,745,360 for the year ended December 31, 2002, a decrease of
$276,834 or 2.58%. Noninterest income also declined to $1,754,538 from
$1,847,061 in 2002. a decline of $92,523 or 5.01%. Noninterest expenses declined
to $8,427, 771 in 2003 from a total of $9,397,600 in 2002. This decline of
$969,829 or 10.32% was caused by a decline in the provision for a valuation
allowance on foreclosed real estate as well as declines in certain other
noninterest expenses relating to the systems conversion in 2002. Income tax
expense decreased by 3.24% to $1,032,432 in 2003.

NET INTEREST INCOME. The primary component of the Company's net income is its
net interest income which is the difference between income earned on assets and
interest paid on the deposits and borrowings used to fund them. Net interest
income is determined by the spread between the yields earned on the Company's
interest-earning assets and the rates paid on interest-bearing liabilities as
well as the relative amounts of such assets and liabilities. Net interest
income, divided by average interest-earning assets, represents the Company's net
interest margin.

Consolidated net interest income for the year ended December 31, 2004 was
$13,799,929 compared to $10,468,526 for the year ended December 31, 2003 and
$10,745,360 for the year ended December 31, 2002. The $3,331,403 increase in the
most recent year was due an increase in interest income of $5,448,414, partially
offset by the increase in interest expense of $2,117,011. For the year ended
December 31, 2003, the $276,834 decrease was due to a decrease of $549,063 in
interest income offset by a decrease of $272,229 in interest expense for the
same period. Changes in the components of net interest income due to changes in
average balances of assets and liabilities and to changes caused by changes in
interest rates are presented in the rate volume analysis below.

During 2004, the Company's interest rate spread declined because the Bank's
yield on interest earning assets fell while its cost for interest bearing
liabilities was the same. The Bank's yield on loans declined due to the
continued pay off of higher interest rate loans in its portfolio. These loans
were generally replaced by lower rate loans. The Bank's investment yield
increased during 2004 as the Bank's average maturity on its investments
increased. While the cost of both deposits and borrowings fell, the proportion
of total interest bearing liabilities that were represented by higher cost
borrowings increased, leading to a stable average cost in 2004 compared to 2003.

During 2003, the Company's interest rate spread decreased because the Bank was
unable to lower the interest rates paid on deposits and borrowings as quickly
and as much as the interest rates earned on loans and investments fell. Rates on
deposits, particularly interest bearing transaction and money market accounts
had already been very low in 2002, as interest rates fell in 2003, the rates
paid on these deposits decreased slightly while the rates on investments and
loans decreased by a greater amount. In addition, the percentage of funding
contributed by relatively higher cost borrowings compared to deposits increased.

                                        4



The effects of these changes can be seen in the fact that in 2003 interest
income declined by $549,063 or 3.29% to $16,164,925, while interest expense
declined to $5,696,399 a decrease of $272,229 or by 4.56%. These declines, in
turn led to a decline in net interest income of $276,834, or 2.58%, to
$10,468,526.

The following table presents information on the average balances of the
Company's interest-earning assets and interest-bearing liabilities and interest
earned or paid thereon for the past three fiscal years.

                                        5





                                                                     (DOLLARS IN THOUSANDS)
                                    ---------------------------------------------------------------------------------------
                                                                FOR THE YEAR ENDED DECEMBER 31,
                                    ---------------------------------------------------------------------------------------
                                                2004                          2003                         2002
                                    ----------------------------  ----------------------------  --------------------------
                                                         AVERAGE                       AVERAGE                      AVERAGE
                                     AVERAGE             YIELD/    AVERAGE             YIELD/   AVERAGE             YIELD/
                                     BALANCE   INTEREST   COST     BALANCE   INTEREST   COST    BALANCE   INTEREST   COST
                                    ---------  --------  -------  ---------  --------  -------  --------  --------  -------
                                                                                         
Interest-earning assets:
Loan portfolio (1)                  $ 254,605  $ 16,033     6.30% $ 201,440  $ 13,412     6.66% $195,280  $ 14,221     7.28%
Investment securities, federal
  funds sold and interest bearing
    deposits                          147,274     5,580     3.79%    93,261     2,753     2.95%   60,637     2,493     4.11%
                                    ---------  --------           ---------  --------           --------  --------
     Total interest-earning assets    401,879    21,613     5.38%   294,702    16,165     5.49%  255,917    16,714     6.53%
                                    ---------  --------           ---------  --------           --------  --------
Interest-bearing liabilities:
Interest bearing deposits and
  escrow                              249,164     3,230     1.30%   212,643     2,869     1.35%  189,518     3,453     1.82%
    Borrowings                        138,031     4,584     3.32%    68,679     2,828     4.12%   48,487     2,515     5.19%
                                    ---------  --------           ---------  --------           --------  --------
Total interest bearing liabilities    387,195     7,813     2.02%   281,322     5,696     2.02%  238,005     5,969     2.51%
                                    =========  ========           =========  ========           ========  ========
Net interest income                            $ 13,800                      $ 10,469                     $ 10,745
                                               ========                      ========                     ========
Interest rate spread                                        3.36%                         3.46%                        4.02%
                                                          ======                        ======                       ======
Net yield on interest-earning
  assets                                                    3.43%                         3.55%                        4.20%
                                                          ======                        ======                       ======
Ratio of average interest-earning
   assets to average interest
     bearing liabilities                                  103.79%                       104.76%                      107.53%
                                                          ======                        ======                       ======


- ---------
(1) Average balance includes non-accrual loans.

                                        6



The table below sets forth certain information regarding changes in interest
income and interest expense of the Bank for the periods indicated. For each
category of interest-earning asset and interest-bearing liability, information
is provided on changes attributable to: (1) changes in volume (changes in volume
multiplied by old rate); and (2) changes in rate (changes in rate multiplied by
old volume). Changes in rate-volume (changes in rate multiplied by the change in
volume) have been allocated to changes due to volume.



                                                2004                        2003
                                               DUE TO                       DUE TO
                                              -------                      -------
                                     VOLUME     RATE      TOTAL   VOLUME     RATE     TOTAL
                                     ------   -------    ------   ------   -------    -----
                                                                    
Interest income:
   Loan portfolio                    $3,541   $  (920)   $2,621   $  410   $(1,220)   $(809)
   Interest-earning cash and
     investment portfolio             1,593     1,234     2,827      963      (703)     260
                                     ------   -------    ------   ------   -------    -----
Total interest-earning assets        $5,134   $   314    $5,448   $1,373   $(1,922)   $(549)
                                     ======   =======    ======   ======   =======    =====
Interest expense:
   Savings deposits and escrows      $  493   $  (132)   $  361   $  312   $  (897)   $(585)
   FHLB advances and other
     borrowings                       2,857    (1,101)    1,756      831      (519)     313
                                     ------   -------    ------   ------   -------    -----
Total interest bearing liabilities   $3,350   $(1,233)   $2,117   $1,143   $(1,416)   $(272)
                                     ======   =======    ======   ======   =======    =====
Net change in net interest income    $1,784   $ 1,547    $3,331   $  230   $  (506)   $(277)
                                     ======   =======    ======   ======   =======    =====


PROVISION FOR LOAN LOSSES. Provision for loan losses for the year ended December
31, 2004 was $452,998 compared to $316,963 and $160,000 for December 31, 2003
and 2002, respectively. The higher provision for loan losses in 2004 was due to
the increase in the size of the loan portfolio as well as the higher
concentration of loans in types with higher credit risk. These factors were
partially offset by the Bank's continued low levels of delinquency and
charge-offs. The loan loss allowance and the provision for loan losses is
determined based upon an analysis of individual loans and the application of
certain loss factors to different loan categories. Individual loans are analyzed
for impairment as the facts and circumstances warrant. In addition, a general
component of the loan loss allowance is added based on a review of the
portfolio's size and composition. At December 31, 2004, the allowance for loan
loss equaled 453% of non-accrual and past due loans compared to 678% and 388% at
December 31, 2003 and 2002, respectively. For the year ended December 31, 2004,
the Company recorded net recoveries of $32,000 (.001% of average loans) compared
to net charge offs of $58,000 (0.03% of average loans) in 2003 and $128,000
(0.06% of average loans) in net charge-offs for 2002.

NONINTEREST INCOME. Noninterest income declined to $1,582,316 in 2004, from
$1,754,538 in 2003, a decline of $172,222 or 9.82%. Noninterest income decreased
to $1,754,538 for the year ended December 31, 2003 compared to $1,847,061, for
the prior year, a decrease of 5.01%. Changes in noninterest income over the past
three years have been the result of wide fluctuations in certain noninterest
income categories, (gain on sale of loans, other income, service charges, and
loan fees) and an increase in income from Bank Owned Life Insurance ("BOLI") in
the past 2 years.

Loan appraisal, credit and miscellaneous charges are highly variable; from 2003
to 2004 these charges decreased by $32,262 or 12.34% to $229,125. From 2002 to
2003, these charges increased to $261,387 an increase of 46.02%. Increases and
decreases in this category reflect changes in lending volumes and patterns as
well as competitive pressures. Gain on sale of loans held-for-sale has been
highly variable reflecting the overall interest rate environment and the Bank's
desire to keep certain loans in its portfolio. Gain on the sale of loans
decreased to $21,404 from $505,435, a decline of $484,031 or 95.77%. This change
was caused by the Bank's declining sales volume of these loans to third party
investors. From 2002 to 2003, this income item increased to $505,435 from
$499,304 an increase of $6,131 or 1.23%.

                                        7


Income from BOLI increased to $261,411 from $230,607 in 2003 and none in 2002.
The income from BOLI in 2003 and 2004 was the result of the purchase of BOLI in
2003. The income for 2004 reflects a full year of ownership as well as higher
earning balances. Service charges and fees are primarily generated by the Bank's
ability to attract and retain transaction-based deposit accounts and by loan
servicing fees net of amortization of and valuation allowances on mortgage
servicing rights. In 2004, service charges increased by $493,873 to $1,189,001
reflecting higher deposit volumes and lower total amortization of mortgage
servicing rights. In 2003, service charges and fees declined to $695,128 from
2002's level of $1,041,662, a decline of $346,534 or 33.27%. This decline was
primarily caused by an increase in the amortization of mortgage servicing rights
and valuation allowances. The Bank hopes to increase its service charge and fee
revenues in the future by increasing the level of transaction-based accounts. In
2004, the Bank recorded a loss of $61,875 on the sale of available for sale
securities and recognized a loss of $65,000 on other than temporary decline in
the value of certain available for sale securities. In 2004, other noninterest
income declined to nothing from $61,981 and $17,945 in 2003 and 2002
respectively.

NONINTEREST EXPENSES. Noninterest expenses for the year ended December 31, 2004
totaled $9,768,419 an increase of $1,340,648 or 15.91% from the prior year.
Noninterest expenses for the year ended December 31, 2003 totaled $8,427,771, a
decrease of $969,829 or 10.32% from 2002. Salary and employee benefits expenses
increased by $730,717 or 15.54% to $5,432,898 in 2004. In 2003, they increased
by 11.21% to $4,702,181 compared to $4,228,050 for the prior year. The increase
reflects growth in the Bank's workforce to fully staff branches, an increasing
need for highly skilled employees due to the higher complexity level of the
Bank's business, and continued increases in the Bank's benefit and incentive
costs. Expenses also included certain supplemental retirement benefits which
were funded by the BOLI income. Occupancy expense increased to $858,891 in 2004
compared to $750,567 in 2003 an increase of $108,324 or 14.43%. In 2003,
occupancy expense decreased to $750,567 compared to $831,148 in 2002. In 2003,
occupancy expenses decreased from 2002 due to a decrease in certain nonrecurring
expenses such as the costs of a temporary branch in Charlotte Hall and certain
major repairs in other branches. In 2004, these expenses reflected the
refurbishment of certain offices and other renovation costs. In 2004,
advertising expenses increased from $308,951 to $539,715 an increase of $230,764
or 74.69%. These advertising costs reflected several major advertising campaigns
and marketing efforts. Advertising decreased to $308,951 for the year ended
December 31, 2003 from $338,216 in 2002. In 2002, the bank introduced several
new products which increased costs. Data processing expenses increased to
$550,781 an increase of $146,814 or 36.34% from the prior year total of
$403,967. The increase is reflective of the Bank's increased size in loans and
deposits as well as increases in certain third party processing costs related to
data processing. From 2003 to 2002 data processing expenses fell to $403,967
from the prior year total of $568,095 a decrease of 28.89%. The Bank incurred
significant data processing costs related to its conversion in 2002. These costs
included training, consulting, and transition fees related to the conversion
process. The successful conversion in 2002 led to a decline in these expenses in
2003. Loss on disposal of obsolete equipment totaled $65,104 in 2002. These
expenses related to the write-off of certain equipment that could not support
the new core data system.

Depreciation of furniture, fixtures, and equipment decreased to $372,237 in 2004
from $507,236 in 2003, a decline of $134,999 or 26.61%. Depreciation declined as
certain assets purchased in 2001 and 2002 in anticipation of the 2002 systems
conversion were fully depreciated in early 2004. In 2003, depreciation of
furniture, fixtures, and equipment increased by $168,052 or 49.55% due to the
large amount of equipment purchased in 2002. Telephone communications expenses
decreased to $103,421 in 2004 from 166,553 in 2003, a decrease of $63,132 or
37.91%. In 2003, these expenses declined by $179,006 or 51.80%. In 2004,
telephone communications decreased due to changes in vendors and renegotiation
of vendor contracts. Telephone communications expenses decreased in 2003 because
2002 expenses included certain data processing conversion costs. In 2002 and
2004, the Bank recorded valuation allowances of $972,889 and $114,606,
respectively on its foreclosed real estate. No valuation allowances on
foreclosed assets were recorded in 2003. ATM expenses increased in 2004 by
$71,266 or 25.99% from $274,188 in 2003. ATM expenses were $312,200 in 2002. In
2002, ATM expenses included costs relating to the systems conversion which were
nonrecurring. The increase in expenses in this area in 2004 included increases
in volumes and rates charged by third party vendors. Office supplies expense
increased in 2004 from 2003 by $20,634 to $151,862, an increase of 15.72%. In
2003, office supplies expense decreased by $159,408 or 54.85% from 2002. The
increase in 2004 was related to higher amounts of deposit and loan activity.
Office equipment

                                        8


expenses decreased in 2004 to $90,520 from $129,849 in 2003 and $247,171 in
2002. These decreases are the result of declining needs for certain specialized
equipment which is no longer needed after our systems conversion. Other
noninterest expense increased by $154,983 or 14.72% to $1,208,034 in 2004, from
$1,053,051 in 2003. In 2003, noninterest expenses increased by $193,703 or
22.54% from 2002. These increases reflect the growing size of the Bank.

INCOME TAX EXPENSE. During the year ended December 31, 2004, the Company
recorded income tax expense of $1,440,994 compared to expenses of $1,032,432 and
$1,067,000 in the two prior years. The Company's effective tax rates for the
years ended December 31, 2004, 2003, and 2002 were 27.9%, 29.7% and 35.20%,
respectively. The 2004 effective tax rate declined due to a large donation of
property made in 2004 which offset slightly lower nontaxable income. The decline
in the effective tax rate from 2002 to 2003 was due to an increase in
non-taxable income and a slight decrease in state taxes.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2004 AND 2003

In 2004, the Company increased in size through the implementation of a
leveraging strategy. This strategy included the sale of a trust preferred issue
of $7,000,000 which was subsequently invested in the Bank. The Bank used the
proceeds to purchase securities and make loans. These increases in interest
earning assets were also funded by increases in short and long term borrowings
as well as by increases in retail deposits. In 2004, total assets increased by
$153,820,131 or 43.73%. Cash and due from banks increased by $3,698,796 or
159.48%. Fed funds sold decreased by $160,647 or 17.12% to $777,519.
Interest-bearing deposits with banks increased by 22.53% or $2,007,832. These
increases all reflect higher cash and liquidity needs due to higher asset size.
While securities available for sale fell by $25,341,103 or 66.18%, securities
held to maturity increased by $101,135,980 or 164.17% to $162,741,155. Generally
the proceeds of securities in the available for sale portfolio were used to buy
new securities in the held to maturity portfolio. The Company purchased
$171,294,471 of securities during 2004. Total securities balances increased by
$75,794,877 or 75.87%. These increases in total securities portfolios resulted
in an increase interest income. Stock in the Federal Home Loan Bank increased
due to stock purchases made necessary by increased Federal Home Loan Bank
borrowing levels. Loans held for sale declined by $474,880 or 100%, as current
loan production is increasingly held in the Bank's portfolio. Loans receivable
increased by $71,584,898 or 32.88%, as the Bank continued to build assets in
2004 to increase net interest income.

Premises and equipment increased to $6,011,913 from $5,580,189 an increase of
7.74% or $431,724. This increase was due to construction costs of a planned new
branch and some renovations at our home office. Foreclosed real estate declined
by $231,203 due to sales and donations of various foreclosed properties. BOLI
increased due to the continued growth of the policies in 2004. Accrued interest
receivable increased due to higher interest earning asset balances. Other assets
decreased to $2,134,303 due to a decrease in certain prepaid tax accounts.

In 2004, total liabilities increased by $150,608,466 or 46.51%. Deposits
increased to $266,754,504 at December 31, 2004 compared to $227,554,568 for the
prior year. Both noninterest and interest bearing deposit totals increased due
to the Bank's continued marketing efforts. Short and long term debt increased as
the Company sought to add assets to increase net interest income offsetting a
decline in interest spread. The increases in short term debt were $84,112,925 or
269.67%, these funds were used to buy securities and increase loan balances.
Long term debt increased by $19,879,937 or 31.53%, these funds were used to buy
securities. The Company completed a Trust Preferred issue of $7,000,000 in 2004
which was used to increase the Bank's equity and support a larger asset base.

The Company experienced a $3,211,665, or 11.51%, increase in stockholders'
equity for the year ended December 31, 2004. The increase in stockholders'
equity was attributable to the retention of earnings from the period of
$3,719,834, less cash dividends of $541,633. Equity was also increased by the
exercise of stock options totaling $241,475, an increase in accumulated other
comprehensive income of $189,270, the tax effect of non-employee stock option
exercise, and activity in the ESOP shares resulting in a gain of $8,507. These
increases were partially offset by the repurchase of common stock in the amount
of $412,973.

                                        9


ASSET/LIABILITY MANAGEMENT

Net interest income, the primary component of the Company's net income, arises
from the difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities and the relative amounts of such assets and
liabilities. The Company manages its assets and liabilities by coordinating the
levels of and gap between interest-rate sensitive assets and liabilities to
control changes in net interest income and in the economic value of its equity
despite changes in market interest rates.

Among the tools used to monitor interest rate risk is a "gap" report which
measures the dollar difference between the amount of interest-earning assets and
interest-bearing liabilities subject to repricing within a given time period. A
gap is considered negative when the amount of interest rate sensitive
liabilities exceeds the amount of interest rate sensitive assets. Generally,
during a period of rising interest rates, an institution with a negative gap
position would be in a worse position to invest in higher-yielding assets which,
consequently may result in the yield on interest earning assets increasing at a
slower rate than its cost of interest bearing liabilities than if it had a
positive gap. While, conversely, during a period of falling interest rates, an
institution with a negative gap would tend to have its interest-earning assets
repricing downward at a slower rate than its interest-rate liabilities as
compared to an institution with a positive gap which, consequently, may tend to
adversely affect net interest income. The following sets forth the amounts of
interest-earning assets and interest-bearing liabilities outstanding at December
31, 2004, which are anticipated by the Company, based on certain assumptions, to
reprice or mature in each of the future time periods shown:



                                                                  OVER 1
                                                    OVER 3 TO    THROUGH      OVER
                                      0-3 MONTHS    12 MONTHS    5 YEARS     5 YEARS
                                      ----------   ----------   ---------   ---------
                                                                
                                                   (DOLLARS IN THOUSANDS)
Assets:
Cash and due from banks                $   6,018   $        -   $       -   $       -
Interest-bearing deposits                 10,920            -           -           -
Fed Funds sold                               778            -           -           -
Securities                                68,127       16,104      68,008      29,595
Loans                                     82,248       22,727     118,103      70,069
                                      ----------   ----------   ---------   ---------

Total Assets                          $  168,091   $   38,831   $ 186,111   $  99,664
                                      ==========   ==========   =========   =========

Liabilities
Noninterest-bearing deposits          $   35,553   $        -   $       -   $       -
Interest-bearing demand deposits          57,856            -           -           -
Money market deposits                     34,692            -           -           -
Savings                                   36,852            -           -           -
Certificates of deposit                   17,625       40,132      44,041           3
Short-term debt                          115,304            -           -           -
Long-term debt                                 -        5,074      32,000      45,857
                                      ----------   ----------   ---------   ---------
Total Liabilities                     $  297,882   $   45,206   $  76,041   $  45,860
                                      ==========   ==========   =========   =========

Gap                                   $ (129,791)  $   (6,375)  $ 110,070   $  53,804
Cumulative Gap                        $ (129,791)  $ (136,166)  $ (26,096)  $  27,708
Cumulative Gap as a percentage
of total assets                           (26.34%)     (27.64%)     (5.30%)      5.62%


The foregoing analysis assumes that the Bank's assets and liabilities move with
rates at their earliest repricing opportunities based on final maturity.
Mortgage-backed securities are assumed to mature during

                                       10


the period in which they are estimated to prepay and it is assumed that loans
and other securities are not called nor do they prepay prior to maturity.
Certificates of deposit and IRA accounts are presumed to reprice at maturity.
NOW and savings accounts are assumed to reprice within three months although it
is the Company's experience that such accounts may be less sensitive to changes
in market rates.

As noted above, the Bank has a substantial excess of liabilities over assets
repricing or maturing within one year. This would indicate that the Bank's net
interest income would decline if interest rates were to increase. A decrease in
net interest income as a result of a general increase in rates is likely, but
the Bank has the ability to moderate the effect of a general increase in
interest rates by controlling increases in rates on transaction accounts, using
available cash to reduce the amounts in particularly rate sensitive liability
accounts, and increasing total assets through increased leverage. In addition,
the analysis above substantially understates the amount of loan prepayments the
Bank has historically experienced even in periods of rising interest rates.

LIQUIDITY AND CAPITAL RESOURCES

The Company currently has no business other than that of the Bank and does not
currently have any material funding requirements, except for the payment of
dividends and the repurchase of stock. The Company's principal sources of
liquidity are cash on hand and dividends received from the Bank. The Bank is
subject to various regulatory restrictions on the payment of dividends.

The Bank's principal sources of funds for investments and operations are net
income, deposits from its primary market area, principal and interest payments
on loans, interest received on investment securities and proceeds from maturing
investment securities. Its principal funding commitments are for the origination
or purchase of loans and the payment of maturing deposits. Deposits are
considered the primary source of funds supporting the Bank's lending and
investment activities. The Bank also uses borrowings from the FHLB of Atlanta to
supplement deposits. The amount of FHLB advances available to the Bank is
limited to the lower of 40% of Bank assets or the amount supportable by eligible
collateral including FHLB stock, current residential first mortgage loans, and
certain securities.

The Bank's most liquid assets are cash, cash equivalents, and federal funds
sold. The levels of such assets are dependent on the Bank's operating financing
and investment activities at any given time. The variations in levels of cash
and cash equivalents are influenced by deposit flows and anticipated future
deposit flows.

Cash, cash equivalents, and interest-bearing deposits as of December 31, 2004
totaled $17,715,779, an increase of $5,545,981, or 45.57%, from the December 31,
2003 total of $12,169,798. This increase was due to the Bank's increase in
deposits and long and short-term borrowings.

The Bank's principal sources of cash flows are its financing activities
including deposits and borrowings. During the year 2004, all financing
activities provided $149,495,359 in cash compared to $68,939,687 during 2003 and
$17,747,865 during 2002. The increase in cash flows from financing activities
during the most recent period was principally due to an increase in borrowing
activity in 2004. The proceeds of long term borrowing increased to $30,000,000
in 2004 compared to $15,000,000 in 2003, and $920,000 in 2002. Short-term
borrowing provided a net increase in cash of $84,112,925 in 2004, compared to
$30,438,987 in 2003 and a use of cash in 2002 of $1,061,019. During 2004, net
deposit growth was $39,199,936 compared to $24,529,456 in 2003, and $19,908,578
in 2002. In 2004, the Company also completed a Trust Preferred offering in the
amount of $7,000,000, the proceeds of which were invested in the Bank. The Bank
also receives cash from its operating activities which provided $6,713,541 in
2004 compared to cash flows of $2,399,051 and $4,159,722 during 2003 and 2002,
respectively. The increase in operating cash flows during 2004 was primarily due
to an increase in net income combined with a decrease in other assets.

The Bank's principal use of cash has been in investing activities including its
investments in loans for portfolio, investment securities and other assets.
During the year ended December 31, 2004, the Bank invested a total of
$152,510,104 compared to $79,012,894 in 2003 and $18,364,135 in 2002. The
principal reason for the increase in cash used in investing activities was an
increase in the purchase of investments.

                                       11


Federal banking regulations require the Company and the Bank to maintain
specified levels of capital. At December 31, 2004, the Company was in compliance
with these requirements with a leverage ratio of 9.29%, a Tier 1 risk-based
capital ratio of 11.01% and total risk-based capital ratio of 11.89%. At
December 31, 2004, the Bank met the criteria for designation as a
well-capitalized depository institution under FRB regulations. See Note 14 of
the consolidated financial statements.

OFF BALANCE SHEET ARRANGEMENTS

In the normal course of its business the Bank has committed to make credit
available to its borrowers under various loan and other agreements provided that
certain terms and conditions are met. For a discussion of these agreements
including collateral and other arrangements see Note 11 to the consolidated
financial statements.

CONTRACTUAL OBLIGATIONS

In the normal course of its business, the Bank commits to make future payments
to others to satisfy contractual obligations. These commitments include the
following: commitments to repay short and long term borrowings, and commitments
incurred under operating lease agreements. These commitments are summarized
below:



                                                         LESS                              MORE THAN
                                                         THAN        1-3          3-5          5
PAYMENTS DUE BY PERIOD                       TOTAL      1 YEAR      YEARS        YEARS       YEARS
(IN THOUSANDS)                             --------    --------   ----------   ---------   ---------
                                                                            
Long Term Debt Obligations                 $  82,931   $  5,074   $   17,000   $  15,000   $  45,857
Short Term Debt Obligations                  115,304    115,304            -           -           -
Deposits                                     266,755    222,711       34,093       9,948           3
Data Processing Servicing Contracts            2,928        747        1,422         209         550
Operating Lease Obligations                    1,708        254          487         417         550
Other Long Term Liabilities Reflected
 on the Registrant's Balance Sheet
 Under GAAP                                        -          -            -           -       7,000
                                           ---------   --------   ----------   ---------   ---------
                                           $ 469,626   $344,090   $   53,001   $  25,574   $  53,960
                                           =========   ========   ==========   =========   =========


IMPACT OF INFLATION AND CHANGING PRICES

The consolidated financial statements and notes thereto presented herein have
been prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the changes in the relative purchasing
power of money over time due to inflation. Unlike most industrial companies,
nearly all of the Company's assets and liabilities are monetary in nature. As a
result, interest rates have a greater impact on the Company's performance than
do the effects of general levels of inflation. Interest rates do not necessarily
move in the same direction or to the same extent as the prices of goods and
services.

                                       12

MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS

MARKET INFORMATION. The following table sets forth high and low bid quotations
reported on the OTC Bulletin for the Company's common stock for each quarter
during 2003 and 2004. These quotes reflect inter-dealer prices without retail
mark-up, mark-down or commission and may not necessarily reflect actual
transactions. All per share amounts have been adjusted to reflect the 3 for 2
stock dividend declared on December 1, 2004.



2003                       High             Low
                          ------           ------
                                     
Fourth Quarter            $28.67           $26.00
Third Quarter              26.67            26.00
Second Quarter             26.00            24.67
First Quarter              26.00            24.67



2004                       High             Low
                          ------           ------
                                     
Fourth Quarter            $29.00           $26.00
Third Quarter              40.00            28.00
Second Quarter             32.17            29.33
First Quarter              65.00            33.33



HOLDERS. The number of stockholders of record of the Company at March 25, 2005
was 515.

DIVIDENDS. The Company has paid annual cash dividends since 1994. During fiscal
years 2004 and 2003, the Company paid cash dividends of $0.47 and $0.37,
respectively.

The Company's ability to pay dividends is governed by the policies and
regulations of the Federal Reserve Board (the "FRB"), which prohibits the
payment of dividends under certain circumstances dependent on the Company's
financial condition and capital adequacy. The Company's ability to pay dividends
is also depending on the receipt of dividends from the Bank.

Federal regulations impose certain limitations on the payment of dividends and
other capital distributions by the Bank. The Bank's ability to pay dividends is
governed by the Maryland Financial Institutions Code and the regulations of the
FRB. Under the Maryland Financial Institution Code, a Maryland bank (1) may only
pay dividends from undivided profits or, with prior regulatory approval, its
surplus in excess of 100% of required capital stock and (2) may not declare
dividends on its common stock until its surplus funds equals the amount of
required capital stock or, if the surplus fund does not equal the amount of
capital stock, in an amount in excess of 90% of net earnings.

Without the approval of the FRB, a state member bank may not declare or pay a
dividend if the total of all dividends declared during the year exceeds its net
income during the current calendar year and retained net income for the prior
two years. The Bank is further prohibited from making a capital distribution if
it would not be adequately capitalized thereafter. In addition, the Bank may not
make a capital distribution that would reduce its net worth below the amount
required to maintain the liquidation account established for the benefit of its
depositors at the time of its conversion to stock form.

                                      13



             Report of Independent Registered Public Accounting Firm




Board of Directors and Stockholders
Tri-County Financial Corporation

      We have audited the accompanying consolidated balance sheets of Tri-County
Financial Corporation as of December 31, 2004 and 2003, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

      We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

      In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Tri-County Financial Corporation as of December 31, 2004 and 2003, and the
results of its consolidated operations and cash flows for each of the three
years in the period ended December 31, 2004, in conformity with accounting
principles generally accepted in the United States of America.

/s/ Stegman & Company

Baltimore, Maryland
March 21, 2005

                                       14


                        TRI-COUNTY FINANCIAL CORPORATION
                           CONSOLIDATED BALANCE SHEETS



                                                                                     DECEMBER 31,
                                                                             ---------------------------
                                                                                 2004          2003
                                                                                      
Assets
 Cash and due from banks                                                     $  6,018,096   $  2,319,300
 Fed Funds sold                                                                   777,519        938,166
 Interest-bearing deposits with banks                                          10,920,164      8,912,332
 Securities available for sale                                                 12,948,971     38,290,074
 Securities held to maturity (approximate fair value of $161,664,754 and
  61,219,315, respectively)                                                   162,741,155     61,605,175
 Federal Home Loan Bank and Federal Reserve Bank stock-at cost                  6,144,300      4,776,850
 Loans held for sale                                                                    -        474,880
 Loans receivable - net of allowance for loan losses
  of $3,057,558 and $2,572,799, respectively                                  289,325,051    217,740,153
 Premises and equipment, net                                                    6,011,913      5,580,189
 Foreclosed real estate                                                           475,561        706,764
 Accrued interest receivable                                                    1,870,135      1,318,318
 Investment in bank owned life insurance                                        6,182,955      5,921,544
 Other assets                                                                   2,351,303      3,146,247
                                                                             ------------   ------------

    TOTAL ASSETS                                                             $505,767,123   $351,729,992
                                                                             ============   ============

Liabilities and Stockholders' Equity
 Deposits
  Noninterest-bearing                                                        $ 35,552,503   $ 29,270,007
  Interest-bearing                                                            231,202,001    198,284,561
                                                                             ------------   ------------
    Total deposits                                                            266,754,504    227,554,568
 Short-term borrowings                                                        115,304,210     31,191,285
 Long-term debt                                                                82,931,113     63,051,176
 Guaranteed preferred beneficial interest in junior
   subordinated debentures                                                      7,000,000              -
 Accrued expenses and other liabilities                                         2,653,721      2,021,053
                                                                             ------------   ------------
    Total Liabilities                                                         474,643,548    323,818,082
                                                                             ------------   ------------

Stockholders' equity:
   Common stock - par value $.01; authorized - 15,000,000 shares;
   issued 1,146,864 and 753,278 shares, respectively                               11,469          7,533
   Additional paid in capital                                                   8,252,152      7,975,036
   Retained earnings                                                           22,833,112     20,071,630
   Accumulated other comprehensive income (loss)                                  186,140         (3,130)
   Unearned ESOP shares                                                          (159,298)      (139,159)
                                                                             ------------   ------------
    Total Stockholders' Equity                                                 31,123,575     27,911,910
                                                                             ------------   ------------

    TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                               $505,767,123   $351,729,992
                                                                             ============   ============


See notes to consolidated financial statements.

                                       15


                        TRI-COUNTY FINANCIAL CORPORATION

                        CONSOLIDATED STATEMENTS OF INCOME



                                                                                            YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------------------
                                                                                    2004             2003             2002
                                                                                -------------    -------------    -------------
                                                                                                         
Interest and dividend income
 Loans, including fees                                                          $  16,033,239    $  13,411,904    $  14,221,247
 Taxable interest and dividends on investment securities                            5,551,943        2,688,451        2,388,095
 Interest on deposits with banks                                                       28,157           64,570          104,646
                                                                                -------------    -------------    -------------
  Total interest and dividend income                                               21,613,339       16,164,925       16,713,988
                                                                                -------------    -------------    -------------
Interest expense
 Deposits                                                                           3,229,502        2,868,709        3,453,443
 Short term borrowings                                                              1,163,647           95,707            7,634
 Long term debt                                                                     3,420,261        2,731,983        2,507,551
                                                                                -------------    -------------    -------------
  Total interest expenses                                                           7,813,410        5,696,399        5,968,628
                                                                                -------------    -------------    -------------
Net interest income                                                                13,799,929       10,468,526       10,745,360
Provision for loan losses                                                             452,998          316,963          160,000
                                                                                -------------    -------------    -------------
Net interest income, after provision for loan losses                               13,346,931       10,151,563       10,585,360
                                                                                -------------    -------------    -------------
Noninterest income:
 Loan appraisal, credit, and miscellaneous charges                                    229,125          261,387          179,006
 Net gain on sale of loans held for sale                                               21,404          505,435          499,304
 Income from bank owned life insurance                                                261,411          230,607                -
 Service charges                                                                    1,189,001          695,128        1,041,662
 Gain on sale of equipment                                                              8,250                -           44,389
 Gain on sale of foreclosed real estate                                                     -                -           64,755
 Loss on the sale of investment securities                                            (61,875)               -                -
 Recognition of other than temporary decline in value of marketable securities        (65,000)
 Other                                                                                      -           61,981           17,945
                                                                                -------------    -------------    -------------
  Total noninterest income                                                          1,582,316        1,754,538        1,847,061
                                                                                -------------    -------------    -------------


                                       16


                        TRI-COUNTY FINANCIAL CORPORATION

                        CONSOLIDATED STATEMENTS OF INCOME



                                                                                            YEARS ENDED DECEMBER 31,
                                                                                -----------------------------------------------
                                                                                      2004           2003             2002
                                                                                  -----------    -------------    -------------
                                                                                                         
Noninterest expenses
 Salary and employee benefits                                                     $ 5,432,898    $   4,702,181    $   4,228,050
 Occupancy expense                                                                    858,891          750,567          831,148
 Advertising                                                                          539,715          308,951          338,216
 Data processing expense                                                              550,781          403,967          568,095
 Loss on disposal of obsolete equipment                                                     -                -           65,104
 Depreciation of furniture, fixtures, and equipment                                   372,237          507,236          339,184
 Telephone communications                                                             103,421          166,553          345,559
 Valuation allowance on foreclosed real estate                                        114,606                -          972,889
 ATM expenses                                                                         345,454          274,188          312,200
 Office supplies                                                                      151,862          131,228          290,636
 Office equipment expenses                                                             90,520          129,849          247,171
 Other                                                                              1,208,034        1,053,051          859,348
                                                                                  -----------    -------------    -------------
  Total noninterest expenses                                                        9,768,419        8,427,771        9,397,600
                                                                                  -----------    -------------    -------------
Income before income taxes                                                          5,160,828        3,478,330        3,034,821
Income tax expense                                                                  1,440,994        1,032,432        1,067,000
                                                                                  -----------    -------------    -------------
Net income                                                                        $ 3,719,834    $   2,445,898    $   1,967,821
                                                                                  ===========    =============    =============
Earnings per share*
Basic                                                                             $      3.24    $        2.16    $        1.72
Diluted                                                                           $      3.10    $        2.05    $        1.63


See notes to consolidated financial statements.

*Share and per share data have been retroactively adjusted to effect a
three-for-two common stock split paid on December 1, 2004.

                                       17


                        TRI-COUNTY FINANCIAL CORPORATION
           Consolidated Statements of Changes in Stockholders' Equity
                  Years Ended December 31, 2004, 2003, and 2002



                                                                                         Accumulated
                                                                                            Other        Unearned
                                                   Common      Paid-in       Retained    Comprehensive     ESOP
                                                    Stock      Capital       Earnings    Income (Loss)    Shares         Total
                                                  --------   -----------   -----------   -------------   ---------   ------------
                                                                                                   
Balance at December 31, 2001                      $  7,568   $ 7,545,590   $17,678,367   $     555,513   $(200,580)  $ 25,586,458
 Comprehensive income:
  Net Income                                             -             -     1,967,821               -           -      1,967,821
  Change in unrealized gains on investment
   securities net of tax of $24,455                      -             -             -         (61,822)          -        (61,822)
                                                                                                                     ------------
    Total comprehensive income                                                                                          1,905,999
 Cash dividend  $0.33 per share                          -             -      (385,129)              -           -       (385,129)
 Excess of fair market value over cost
  of leveraged ESOP shares released                      -        10,445             -               -           -         10,445
 Exercise of stock options                             133       160,871             -               -           -        161,004
 Repurchase of common stock                           (123)            -      (443,444)                                  (443,567)
 Net change in unearned ESOP shares                     20             -             -               -      37,535         37,555
                                                  --------   -----------   -----------   -------------   ---------   ------------
Balance at December 31, 2002                         7,598     7,716,906    18,817,615         493,691    (163,045)    26,872,765
 Comprehensive income:
  Net Income                                             -             -     2,445,898               -           -      2,445,898
  Change in unrealized gains (losses) on
   investment securities net of tax of $268,756                                               (496,821)                  (496,821)
                                                                                                                     ------------
    Total comprehensive income                                                                                          1,949,077
 Cash dividend  $0.37 per share                                               (422,361)                                  (422,361)
 Excess of fair market value over cost
  of leveraged ESOP shares released                               39,533                                                   39,533
 Exercise of stock options                             116       200,435                                                  200,551
 Repurchase of common stock                           (197)                   (769,522)                                  (769,719)
 Net change in unearned ESOP shares                     16                                                  23,886         23,902
 Exercise of nonemployee stock options                   -        18,162             -               -           -         18,162
                                                  --------   -----------   -----------   -------------   ---------   ------------
Balance at December 31, 2003                         7,533     7,975,036    20,071,630          (3,130)   (139,159)    27,911,910
 Comprehensive income:
  Net Income                                                                 3,719,834                                  3,719,834
  Change in unrealized gains on investment
   securities net of tax of $97,503                                                            189,270                    189,270
                                                                                                                     ------------
    Total comprehensive income                                                                                          3,909,104
 Cash dividend  $0.47 per share                                               (541,633)                                  (541,633)
 Excess of fair market value over cost
  of leveraged ESOP shares released                               28,670                                                   28,670
 Exercise of stock options                             214       241,261                                                  241,475
 Repurchase of common stock                            (93)                   (412,880)                                  (412,973)
 Net change in unearned ESOP shares                    (24)                                                (20,139)       (20,163)
 3 for 2 stock split in the form of a dividend       3,839                      (3,839)                                         -
 Exercise of nonemployee stock options                   -         7,185             -               -           -          7,185
                                                  --------   -----------   -----------   -------------   ---------   ------------
Balance at December 31, 2004                      $ 11,469   $ 8,252,152   $22,833,112   $     186,140   $(159,298)  $ 31,123,575
                                                  ========   ===========   ===========   =============   =========   ============


                                       18


                        TRI-COUNTY FINANCIAL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                                           YEARS ENDED DECEMBER 31,
                                                                                           ------------------------
                                                                                    2004             2003            2002
                                                                                -------------    -------------   -------------
                                                                                                        
Cash flows from operating activities:
 Net income                                                                     $   3,719,834    $   2,445,898   $   1,967,821
  Adjustments to reconcile net income to net
  cash provided by operating activities:
   Valuation allowance on foreclosed real estate                                      114,606                -         972,889
   Provision for loan losses                                                          452,998          316,963         160,000
   Loss on investment security                                                        126,875                -               -
   Depreciation and amortization                                                      636,711          663,134         445,558
   Net amortization of premium/discount on
   mortgage backed securities and investments                                         116,256          447,503          48,426
   Increase in cash surrender of bank owned life insurance                           (261,411)        (221,544)              -
   Deferred income tax expense (benefit)                                               65,850          (22,219)       (399,000)
   Decrease (increase) in accrued interest receivable                                (551,817)        (275,865)          6,948
   Increase (decrease) in deferred loan fees                                          114,618          (17,849)        (90,291)
   Increase (decrease) in accrued expenses and other liabilities                      349,818       (1,332,467)        562,539
   Decrease (increase) in other assets                                                914,440          170,189        (319,625)
   Loss (gain) on disposal of premises and equipment                                   (8,250)          12,241          76,315
   Origination of loans held for sale                                                       -      (16,792,123)    (23,376,262)
   Proceeds from sale of loans held for sale                                          496,284       18,085,314      24,967,214
   Gain on sales of loans held for sale                                               (21,404)        (505,434)       (499,304)
                                                                                -------------    -------------   -------------
   Net cash provided by operating activities                                        6,265,408        2,973,741       4,523,228
                                                                                -------------    -------------   -------------
Cash flows from investing activities:
  Purchase of investment securities available for sale                            (27,944,571)     (65,726,882)    (30,740,615)
  Proceeds from sale, redemption or principal payments
   of investment securities available for sale                                     53,031,692       67,772,952      24,692,742
  Purchase of investment securities held to maturity                             (143,349,900)     (64,384,597)     (2,375,053)
  Proceeds from maturities or principal payments
   of investment securities held to maturity                                       42,511,543        5,898,120       1,822,600
  Net (purchase) redemption of FHLB and Federal Reserve stock                      (1,367,450)      (2,040,100)        298,800
  Loans originated or acquired                                                   (192,785,961)    (172,289,356)    (86,078,892)
  Principal collected on loans                                                    120,633,447      151,699,369      82,009,912
  Purchase of premises and equipment                                               (1,068,435)        (528,169)     (1,106,504)
  Proceeds from disposal of premises and equipment                                      8,250            9,000         281,084
  Purchase of Bank owned life insurance policies                                            -       (5,700,000)              -
  Sale of foreclosed real estate
                                                                                      116,597            9,250         333,484
                                                                                -------------    -------------   -------------

  Net cash used in investing activities                                          (150,214,788)     (85,280,413)    (10,862,442)
                                                                                -------------    -------------   -------------


See notes to consolidated financial statements.

                                       19


                        TRI-COUNTY FINANCIAL CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS



                                                                  YEARS ENDED, DECEMBER 31,
                                                        ---------------------------------------------
                                                            2004            2003            2002
                                                        -------------   -------------   -------------
                                                                               
Cash flows from financing activities
      Net increase in deposits                             39,199,936      24,529,456      19,908,578
      Net increase (decrease) in short-term borrowings     84,112,925      30,438,987      (1,061,019)
      Dividends paid                                         (541,633)       (422,361)       (385,129)
      Exercise of stock options                               248,661         218,712         161,004
      Net change in unearned ESOP shares                        8,508          63,436          47,999
      Repurchase of common stock                             (412,973)       (769,719)       (443,568)
      Proceeds from long-term borrowings                   30,000,000      15,000,000         920,000
      Payments of long-term borrowings                    (10,120,063)       (118,824)     (1,400,000)
      Trust Preferred Debentures                            7,000,000               -               -
                                                        -------------   -------------   -------------

      Net cash provided by financing activities           149,495,361      68,939,687      17,747,865

Increase (Decrease) in cash and cash equivalents            5,545,981     (13,366,985)     11,408,651

Cash and cash equivalents at beginning of year             12,169,798      25,536,783      14,128,132
                                                        -------------   -------------   -------------

Cash and cash equivalents at end of year                $  17,715,779   $  12,169,798   $  25,536,783
                                                        =============   =============   =============

Supplementary cash flow information:
   Cash paid during the year for:
      Interest                                          $   5,223,366   $   5,647,280   $   6,225,058
      Income taxes                                          1,232,500       1,715,369       2,110,500


See notes to consolidated financial statements.

                                      20


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of Tri-County
Financial Corporation and its wholly owned subsidiaries, Community Bank of
Tri-County (the "Bank") and Tri-County Capital Trust I and the Bank's wholly
owned subsidiaries, Tri-County Investment Corporation and Community Mortgage
Corporation of Tri-County (collectively, the "Company"). All significant
intercompany balances and transactions have been eliminated in consolidation.
The accounting and reporting policies of the Company conform with accounting
principles generally accepted in the United States of America and to general
practices within the banking industry. Certain reclassifications have been made
to amounts previously reported to conform with classifications made in 2004.

NATURE OF OPERATIONS

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

USE OF ESTIMATES

In preparing consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the determination
of the allowance for loan losses, the valuation of foreclosed real estate, and
deferred tax assets.

SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK

Most of the company's activities are with customers located in the Southern
Maryland area comprising St. Mary's, Charles, and Calvert counties. Note 3
discusses the types of securities held by the Company. Note 4 discusses the type
of lending in which the Company is engaged. The Company does not have any
significant concentration to any one customer or industry.

CASH AND CASH EQUIVALENTS

For purposes of the consolidated statements of cash flows, the Company considers
all highly liquid debt instruments with original maturities of three months or
less when purchased to be cash equivalents.

SECURITIES

Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and recorded at amortized cost.
Securities not classified as held to maturity or trading, including equity
securities with readily determinable fair values are classified as "available
for sale" and recorded at estimated fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive income.

                                      21


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the estimated fair
value of held to maturity and available for sale securities below their cost
that are deemed to be other than temporary are reflected in earnings as realized
losses. In estimating other than temporary impairment losses, management
considers: (1) the length of time and the extent to which the fair value has
been less than cost, (2) the financial condition and near term prospects of the
issuer, and (3) the intent and ability of the Company to retain its investment
in the issuer for a period of time sufficient to allow for any anticipated
recovery in fair value. Gains and losses on the sale of securities are recorded
on the trade data and are determined using the specific identification method.
Investment in Federal Reserve Bank and Federal Home Loan Bank of Atlanta stock
are recorded at cost and are considered restricted as to marketability. The Bank
is required to maintain investments in the Federal Reserve Bank and Federal Home
Loan Bank based upon levels of financial activity.

LOANS HELD FOR SALE

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

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

LOANS

The Company originates mortgage, commercial, and consumer loans to customers. A
substantial portion of the loan portfolio is represented by loans throughout
southern Maryland. The ability of the Company's debtors to honor their contracts
is dependent upon the real estate and general economic conditions in this area.

Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or payoff are reported at their outstanding unpaid
principal balances adjusted for the allowance for loan losses, and any deferred
fees or costs on originated loans. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan yield
using the interest method.

The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well secured and in the
process of collection. Consumer loans are charged-off no later than 180 days
past due. In all cases, loans are placed on nonaccrual or charged-off at an
earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected from loans that are placed on nonaccrual
or charged-off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying for
return to accrual. Loans are returned to accrual status when all principal and
interest amounts contractually due are brought current and future payments

                                      22


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

are reasonably assured.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is established as probable losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes that the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans in
light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.

The allowance for loan losses consists of a specific component and a general
component. The specific component relates to loans that are classified as either
doubtful, substandard, or special mention. For such loans that are also
classified as impaired, an allowance is established when the discounted cash
flows (or collateral value or observable market price) of the impaired loan is
lower than carrying value of that loan. The general component covers the
non-classified loans and is based on historical loss experience, peer group
comparisons, industry data and loss percentages used for similarly graded loans
adjusted for qualitative factors.

A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all of the circumstances
surrounding the loan and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record, and the amount of
the shortfall in relation to the principal and interest owed. Impairment is
measured on a loan by loan basis for commercial and construction loans by either
the present value of expected future cash flows discounted at the loan's
effective interest rate, the loan's observable market price, or the fair value
of the collateral if the loan is collateral dependent.

Large groups of smaller homogeneous loans are collectively evaluated for
impairment. Accordingly, the Company does not separately identify individual
consumer and residential loans for impairment disclosures, unless such loans are
the subject of a restructuring agreement.

SERVICING

Servicing assets are recognized as separate assets when rights are acquired
through purchase or through the sale of financial assets. Generally, purchased
servicing rights are capitalized at the cost to acquire the rights. For sales of
mortgage loans, a portion of the cost of originating the loan is

                                      23


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

allocated to the servicing based on relative estimated fair value. Estimated
fair value is based on market prices for comparable mortgage servicing
contracts, when available, or alternatively, is based on a valuation model that
calculates the present value of estimated future net servicing. The valuation
model incorporates assumptions that market participants would use in estimating
future net servicing income, such as the cost to service, the discount rate, an
inflation rate, ancillary income, prepayment speeds and default rates and
losses. Capitalized servicing rights are reported in other assets and are
amortized into noninterest income in proportion to, and over the period of, the
estimated future net servicing income of the underlying financial assets.

Servicing assets are evaluated for impairment based upon the estimated fair
value of the rights as compared to amortized cost. Impairment is determined by
stratifying rights into tranches based on predominant risk characteristics, such
as interest rate, loan type and investor type. Impairment is recognized through
a valuation allowance for an individual tranche, to the extent that fair value
is less than the capitalized amount for the tranche. If the Company later
determines that all or a portion of the impairment no longer exists for a
particular tranche, a reduction of the allowance may be recorded as an increase
to income.

Servicing fee income is recorded for fees earned for servicing loans. The fees
are based on a contractual percentage of the outstanding principal; or a fixed
amount per loan and recorded as income when earned. The amortization of mortgage
servicing rights is netted against loan servicing fee income.

PREMISES AND EQUIPMENT

Land is carried at cost. Premises and improvements and equipment are carried at
cost, less accumulated depreciation and amortization computed by the
straight-line method over the estimated useful lives of the assets which are as
follows:

                                   
Buildings and improvements            15 - 50 years
Furniture and equipment                3 - 15 years
Automobiles                                 5 years



Maintenance and repairs are charged to expense as incurred while improvements
that extend the useful life of premises and equipment are capitalized.

FORECLOSED REAL ESTATE

Assets acquired through, or in lieu of, loan foreclosure are held for sale and
are initially recorded at the lower of cost or estimated fair value at the date
of foreclosure, establishing a new cost basis. Subsequent to foreclosure,
valuations are periodically performed by management and the assets are carried
at the lower of carrying amount or estimated fair value less cost to sell.
Revenue and expenses from operations and changes in the valuation allowance are
included in noninterest expense.

                                      24


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

TRANSFERS OF FINANCIAL ASSETS

Transfers of financial assets are accounted for as sales, when control over the
assets has been surrendered. Control over transferred assets is deemed to be
surrendered when: (1) the assets have been isolated from the Company, (2) the
transferee obtains the right (free of conditions that constrain it from taking
advantage of that right) to pledge or exchange the transferred assets, and (3)
the Company does not maintain effective control over the transferred assets
through an agreement to repurchase them before their maturity.

ADVERTISING COSTS

The Company expenses advertising costs as incurred.

INCOME TAXES

The Company files a consolidated federal income tax return with its
subsidiaries. Deferred tax assets and liabilities are determined using the
liability (or balance sheet) method. Under this method, the net deferred tax
asset or liability is determined based on the tax effects of the temporary
differences between the book and tax bases of the various balance sheet assets
and liabilities and gives current recognition to changes in tax rates and laws.

OFF BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS

In the ordinary course of business, the Company has entered into commitments to
extend credit, including commitments under commercial lines of credit, letters
of credit, and standby letters of credit. Such financial instruments are
recorded when they are funded.

STOCK-BASED COMPENSATION

Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation, encourages all entities to adopt a fair value based method
of accounting for employee stock compensation plans, whereby compensation cost
is measured at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. However, it also
allows an entity to continue to measure compensation cost for these plans using
the intrinsic value based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,
whereby compensation cost is the excess, if any, of the quoted market price of
the stock at the grant date (or other measurement date) over the amount an
employee must pay to acquire the stock. The Company has elected to continue with
the accounting methodology in Opinion No. 25. Stock options issued under the
Company's stock option plans have no intrinsic value at the grant date, and
under Opinion No. 25 no compensation cost is recognized for them.

However, SFAS No. 123 was revised as SFAS No. 123R in December 2004, with an
effective date of July 2005. This revision is discussed further in the "Recent
Accounting Pronouncements" section of this Note.

At December 31, 2004, the Company maintains stock-based compensation plans,
which are more fully described in Note 12. Had compensation cost for the
Company's stock option plans been determined based on the fair value based
method of accounting at the grant dates for awards under

                                       25


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

the plan consistent with the method prescribed by SFAS No. 123, the Company's
net income and earnings per share would have been adjusted to the pro forma
amounts indicated below:



                                                                              Years Ended December 31,
                                                                     ----------------------------------------
                                                                        2004            2003          2002
                                                                     -----------    ------------   ----------
                                                                                          
Net income, as reported                                              $ 3,719,834    $  2,445,898   $1,967,821

Additional expense determined under fair value based method             (735,180)       (141,000)    (217,187)
                                                                     -----------    ------------   ----------
Pro forma net income                                                 $ 2,984,654    $  2,304,898   $1,750,634
                                                                     ===========    ============   ==========

Earnings per share as reported
   Basic                                                             $      3.24    $       2.16   $     1.72
   Diluted                                                                  3.10            2.05         1.63

Pro forma earnings per share
   Basic                                                                    2.60            2.03         1.53
   Diluted                                                                  2.49            1.93         1.45


Per share amounts have been adjusted retroactively to reflect the 3 for 2 stock
split in December 2004.

For the purpose of computing the pro forma amounts indicated above, the fair
value of each option on the date of grant is estimated using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
the grants:



                                                   2004              2003              2002
                                                 --------          --------          --------
                                                                            
Dividend Yield                                       1.80%             2.17%             1.41%
Expected Volatility                                 25.51%            17.24%            35.00%
Risk - free interest rate                            4.31%             4.29%             4.82%
Expected lives (in years)                              10                10                10
Weighted average fair value                      $  12.68          $  10.22          $  17.24


EARNINGS PER COMMON SHARE

Basic earnings per common share represents income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance. Potential common shares that may be issued by the Company relate
solely to outstanding stock options, and are determined using the treasury stock
method. In 2004 there were 46,271 options excluded from the calculation as their
effect would be anti-dilutive.

                                       26




                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

Earnings per common share have been computed based on the following:



                                                                     Years Ended December 31,
                                                                     ------------------------
                                                               2004            2003           2002
                                                            -----------    -----------    -----------
                                                                                 
Net income                                                  $ 3,719,834    $ 2,445,898    $ 1,967,821
                                                            ===========    ===========    ===========

Average number of common share outstanding                    1,146,339      1,131,066      1,142,126
Effect of dilutive options                                       52,341         62,966         64,058
                                                            -----------    -----------    -----------
Average number of  shares used to calculate diluted
earnings per share outstanding                                1,198,680      1,194,032      1,206,183
                                                            ===========    ===========    ===========


The numbers of common shares outstanding have been adjusted to give retroactive
effect to the 3 for 2 stock split in December 2004.

COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.

The components of other comprehensive income and related tax effects are as
follows:



                                                                                      Years Ended December 31,
                                                                                      ------------------------
                                                                                 2004           2003           2002
                                                                              -----------    -----------    -----------
                                                                                                   
Net income                                                                    $ 3,719,834    $ 2,445,898    $ 1,967,821
Other comprehensive income items
   Unrealized holding gains (losses) on available for sale securities
     net of tax of expense (benefit)of $76,465, $(268,756), $(24,455)             148,433       (496,821)       (61,822)
     respectively
   Plus: reclassification adjustment for losses net of tax benefit of
     $21,038                                                                       40,797              -              -
                                                                              -----------    -----------    -----------
Total other comprehensive income                                              $   189,270    $  (496,821)   $   (61,822)
                                                                              -----------    -----------    -----------
Total comprehensive income                                                    $ 3,909,104    $ 1,949,077    $ 1,905,999
                                                                              ===========    ===========    ===========


The components of accumulated other comprehensive income, included in
stockholders' equity are as follows:



                                                                            December 31,
                                                                            ------------
                                                                        2004           2003
                                                                     ----------     ----------
                                                                              
Net unrealized gains (losses) on securities available for sale       $  282,031     $   (4,742)
Tax effect                                                              (95,891)         1,612
                                                                     ----------     ----------
   Net of tax amount                                                 $  186,140     $   (3,130)
                                                                     ==========     ==========


                                       27



                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2004, the Financial Accounting Standards Board ("FASB") issued SAFS
No. 153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29,
Accounting for Nonmonetary Transactions." This statement amends the principle
that exchanges of nonmonetary assets should be measured based on the fair value
of the assets exchanged and more broadly provides for exceptions regarding
exchanges of nonmonetary assets that do not have commercial substance. This
Statement is effective for nonmonetary asset exchanges occurring in fiscal
periods beginning after June 15, 2005. The adoption of this standard is not
expected to have a material impact on financial condition, results of
operations, or liquidity.

In December 2004, FASB issued SFAS No. 123R, "Share-Based Payment," which is a
revision of SFAS No. 123, "Accounting for Stock Issued for Employees." SFAS No.
123R requires that all share-based payments to employees, including grants of
employee stock options, be valued at fair value on the grant date and be
expensed over the applicable vesting period. SFAS No. 123R is effective for the
Company on July 1, 2005. The Company will transition to SFAS No. 123R using the
"modified prospective application." Under the "modified prospective
application," compensation costs will be recognized in the financial statements
for all new share-based payments granted after July 1, 2005. Additionally, the
Company will recognize compensation costs for the portion of previously granted
awards for which the requisite service has not been rendered ("nonvested
awards") that are outstanding as of July 1, 2005 over the remaining requisite
service period of the awards. The compensation expense to be recognized for the
nonvested awards will be based on the fair value of the awards. The Company does
not expect the impact of utilizing the "modified prospective application" to
adopt SFAS No. 123R to be materially different from the pro forma information
shown above in this Note 1 under "Stock-Based Compensation."

In March 2004, FASB Emerging Issues Task Force (EITF) released Issue 03-01,
"Meaning of Other Than Temporary Impairment and Its Application to Certain
Investments." EITF 03-1 provides guidance for determining whether impairment for
certain debt and equity investments is other-than-temporary and the measurement
of the impaired loss. Certain disclosure requirements of EITF 03-1 were adopted
in 2003 and the Company complied with the new disclosure requirements in its
consolidated financial statements. The recognition and measurement requirements
of EITF 03-01 were initially effective for periods beginning after June 15,
2004. In September 2004, however, the FASB staff issued FASB Staff Position
("FSP") EITF 03-1-1, which delayed the effective date for certain measurement
and recognition guidance contained in Issue 03-1. The FSP requires the
application of pre-existing other-than-temporary guidance during the period of
delay until a final consensus is reached. Management does not anticipate the
issuance of the final consensus will have a material impact on financial
condition, the results of operations, or liquidity. During 2004, the Company
recorded a $65,000 impairment loss relating to its investment in FHLMC preferred
stock whose decline in value was determined to be other-than-temporary.

In December 2003, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 03-3, "Accounting for Certain Loans or Debt
Securities Acquired in a Transfer". SOP 03-3 requires acquired loans, including
debt from the seller for those-individually-evaluated

                                       28





                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

loans that have evidence of deterioration in credit quality since origination,
and it is probable all contractual cash flows on the loan will be unable to be
collected. SOP 03-3 also requires the excess of all undiscounted cash flows
expected to be collected at acquisition over the purchase's initial investment
to be recognized as interest income on a level-yield basis over the life of the
loan. Subsequent increases in cash flows expected to be collected are recognized
as impairment. Loans carried at fair value, loans held for sale, and loans to
borrowers in good standing under revolving credit agreements are excluded from
the scope of SOP 03-3. The guidance is effective for loans acquired in fiscal
years beginning after December 15, 2004 and is not expected to have a material
impact on the Company's financial condition, result of operations, or liquidity.

NOTE 2--RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANK

The Bank is required to maintain average balances on hand or with the Federal
Reserve Bank. At December 31, 2004 and 2003, these reserve balances amounted to
$225,000.

                                       29





                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

NOTE 3--INVESTMENT SECURITIES

The amortized cost and estimated fair values of securities with gross unrealized
losses and gains are:



                                                                         December 31, 2004
                                                                         -----------------
                                                  Amortized          Gross             Gross            Estimated
                                                     Cost      Unrealized Gains  Unrealized Losses     Fair Value
                                                 ------------  ----------------  -----------------    -------------
                                                                                          
Asset-backed securities issued by GSEs           $ 11,543,520  $        113,741  $         104,584    $  11,552,677
Corporate equity securities                           481,010           290,467              5,000          766,477
Bond mutual funds                                     642,408                 -             12,591          629,817
                                                 ------------  ----------------  -----------------    -------------
Total securities available for sale              $ 12,666,938  $        404,208  $         122,175    $  12,948,971
                                                 ============  ================  =================    =============

Securities held-to-maturity
Asset-backed securities issued by:
GSEs                                             $108,862,740  $        127,154  $       1,275,511    $ 107,714,383
Other                                              51,796,259           350,848            234,149       51,912,958
                                                 ------------  ----------------  -----------------    -------------
Total debt securities held-to-maturity            160,658,999           478,002          1,509,660      159,627,341

U.S. Government obligations                           301,181                 -                726          300,455
Other investments                                   1,780,975                 -             44,017        1,736,958
                                                 ------------  ----------------  -----------------    -------------
Total securities held to maturity                $162,741,155  $        478,002  $       1,554,403    $ 161,664,754
                                                 ============  ================  =================    =============




                                                                        December 31, 2003
                                                                        -----------------
                                                  Amortized          Gross             Gross            Estimated
Securities available for sale                        Cost      Unrealized Gains  Unrealized Losses      Fair Value
                                                 ------------  ----------------  -----------------    -------------
                                                                                          
Asset-backed securities issued by GSEs           $ 34,902,854  $        102,973  $         309,722    $  34,696,105
Corporate equity securities                           546,010           250,423             40,000          756,433
Bond mutual funds                                   2,845,950                 -              8,415        2,837,535
                                                 ------------  ----------------  -----------------    -------------
Total securities available for sale              $ 38,294,814  $        353,396  $         358,137    $  38,290,074
                                                 ============  ================  =================    =============

Securities held-to-maturity
Asset-backed securities issued by:

        GSEs                                     $ 50,067,413  $        103,018  $         646,379    $  49,524,052
        Other                                       7,284,039                 -                  -        7,284,039
                                                 ------------  ----------------  -----------------    -------------
Total debt securities held-to-maturity             57,351,452           103,018            646,379       56,808,091
U.S. Government obligations                           300,000                 -                249          299,751
Other investments                                   3,953,723           157,750                  -        4,111,473
                                                 ------------  ----------------  -----------------    -------------
Total securities held-to-maturity                $ 61,605,175  $        260,768  $         646,628    $  61,219,315
                                                 ============  ================  =================    =============


Other investments consist of certain CD strip instruments whose estimated fair
value is estimated based on market returns on similar risk and maturity
instruments because no active market exists for these instruments. At December
31, 2004, U.S. Government obligations with a carrying value of $300,000 were
pledged to secure municipal deposits and for other purposes required or
permitted

                                       30


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

by law. In addition, at December 31, 2004, certain other securities with a
carrying value of $7,598,000 were pledged to secure certain deposits. At
December 31, 2004, securities with a carrying value of $72,194,000 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 December 31, 2004 are as follows:



                                                          Continuous unrealized losses
                                                                   existing for
                                                                   ------------
                                                            Less than      More than
                                           Estimated           12             12          Total unrealized
                                          Fair Value         months          months            losses
                                          ------------    ------------    ------------    ----------------
                                                                              
Asset-backed securities issued by GSEs    $  6,438,501    $    104,584    $          -    $        104,584
Corporate equity securities                    435,000               -           5,000    $          5,000
Bond mutual funds                              595,758          12,591               -              12,591
                                          ------------    ------------    ------------    ----------------
                                          $  7,469,259    $    117,175    $      5,000    $        122,175
                                          ============    ============    ============    ================


The available-for-sale investment portfolio has an estimated fair value of
approximately $12.9 million of which approximately $7.5 million of the
securities have some unrealized losses from their purchase price. Of these
securities, $6.4 million, or 86%, are mortgage backed securities issued by GSEs,
$600,000 or 8% are short duration mutual fund shares, and $435,000 or 6% are
equity securities. The unrealized losses that exist in the mortgage backed
securities and mutual fund shares are the result of market changes in interest
rates since the original purchase.

The mutual fund shares have a modest duration and are backed by one year
adjustable rate mortgage backed securities. The asset backed securities have an
average duration of 3.3 years and are guaranteed by their issuer as to credit
risk. Total unrealized losses on these investments are minimal (approximately
2%). We believe that the losses in the equity securities are temporary.
Persistent losses may require a reevaluation of these losses. These factors
coupled with the fact the Company has both the intent and ability to hold these
investments for a period of time sufficient to allow for any anticipated
recovery in fair value substantiates that the unrealized losses in the
available-for-sale portfolio are temporary.

Gross unrealized losses and estimated fair value by length of time that the
individual held-to-maturity securities have been in a continuous unrealized loss
position at December 31, 2004 are as follows:

                                       31


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002




                                                           Continuous unrealized losses
                                                                    existing for
                                                                    ------------              Total
                                          Estimated Fair   Less than 12    More than 12     unrealized
                                              Value           months         months          Losses
                                          --------------   ------------    ------------    -----------
                                                                               
Asset-backed securities issued by GSEs    $   71,536,064   $    708,062    $    567,449    $ 1,275,511
Asset-backed securities issued by other       30,182,784        186,187          47,963        234,149
U.S. Government obligations                      301,181            726               -            726
Other Investments                              1,780,975         44,017               -         44,017
                                          --------------   ------------    ------------    -----------
                                          $  103,801,004   $    938,991    $    615,411    $ 1,554,403
                                          ==============   ============    ============    ===========


The held-to-maturity investment portfolio has an estimated fair value of
approximately $161.7 million of which approximately $103.8 million of the
securities have some unrealized losses from their purchase price. Of these
securities, $101.7 million, or 98%, are mortgage backed securities and the
remainder is a short duration U.S. Treasury note and a CD strip investment. The
U.S.Treasury note will mature within three months from the balance sheet date at
full face value. The CD strip will mature within 3 years. The remaining asset
backed securities have a duration of approximately 5 years, are guaranteed as to
payment by the issuer, and have minimal losses compared to carrying value
(approximately 1.5%). The unrealized losses that exist are the result of market
changes in interest rates since the original purchase. These factors coupled
with the Company's intent and ability to hold these investments for a period of
time sufficient to allow for any anticipated recovery in fair value
substantiates that the unrealized losses in the held-to-maturity portfolio are
temporary.

The amortized cost and estimated fair value of debt securities at December 31,
2004, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because the issuers of the securities may have the
right to prepay obligations without prepayment penalties.



                                            Available for Sale              Held to Maturity
                                            ------------------              ----------------
                                                       Estimated                       Estimated
                                        Amortized         Fair         Amortized         Fair
                                         Cost            Value           Cost           Value
                                     --------------   ------------   -------------   --------------
                                                                         
 Within one year                     $      642,408   $    629,817   $   1,478,181   $    1,448,365
 Over one year through five years                 -              -         603,975          589,048
 Over five years through ten years                -              -               -                -
                                     --------------   ------------   -------------   --------------
                                            642,408        629,817       2,082,156        2,037,413
 Mortgage-backed securities              11,543,520     11,552,676     160,658,999      159,627,341
                                     --------------   ------------   -------------   --------------
                                     $   12,185,928   $ 12,182,493   $ 162,741,155   $  161,664,754
                                     ==============   ============   =============   ==============


Total sales of investments available for sale during 2004 were $36,900,000,
these sales produced a net loss of $61,875. There were no sales of investment
securities available for sale during 2003 or 2002. 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.

                                       32


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

NOTE 4 -- LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

A summary of the balances of loans are as follows:



                                               2004                  2003
                                               ----                  ----
                                                         
Commercial real estate                   $    136,341,596      $     93,824,812
Residential first mortgages                    59,087,000            42,971,076
Construction and land development              17,597,911            19,598,992
Home equity and second mortgage loans          23,925,108            19,561,771
Commercial loans                               39,136,777            30,435,729
Consumer loans                                  3,462,613             4,096,926
Commercial equipment                           13,595,978            10,473,403
                                         ----------------      ----------------
                                              293,146,983           220,962,709
                                         ----------------      ----------------
Less:
 Deferred loan fees                               764,374               649,756
 Allowance for loan losses                      3,057,558             2,572,799
                                         ----------------      ----------------
                                                3,821,932             3,222,556
                                         ----------------      ----------------

                                         $    289,325,051      $    217,740,153
                                         ================      ================


An analysis of the allowance for loan losses follows:



                                       2004            2003            2002
                                       ----            ----            ----
                                                          
Balance January 1,                 $  2,572,799    $  2,314,074    $  2,281,581

Add:
Provision charged to operations         452,998         316,963         160,000
Recoveries                               49,083           2,446           2,795
Less:
Charge-offs                              17,322          60,684         130,302
                                   ------------    ------------    ------------

Balance, December 31               $  3,057,558    $  2,572,799    $  2,314,074
                                   ============    ============    ============


No loans included within the scope of SFAS No. 114 were identified as being
impaired at December 31, 2004 or 2003 and for the years then ended.

Loans on which the recognition of interest has been discontinued, which were not
included within the scope of SFAS No. 114, amounted to approximately $675,000,
$379,000, and $597,000 at

                                       33


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

December 31, 2004, 2003, and 2002, respectively. If interest income had been
recognized on nonaccrual loans at their stated rates during 2004, 2003, and
2002, interest income would have been increased by approximately $44,391,
$11,626, and $33,320, respectively. Income in the amount of $21,955 and $29,066
was recognized on these loans in 2004 and 2003, respectively. No income was
recognized for these loans in 2002.

Included in loans receivable at December 31, 2004 and 2003 is $1,268,353 and
$593,452 due from officers and directors of the Bank. These loans are made in
the ordinary course of business at substantially the same terms and conditions
as those prevailing at the time for comparable transactions with outsiders and
are not considered to involve more than the normal risk of collectibility. For
the years ending December 31, 2004 and 2003 all loans to directors and officers
of the Bank were performing according to the original loan terms. Activity in
loans outstanding to officers and directors is summarized as follows:



                                      2004                 2003
                                      ----                 ----
                                               
Balance, beginning of year      $        593,452     $      1,022,846
New loans made during year             1,211,526              528,106
Repayments made during year             (285,765)            (931,108)
Reductions due to change in
 directors and officers                 (250,860)             (26,392)
                                ----------------     ----------------
Balance, end of year            $      1,268,353     $        593,452
                                ================     ================


NOTE 5 -- LOAN SERVICING

Loans serviced for others are not reflected in the accompanying balance sheets.
The unpaid principal balances of mortgages serviced for others were $39,327,875
and $54,660,488 at December 31, 2004 and 2003, respectively.

Servicing loans for others generally consists of collecting mortgage payments,
maintaining escrow accounts, disbursing payments to investors and foreclosure
processing. Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from borrowers, such
as late payment fees. The following table presents the activity of the mortgage
servicing rights ("MSR").

                                       34


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002



                                                                                 Year Ended December 31,
                                                                     --------------------------------------------
                                                                        2004             2003             2002
                                                                     -----------      ----------      -----------
                                                                                             
Balance at beginning of the year                                     $   676,940      $  780,408      $   525,075
Additions                                                                  7,861         284,327          303,333
Amortization                                                            (207,599)       (177,795)         (48,000)
Application of valuation allowance to permanently impaired MSRs                -        (210,000)               -
                                                                     -----------      ----------      -----------
    Balance at end of year                                           $   477,202      $  676,940      $   780,408
                                                                     ===========      ==========      ===========

Valuation allowance for impairment
Balance at beginning of the year                                     $         -      $        -      $         -
Additions                                                                      -         210,000
Application of valuation allowance to permanently impaired MSRs                -        (210,000)               -
                                                                     -----------      ----------      -----------
     Balance at end of year                                          $         -      $        -      $         -
                                                                     ===========      ==========      ===========


NOTE 6 - 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:



                                        Years ended December 31,
                               ----------------------------------------
                                   2004          2003            2002
                               -----------     ---------      ---------
                                                     
Balance at beginning of year   $   972,899     $ 972,899      $       -

Provision for losses               114,606             -        972,899
Charge-offs                       (415,765)            -              -
                               -----------     ---------      ---------
Balance at end of year         $   671,740     $ 972,899      $ 972,899
                               ===========     =========      =========


Expenses applicable to foreclosed assets include the following:



                                                  Years ended December 31,
                                             --------------------------------
                                                2004       2003        2002
                                             ---------  ----------  ---------
                                                           
Net loss on sale of foreclosed real estate   $       -  $        -  $ (64,755)
Donation of property                            25,000
Provision for losses                           114,606           -    972,889
Operating expenses                               6,278      10,153     12,176
                                             ---------  ----------  ---------
                                             $ 145,884  $   10,153  $ 920,310
                                             =========  ==========  =========


                                       35



                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

NOTE 7 --PREMISES AND EQUIPMENT

A summary of the cost and accumulated depreciation of premises and equipment
follows:



                                          2004            2003
                                       -----------    -----------
                                                
Land                                   $ 1,368,077    $ 1,368,077
Building and improvements                5,048,190      4,619,671
Furniture and equipment                  3,137,954      2,574,424
Automobiles                                168,425        124,388
                                       -----------    -----------
Total cost                               9,722,647      8,656,560
Less accumulated depreciation            3,710,734      3,106,371
                                       -----------    -----------
Premises and equipment, net            $ 6,011,913    $ 5,580,189
                                       ===========    ===========


Certain bank facilities are leased under various operating leases. Rent expense
was $190,306, $197,157, and $211,200 in 2004, 2003 and 2002, respectively.
Future minimum rental commitments under noncancellable operating leases are as
follows:

                 
2005                $  253,860
2006                   276,360
2007                   210,360
2008                   208,560
2009                   208,560
Thereafter             550,320
                    ----------

Total               $1,708,020
                    ==========



During 2004, the Bank committed to build a new location at a total cost of
approximately $700,000. Approximately $260,000 of these costs are in buildings
and improvements at December 31, 2004.

                                       36



                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

NOTE 8 -- DEPOSITS

Deposits at December 31 consist of the following:



                                   2004                2003
                              -------------       -------------
                                            
Noninterest-bearing demand    $  35,552,503       $  29,270,007
Interest-bearing:
    Demand                       57,855,849          29,674,110
    Money market deposits        34,692,434          44,473,200
    Savings                      36,851,744          34,670,884
    Certificates of deposit     101,801,974          89,466,367
                              -------------       -------------
Total interest-bearing          231,202,001         198,284,561
                              -------------       -------------
Total deposits                $ 266,754,504       $ 227,554,568
                              =============       =============


The aggregate amount of time deposits in denominations of $100,000 or more at
December 31, 2004 and 2003 was $32,268,000 and $26,869,000, respectively.

At December 31, 2004, the scheduled maturities of time deposits are as follows
(in thousands):

        
2005       $  57,758
2006          19,785
2007          14,308
2008           4,672
2009           5,276
2010               3
           ---------
           $ 101,802
           =========



NOTE 9--SHORT TERM BORROWINGS AND LONG-TERM DEBT

The Bank's long-term debt consists of advances from the Federal Home Loan Bank
of Atlanta. The Bank classifies debt based upon original maturity, and does not
reclassify debt to short term status during its life. These include fixed rate,
adjustable rate, and convertible advances. Rates and maturities on these
advances are as follows:

                                       37


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002



                         Fixed   Adjustable     Fixed Rate
                          Rate      Rate       Convertible
                         -----   ----------    -----------
                                      
         2004

Highest rate             5.43%      2.97%         6.25%
Lowest rate              1.13%      2.97%         3.27%
Weighted average rate    3.98%      2.97%         4.68%
Matures through          2022       2005          2013

         2003

Highest rate             5.43%      1.96%         6.25%
Lowest rate              1.00%      1.96%         3.27%
Weighted average rate    3.94%      1.96%         5.15%
Matures through          2022       2005          2011


The Bank's fixed rate debt generally consists of advances with monthly interest
payments and principal due at maturity. The Bank's adjustable rate long-term
debt adjusts quarterly based upon a margin over the three month London Interbank
Offered Rate ("LIBOR"). The margin is set at 80 basis points. The debt has a
minimum interest of 0.80% and a maximum rate of 5.30%. The Bank's fixed rate,
convertible, long-term debt is callable by the issuer, after an initial period
ranging from six months to five years. These advances become callable in 2005.
Depending on the specific instrument, the instrument is callable either
continuously after the initial period (Bermuda option) or only at the date
ending the initial period (European). All advances have a prepayment penalty,
determined based upon prevailing interest rates. The contractual maturities of
long-term debt are as follows:



                                   December 31,                     December 31,
                                      2004                              2003
              -------------------------------------------------------------------
                 Fixed      Adjustable    Fixed Rate
                  Rate         Rate       Convertible      Total        Total
              -----------   -----------   -----------   -----------   -----------
                                                       
Due in 2005   $    74,000   $ 5,000,000   $         -   $ 5,074,000   $15,074,000
Due in 2006    12,000,000             -             -    12,000,000    12,000,000
Due in 2007     5,000,000             -             -     5,000,000     5,000,000
Due in 2008             -             -             -             -             -
Due in 2009    15,000,000             -             -    15,000,000             -
Thereafter      5,857,113             -    40,000,000    45,857,113    30,889,176
              -----------   -----------   -----------   -----------   -----------
              $37,931,113   $ 5,000,000   $40,000,000   $82,931,113   $62,963,176
              ===========   ===========   ===========   ===========   ===========


From time to time, the Bank also has daily advances outstanding, which are
classified as short-term debt. These advances are repayable at the Bank's option
at any time and reprice daily. These advances totaled $36,000,000 and
$31,000,000 at December 31, 2004 and 2003, respectively. The rate on the
short-term debt at December 31, 2004 was 2.44%.

                                       38


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

Under the terms of an Agreement for Advances and Security Agreement with Blanket
Floating Lien (the "Agreement"), the Company maintains eligible collateral
consisting of 1 - 4 unit residential first mortgage loans, discounted at 80% of
the unpaid principal balance, equal to 100% at December 31, 2004, of its total
outstanding long and short-term Federal Home Loan Bank advances. During 2003 and
2004, the Bank entered into addendums to the Agreement that expanded the types
of eligible collateral under the Agreement to include certain commercial real
estate and second mortgage loans. These loans are subject to eligibility rules,
and collateral values are discounted at 50% of the unpaid loan principal
balance. In addition, only 50% of total collateral for Federal Home Loan Bank
advances may consist of commercial real estate loans. In addition the Bank has
pledged its Federal Home Loan Bank stock of $6,054,300 and securities with a
carrying value of $72,194,000 as additional collateral for its advances. The
Bank is limited to total advances of up to 40% of assets or $202 million. The
Bank had sufficient collateral to borrow this amount.

In addition, the Bank had outstanding notes payable to the U.S. Treasury, which
are Federal treasury tax and loan deposits accepted by the Bank and remitted on
demand to the Federal Reserve Bank. At December 31, 2004 and 2003, such
borrowings were $454,210 and $191,285, respectively. The Bank pays interest on
these balances at a slight discount to the federal funds rate. The notes are
secured by investment securities with an amortized cost of approximately
$5,948,600 and $5,948,600 at December 31, 2004 and 2003, respectively.

In addition to the other short-term borrowings noted above, the Bank had
outstanding agreements to repurchase certain securities which had been sold.
These agreements are classified as short-term debt and are reflected as the cash
received in connection with the transaction. Generally these agreements mature
within three months. The Bank may be required to provide additional collateral
based on the fair value of these underlying securities. Total amounts
outstanding at December 31, 2004 were $78,850,000.

NOTE 10 -- INCOME TAXES

Allocation of federal and state income taxes between current and deferred
portions is as follows:



                                2004            2003             2002
                           -------------    -------------    -------------
                                                    
Current
    Federal                $   1,284,026    $     961,686    $   1,312,000
    State                         91,118           92,965          154,000
                           -------------    -------------    -------------
                               1,375,144        1,054,651        1,466,000
                           -------------    -------------    -------------

Deferred
    Federal                       57,973          (19,561)        (327,000)
    State                          7,877           (2,658)         (72,000)
                           -------------    -------------    -------------
                                  65,850          (22,219)        (399,000)
                           -------------    -------------    -------------
Total Income Tax Expense   $   1,440,994    $   1,032,432    $   1,067,000
                           =============    =============    =============


                                       39


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

The reasons for the differences between the statutory federal income tax rate
and the effective tax rates are summarized as follows:



                                                 2004                         2003                         2002
                                     --------------------------    -------------------------    -------------------------
                                                       Percent                    Percent of                   Percent of
                                                     of Pre Tax                    Pre Tax                      Pre Tax
                                        Amount         Income         Amount        Income         Amount        Income
                                     ------------    ----------    ------------   ----------    ------------   ----------
                                                                                             
Expected income tax expense at
   federal tax rate                  $  1,754,682      34.00%      $  1,182,632     34.00%      $  1,031,839     34.00%
State taxes net of federal benefit         65,337       1.27             59,603      1.70             61,666      2.00
Nondeductible expenses                      2,527       0.05             14,130      0.40             20,908      0.70
Nontaxable income                        (179,443)     (3.48)          (213,613)    (6.10)          (109,198)    (3.60)
Donation of property                     (202,109)     (3.92)                 -         -                  -         -
Other                                           -          -            (10,320)    (0.30)            61,785      2.00
                                     ------------      -----       ------------     -----       ------------     -----

                                     $  1,440,994      27.92%      $  1,032,432     29.70%      $  1,067,000     35.20%
                                     ============      =====       ============     =====       ============     =====


The net deferred tax assets in the accompanying balance sheets include the
following components:



                                                       2004          2003
                                                    -----------   -----------
                                                            
Deferred tax assets:
   Deferred fees                                    $     7,609   $     9,612
   Allowance for loan losses                          1,151,205       960,130
   Deferred compensation                                159,396       152,838
   Valuation allowance on foreclosed real estate        259,991       375,730
   Unrealized loss on investment
       securities available for sale                          -         1,612
                                                    -----------   -----------
       Total deferred tax assets                      1,578,201     1,499,922
                                                    -----------   -----------
Deferred tax liabilities:
   FHLB stock dividends                                 152,896       152,896
   Depreciation                                         406,797       261,057
   Unrealized gain on investment
       securities available for sale                     95,891             -
                                                    -----------   -----------
       Total deferred tax liabilities                   655,584       413,953
                                                    -----------   -----------
       Net deferred tax assets                      $   922,617   $ 1,085,969
                                                    ===========   ===========


Retained earnings at December 31, 2004, included approximately $1.2 million of
bad debt deductions allowed for federal income tax purposes (the "base year tax
reserve") for which no deferred income tax has been recognized. If, in the
future, this portion of retained earnings is used

                                       40


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

for any purpose other than to absorb bad debt losses, it would create income for
tax purposes only and income taxes would be imposed at the then prevailing
rates. The unrecorded income tax liability on the above amount was approximately
$463,000 at December 31, 2004.

Prior to January 1, 1996, the Bank computed its tax bad debt deduction based
upon the percentage of taxable income method as defined by the Internal Revenue
Code. The bad debt deduction allowable under this method equaled 8% of taxable
income determined without regard to the bad debt deduction and with certain
adjustments. The tax bad debt deduction differed from the bad debt expense used
for financial accounting purposes.

In August 1996, the Small Business Job Protection Act (the "Act") repealed the
percentage of taxable income method of accounting for bad debts effective for
years beginning after December 31, 1995. The Act required the Bank to change its
method of computing reserves for bad debts to the experience method. This method
is available to banks with assets less than $500 million and allows the Bank to
maintain a tax reserve for bad debts and to take bad debt deductions for
reasonable additions to the reserve. As a result of this change, the Bank has to
recapture into income a portion of its existing tax bad debt reserve. This
recapture occurs ratably over a six-taxable year period, beginning with the 1998
tax year. For financial reporting purposes, this recapture does not result in
additional tax expense as the Bank adequately provided deferred taxes in prior
years. Furthermore, this change does not require the Bank to recapture its base
year tax reserve.

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

The Bank is party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments are commitments to extend credit. These instruments may,
but do not necessarily, involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance sheets. The
Bank's exposure to credit loss in the event of nonperformance by the other party
to the financial instrument is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments as it
does for on-balance-sheet loans receivable.

As of December 31, 2004 and 2003, in addition to the undisbursed portion of
loans receivable of approximately $25,294,533 and $11,568,404, respectively, the
Bank had outstanding loan commitments approximating $578,000 and $2,871,000,
respectively.

Standby letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. These guarantees
are issued primarily to support construction borrowing arrangements. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers. The Bank holds cash or a
secured interest in real estate as collateral to support those commitments for
which collateral is deemed necessary. Standby letters of credit outstanding
amounted to $8,998,000 and $9,538,000 at December 31, 2004 and 2003,
respectively. In addition to the commitments noted above, customers had
approximately $39,200,000 and $28,600,000 available under lines of credit at
December 31, 2004 and 2003, respectively.

                                       41


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

NOTE 12 -- STOCK OPTION AND INCENTIVE PLAN

The Company had a stock option and incentive plan to attract and retain
personnel and provide incentive to employees to promote the success of the
business. At January 31, 2005, the Company's incentive stock option plan which
was enacted in 1995 expired. All shares authorized and available under this plan
were awarded as of December 31, 2004. In addition, the Company had a stock
option plan for its non-employee directors, which has expired. The exercise
price for options granted under either plan is set at the discretion of the
Board of Directors, but is not less than the market value of the shares as of
the date of grant. An option's maximum term is ten years and the options
generally vest immediately upon issuance.

The following tables summarize activity in the plan:



                                             2004                      2003                     2002
                                     --------------------      --------------------     --------------------
                                                 Weighted                 Weighted                 Weighted
                                                  Average                 Average                  Average
                                                 Exercise                 Exercise                 Exercise
                                     Shares        Price       Shares      Price         Shares     Price
                                     -------    ---------      -------    ---------     -------    ---------
                                                                                 
Outstanding at beginning of year     154,194    $   16.81      146,402    $   14.31     149,519    $   12.66
Granted                               57,971        34.52       25,223        27.64      18,893        21.11
Exercised                            (30,804)        7.84      (17,430)       11.49     (21,117)        8.61
Forfeitures                           (2,079)      (19.27)           -            -        (893)       17.51
                                     -------                   -------                  -------

Outstanding at end of year           179,281    $   24.12      154,194    $   16.81     146,402    $   14.31
                                     =======                   =======                  =======


Option amounts and exercise prices have been adjusted retroactively to give
effect to the 3 for 2 stock split. Options outstanding are all currently
exercisable and are summarized as follows:



                    Weighted
                     Average     Weighted
      Number        Remaining    Average
   Outstanding     Contractual   Exercise
December 31, 2004      Life       Price
- -----------------  -----------   --------
                           
     9,902           1 years     $  6.85
    26,896           4 years       16.15
    11,244           5 years       17.73
    20,754           6 years       17.77
    20,360           7 years       17.79
    11,460           8 years       26.00
    20,696           9 years       28.67
    57,969          10 years       34.52
   -------
   179,281                         24.12
   =======


                                       42


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

NOTE 13 -- EMPLOYEE BENEFIT PLANS

The Bank has an Employee Stock Ownership Plan (ESOP) which covers substantially
all of the Bank's employees. The ESOP acquires stock of the Bank's parent
corporation, Tri-County Financial Corporation. The Company accounts for its ESOP
in accordance with AICPA Statement of Position 93-6. Accordingly, unencumbered
shares held by the ESOP are treated as outstanding in computing earnings per
share. Shares issued to the ESOP but pledged as collateral for loans obtained to
provide funds to acquire the shares are not treated as outstanding in computing
earnings per share. Dividends on ESOP shares are recorded as a reduction of
retained earnings. The ESOP may acquire in the open market up to 195,700 shares.
At December 31, 2004, the Plan owned 81,149 shares.

The Company also has a 401(k) plan. The Bank matches a portion of the employee
contributions. This ratio is determined annually by the Board of Directors.
During 2002 one-half of an employee's first 6% deferral was matched. In 2003 and
2004, the Company matched one-half of the employee's first 8% deferral. All
employees who have completed one year of service and have reached the age of 21
are covered under this defined contribution plan. Contributions are determined
at the discretion of management and the Board of Directors. For the years ended
December 31, 2004, 2003, and 2002, the Company charged $89,000, $81,000, and
$108,000, respectively, against earnings to fund the Plans.

In addition, the Bank has a separate nonqualified retirement plan for
non-employee directors. Directors are eligible for a maximum benefit of $3,500 a
year for ten years following retirement from the Board of Community Bank of
Tri-County. The maximum benefit is earned at 15 years of service as a
non-employee director. Full vesting occurs after 2 years of service. Expense
recorded for this plan was $(18,000), $24,000, and $11,000 for the years ending
December 31, 2004, 2003, and 2002, respectively.

NOTE 14 -- REGULATORY MATTERS

The Company and the Bank are subject to various regulatory capital requirements
administered by the federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possible additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's and the Bank's financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the table below) of tangible and core capital (as defined in the
regulations) to total adjusted assets (as defined), and of risk-based capital
(as defined) to risk-weighted assets (as defined). Management believes, as of
December 31,

                                       43


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

2004, that the Company and the Bank meet all capital adequacy requirements to
which they are subject.

As of December 31, 2004, the most recent notification from the Federal Reserve
categorized the Bank as well-capitalized under the regulatory framework for
prompt corrective action. To be categorized as well-capitalized, the Bank must
maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios
as set forth in the table. There are no conditions or events since that
notification that management believes have changed the Company's or the Bank's
category. The Company's and the Bank's actual capital amounts and ratios for
2004 and 2003 are presented in the tables below:



                                                                                      To be considered well
                                                                                        capitalized under
                                                                Required for capital         prompt
                                                   Actual        adequacy purposes      corrective action
                                               --------------   --------------------  ---------------------
                                                                                 
At December 31, 2004
  Total capital (to risk weighted assets)
      The Company                              $41,368  11.89%    $27,842    8.00%
      The Bank                                 $40,605  11.67%    $27,826    8.00%      $34,782    10.00%

Tier 1 capital (to risk weighted assets)
      The Company                              $38,310  11.01%    $13,921    4.00%
      The Bank                                 $37,548  10.80%    $13,913    4.00%      $20,869     6.00%

Tier 1 capital (to average assets)
      The Company                              $38,310   9.29%    $16,494    4.00%
      The Bank                                 $37,548   9.13%    $16,454    4.00%      $20,568     5.00%

At December 31, 2003
  Total capital (to risk weighted assets)
      The Company                              $30,488  12.20%    $19,992    8.00%
      The Bank                                 $29,193  11.73%    $19,912    8.00%      $24,890    10.00%

Tier 1 capital (to risk weighted assets)
      The Company                              $27,915  11.17%     $9,996    4.00%
      The Bank                                 $26,630  10.70%     $9,956    4.00%      $14,934     6.00%

Tier 1 capital (to average assets)
      The Company                              $27,915   8.04%    $13,881    4.00%
      The Bank                                 $26,630   7.70%    $13,841    4.00%      $17,302     5.00%


NOTE 15 -- 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 necessarily 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

                                       44

                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

cash flows. Furthermore, the fair values disclosed should not be interpreted as
the aggregate current value of the Company.



                                                  December 31, 2004                December 31, 2003
                                          -------------------------------   -------------------------------
                                                                               Estimated        Estimated
                                             Carrying           Fair           Carrying           Fair
                                              Amount           Value            Amount            Value
                                          --------------   --------------   --------------   --------------
                                                                                 
Assets:
  Cash and cash equivalents               $    6,795,615   $    6,795,615   $    3,257,466   $    3,257,466
  Interest bearing deposits with banks        10,920,164       10,920,164        8,912,332        8,912,332
  Investment securities and stock in FHLB
    and FRB                                  181,834,426      180,758,025      104,672,099      104,281,498
  Loans receivable, net                      289,325,051      292,988,000      217,740,153      226,213,642
  Loans held for sale                                  -                -          474,880          482,003

Liabilities:
  Savings, NOW, and money market accounts $  164,952,530   $  164,952,530   $  138,088,201   $  138,088,201
  Time certificates                          101,801,974      101,448,140       89,466,367       91,095,780
  Long-term debt and other borrowed funds    198,235,323      199,752,029       94,242,461       97,940,064


At December 31, 2004 and 2003, the Company had outstanding loan commitments and
standby letters of credit of $9.0 million and $12.4 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.

Mortgage-Backed Securities - Fair values are based on quoted market prices or
dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.

Loans Receivable and Loans Held for Sale - 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.

                                       45


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

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.

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

The fair value estimates presented herein are based on pertinent information
available to management as of December 31, 2004 and 2003. Although management is
not aware of any factors that would significantly affect the estimated fair
value amounts, such amounts have not been comprehensively revalued for purposes
of these financial statements since that date and, therefore, current estimates
of fair value may differ significantly from the amount presented herein.

NOTE 16-- GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED
DEBENTURES

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 with an interest rate of 4.22% 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 1's common securities, to
purchase $7.2 million of the Company's junior subordinated debentures. The
interest rate on the debentures and the trust preferred securities is variable
and adjusts quarterly. The Company has, through various contractual
arrangements, fully and unconditionally guaranteed all of Capital Trust I's
obligations with respect to the capital securities. These debentures qualify as
Tier I capital and are presented in the Consolidated Balance Sheets as
"Guaranteed Preferred Beneficial Interests in Junior Subordinated Debentures."
Both the capital securities of Capital Trust I and the junior subordinated
debentures are scheduled to mature on July 22, 2034, unless called by the
Company not earlier than July 22, 2009.

Costs associated with the issuance of the trust-preferred securities were less
than $10,000 and were expensed as period costs.

                                       46


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

NOTE 17--CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY

Financial information pertaining only to Tri-County Financial Corporation is as
follows:

Balance Sheets



                                                                                       December 31,
                                                                              ------------------------------
                                                                                   2004             2003
                                                                              -------------    -------------
                                                                                         
Assets
Cash-noninterest bearing                                                      $    269,072     $    298,364
Cash-interest bearing                                                              181,516          255,108
Investment securities available for sale                                            34,666           33,152
Investment in wholly owned subsidiaries                                         37,951,438       26,627,098
Other assets                                                                       194,074          957,544
                                                                              ------------     ------------

                                                                              $ 38,630,766     $ 28,171,266
                                                                              ============     ============

Liabilities and Stockholders' Equity
Current liabilities                                                           $    290,191     $    259,356
Guaranteed preferred beneficial interest in junior Subordinated Debentures       7,217,000                -
                                                                              ------------     ------------
Total liabilities                                                                7,507,191          259,356

Stockholders' equity
   Common stock                                                                     11,469            7,533
   Surplus                                                                       8,252,152        7,975,036
   Retained earnings                                                            22,833,112       20,071,630
   Total accumulated other comprehensive income (loss)                             186,140           (3,130)
   Unearned ESOP shares                                                           (159,298)        (139,159)
                                                                              ------------     ------------
                                                                                31,123,575       27,911,910

                                                                              $ 38,630,766     $ 28,171,266
                                                                              ============     ============


Condensed Statements of Income:



                                                               Year Ended December 31,
                                                    --------------------------------------------
                                                        2004            2003            2002
                                                    ------------    ------------    ------------
                                                                           
Dividends from subsidiary                           $         -     $   500,000     $ 1,000,000
Interest income                                           6,349          10,356          18,644
Interest expense                                        140,341               -               -
                                                    -----------     -----------     -----------
Net interest Income                                    (133,992)        510,356       1,018,644
Miscellaneous expenses                                 (166,364)       (174,595)       (154,995)
                                                    -----------     -----------     -----------

Income before income taxes and equity in               (300,356)        335,761         863,649
   undistributed net income of subsidiary
Federal and state income tax benefit                    102,120          55,841          46,000

Equity in undistributed net income of subsidiary      3,918,070       2,054,296       1,058,172
                                                    -----------     -----------     -----------
NET INCOME                                          $ 3,719,834     $ 2,445,898     $ 1,967,821
                                                    ===========     ===========     ===========


                                       47


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

Condensed Statements of Cash Flows:



                                                                        Year Ended December 31,
                                                             --------------------------------------------
                                                                 2004            2003            2002
                                                             ------------    ------------    ------------
                                                                                    
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                 $ 3,719,834     $ 2,445,898     $ 1,967,821
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Equity in undistributed earnings of subsidiary            (3,918,070)     (2,054,296)     (1,058,172)
    Decrease (Increase) in other assets                          763,470         (72,560)       (147,776)
    Increase in current liabilities                               30,835           5,008          14,222
                                                             -----------     -----------     -----------

      Net cash provided by operating activities                  596,069         324,050         730,095
                                                             -----------     -----------     -----------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of investment securities available for sale            (1,514)           (714)              -
  Maturity or redemption of investment securities
    available for sale                                                 -               -          79,146
                                                             -----------     -----------     -----------

      Net cash provided (used) by investing activities            (1,514)           (714)         79,146
                                                             -----------     -----------     -----------

CASH FLOWS FROM FINANCING ACTIVITIES:

  Proceeds from guaranteed preferred beneficial interests
    in Junior Subordinated Securities                          7,217,000               -               -
  Downstream of capital to subsidiary                         (7,000,000)
  Investment in trust subsidiary                                (217,000)
  Dividends paid                                                (541,633)       (422,361)       (385,129)
  Exercise of stock options                                      248,661         218,713         161,004
  Net change in ESOP loan                                          8,506          63,435          48,000
  Redemption of common stock                                    (412,973)       (769,720)       (443,568)
                                                             -----------     -----------     -----------

      Net cash used in financing activities                     (697,439)       (909,933)       (619,693)
                                                             -----------     -----------     -----------

INCREASE (DECREASE) IN CASH                                     (102,884)       (586,597)        276,927

CASH AT BEGINNING OF YEAR                                        553,472       1,140,069         950,521
                                                             -----------     -----------     -----------

CASH AT END OF YEAR                                          $   450,588     $   553,472     $ 1,227,448
                                                             ===========     ===========     ===========


                                       48


                        TRI-COUNTY FINANCIAL CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2004, 2003, AND 2002

NOTE 18 --QUARTERLY FINANCIAL RESULTS (UNAUDITED)

      A summary of selected consolidated quarterly financial data for the two
years ended December 31, 2004 is reported as follows:



                                          2004           2004           2004          2004
                                         Fourth          Third         Second         First
                                         Quarter        Quarter       Quarter        Quarter
                                       ----------     ----------     ----------     ----------
                                                                        
Interest and dividend income           $6,455,056     $5,943,358     $4,621,114     $4,593,811
Interest Expense                        2,560,878      2,086,208      1,602,035      1,564,289
                                       ----------     ----------     ----------     ----------
Net interest income                     3,894,178      3,857,150      3,019,079      3,029,522
Provision for loan loss                   136,028        232,996         13,772         70,202
                                       ----------     ----------     ----------     ----------
Net interest income after provision     3,758,150      3,624,154      3,005,307      2,959,320

Noninterest income                        422,187        302,372        461,529        396,228
Noninterest expense                     2,747,623      2,307,562      2,317,511      2,395,723

Income before income taxes              1,432,714      1,618,964      1,149,325        959,825
Provision for income taxes                486,960        537,658        345,749         70,627
 Net income                            $  945,754     $1,081,306     $  803,576     $  889,198
                                       ==========     ==========     ==========     ==========

Earnings per common share

Basic                                  $     0.81     $     0.94     $     0.70     $     0.79

Diluted                                $     0.78     $     0.90     $     0.67     $     0.75



                                          2003           2003           2003           2003
                                         Fourth          Third         Second          First
                                         Quarter        Quarter        Quarter        Quarter
                                       ----------     ----------     ----------     ----------
                                                                        
Interest and dividend income           $4,112,111     $4,210,624     $3,923,796     $3,918,384
Interest Expense                        1,524,537      1,431,824      1,378,744      1,361,294
                                       ----------     ----------     ----------     ----------
Net interest income                     2,587,574      2,778,800      2,545,052      2,557,090
Provision for loan loss                   171,623         31,013        108,941          5,386
                                       ----------     ----------     ----------     ----------
Net interest income after provision     2,415,951      2,747,787      2,436,111      2,551,704

Noninterest income                        580,039        332,762        453,793        387,954
Noninterest expense                     2,163,566      2,190,164      2,125,494      1,948,547

Income before income taxes                832,424        890,385        764,410        991,111
Provision for income taxes                133,667        293,550        255,215        350,000
 Net income                            $  698,757     $  596,835     $  509,195     $  641,111
                                       ==========     ==========     ==========     ==========

Earnings per common share

Basic                                  $     0.62     $     0.53     $     0.45     $     0.56

Diluted                                $     0.58     $     0.50     $     0.43     $     0.53


All per share amounts have been adjusted for the 3 for 2 stock split which
occurred in December 2004.

                                       49

EX-21

                                                                               .
                                                                               .
                                                                               .

                                                                      EXHIBIT 21

                         SUBSIDIARIES OF THE REGISTRANT

PARENT

Tri-County Financial Corporation



                                  PERCENTAGE       STATE OF
                                     OWNED      INCORPORATION
                                  ----------    -------------
                                          
SUBSIDIARY
Community Bank of Tri-County         100%         Maryland

Tri-County Capital Trust I           100%         Delaware

SUBSIDIARIES OF COMMUNITY
 BANK OF TRI-COUNTY

Community Mortgage Corporation
 of Tri-County                       100%         Maryland

Tri-County Investment
 Corporation                         100%         Delaware

EX-23

                                                                      EXHIBIT 23



                        [LETTERHEAD OF STEGMAN & COMPANY]



              CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNT FIRM

         We hereby consent to the incorporation of our report dated March 21,
2005, relating to the consolidated financial statements of Tri-County Financial
Corporation, by reference in Registration Statements Nos. 33-97174, 333-79237
and 333-70800, each of Form S-8, and in the Annual Report on Form 10-K of
Tri-County Financial Corporation, for the year ended December 31, 2004.


                                                           /s/ Stegman & Company

Baltimore, Maryland
March 28, 2005

EX-31.1

                                                                    EXHIBIT 31.1

                                  CERTIFICATION

I, Michael L. Middleton, President and Chief Executive Officer of Tri-County
Financial Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of Tri-County Financial
Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.

Date: March 29, 2005

                                         /s/ Michael L. Middleton
                                         ---------------------------------------
                                         Michael L. Middleton
                                         President and Chief Executive Officer
                                         (Principal Executive Officer)

EX-31.2

                                                                    EXHIBIT 31.2

                                  CERTIFICATION

I, William J. Pasenelli, Chief Financial and Accounting Officer of Tri-County
Financial Corporation, certify that:

1. I have reviewed this annual report on Form 10-K of Tri-County Financial
Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;

(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures as of the end of the period covered by
this report based on such evaluation; and

(c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.

Date: March 29, 2005

                                         /s/ William J. Pasenelli
                                         ---------------------------------
                                         William J. Pasenelli
                                         Chief Financial and Accounting Officer
                                         (Principal Financial Officer)

EX-32

                                                                      EXHIBIT 32

                CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350
                    AS ADOPTED PURSUANT TO SECTION 906 OF THE
                           SARBANES-OXLEY ACT OF 2002

The undersigned executive officers of Tri County Financial Corporation (the
"Registrant") hereby certify that this Annual Report on Form 10-K for the year
ended December 31, 2004 (the "Report") fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Registrant.

                                           By: /s/ Michael L. Middleton
                                               ---------------------------------
                                               Name:  Michael L. Middleton
                                               Title: President and
                                                      Chief Executive Officer

                                           By: /s/ William J. Pasenelli
                                               ---------------------------------
                                               Name:  William J. Pasenelli
                                               Title: Vice President and
                                                      Chief Financial Officer

Date: March 29, 2005