##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended September 30, 2005
 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 Number 0-18279
 Tri-County Financial Corporation
  Maryland
    
    52-1652138(State of other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 3035 Leonardtown Road, Waldorf, Maryland
    
    20601(Address of principal executive offices)
    
    (Zip Code)
 
 
 þ o
 o þ
 o þ




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TRI-COUNTY
FINANCIAL CORPORATION  FORM 10-Q
 INDEX
 PagePART I  FINANCIAL INFORMATIONItem 1
 Financial Statements (Unaudited)Consolidated Balance Sheets  September 30, 2005
and December 31, 2004
    
    3Consolidated
Statements of Income and Comprehensive Income 
Three and Nine Months Ended September 30, 2005 and 2004
    
    4 - 5Consolidated Statements of Cash Flows  Nine Months
Ended September 30, 2005 and 2004
    
    6 - 7Notes to Consolidated Financial Statements
    
    8 - 11Item 2 Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    11 - 18Item 3
  Quantitative and Qualitative Disclosures about Market Risk
    
    18Item 4  Controls and Procedures
    
    18-19PART II  OTHER INFORMATIONItem 1  Legal Proceedings
    
    19Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    19Item 3  Defaults Upon Senior Securities
    
    19Item 4  Submission of Matters to a Vote of Security Holders
    
    19Item 5
 Other Information
    
    19Item 6  Exhibits
    
    19SIGNATURES
    
    20EX-10.1 AMENDMENT TO EMPLOYMENT AGEEMENT WITH C. MARIE BROWNEX-10.2 AMENDMENT TO EMPLOYMENT AGREEMENT WITH GREGORY C. COCKERHAMEX-10.3 AMENDMENT TO EMPLOYMENT AGREEMENT WITH WILLIAM J. PASENELLIEX-31 SECTION 302 CERTIFICATION OF CEO AND CFOEX-32 SECTION 906 CERTIFICATION OF CEO AND CFO
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##### Table of Contents



PART I FINANCIAL STATEMENTS
 
 ITEM I. FINANCIAL STATEMENTS
 TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 2005 AND DECEMBER 31, 2004
(UNAUDITIED)
 September 30, 2005
    
    
    December 31, 2004ASSETSCash and due from banks
    
    $
    4,487,454
    
    
    $
    6,018,096Federal funds sold
    
    
    383,705
    
    
    
    777,519Interest-bearing deposits with banks
    
    
    14,486,622
    
    
    
    10,920,164Securities available for sale
    
    
    7,996,391
    
    
    
    12,948,971Securities held to maturity  at amortized cost
    
    
    128,093,569
    
    
    
    162,741,155Federal Home Loan Bank and Federal Reserve Bank stock  at cost
    
    
    6,538,200
    
    
    
    6,144,300Loans receivable  net of allowance for loan losses
of $3,258,582 and $3,057,558, respectively
    
    
    348,652,999
    
    
    
    289,325,051Premises and equipment, net
    
    
    6,675,367
    
    
    
    6,011,913Foreclosed real estate
    
    
    475,561
    
    
    
    475,561Accrued interest receivable
    
    
    2,191,972
    
    
    
    1,870,135Investment in bank owned life insurance
    
    
    6,369,909
    
    
    
    6,182,955Other assets
    
    
    2,370,749
    
    
    
    2,351,303TOTAL ASSETS
    
    $
    528,722,498
    
    
    $
    505,767,123LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Noninterest-bearing deposits
    
    $
    40,288,440
    
    
    $
    35,552,503Interest-bearing deposits
    
    
    291,905,297
    
    
    
    231,202,001Total deposits
    
    
    332,193,737
    
    
    
    266,754,504Short-term borrowings
    
    
    50,496,120
    
    
    
    115,304,210Long-term debt
    
    
    97,832,221
    
    
    
    82,931,113Guaranteed preferred beneficial interest in junior subordinated
debentures
    
    
    12,000,000
    
    
    
    7,000,000Accrued expenses and other liabilities
    
    
    3,035,485
    
    
    
    2,653,721Total liabilities
    
    
    495,557,563
    
    
    
    474,643,548STOCKHOLDERS EQUITY:Common stock
 par value $.01; authorized  15,000,000 shares;
issued and outstanding 1,155,925 and 1,146,864 shares, respectively
    
    
    11,559
    
    
    
    11,469Additional paid in capital
    
    
    8,447,202
    
    
    
    8,252,152Retained earnings
    
    
    24,763,828
    
    
    
    22,833,112Accumulated other comprehensive income
    
    
    69,627
    
    
    
    186,140Unearned ESOP shares
    
    
    (127,281
    )
    
    
    (159,298
    )Total stockholders equity
    
    
    33,164,935
    
    
    
    31,123,575TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    528,722,498
    
    
    $
    505,767,123
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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004INTEREST INCOME:Interest and fees on loans
    
    $
    5,765,253
    
    
    $
    4,182,698
    
    
    $
    16,081,572
    
    
    $
    11,549,192Taxable interest and dividends
on investment
securities
    
    
    1,644,284
    
    
    
    1,725,835
    
    
    
    5,147,636
    
    
    
    3,592,995Interest on deposits with banks
    
    
    24,165
    
    
    
    7,321
    
    
    
    53,401
    
    
    
    16,096Total interest income
    
    
    7,433,702
    
    
    
    5,915,854
    
    
    
    21,282,609
    
    
    
    15,158,283INTEREST EXPENSE:Interest on deposits
    
    
    1,767,789
    
    
    
    842,329
    
    
    
    4,268,209
    
    
    
    2,290,241Interest on short term borrowings
    
    
    553,415
    
    
    
    315,333
    
    
    
    2,192,712
    
    
    
    494,574Interest on long term debt
    
    
    1,245,426
    
    
    
    928,546
    
    
    
    3,284,245
    
    
    
    2,467,717Total interest expense
    
    
    3,566,630
    
    
    
    2,086,208
    
    
    
    9,745,166
    
    
    
    5,252,532NET INTEREST INCOME
    
    
    3,867,072
    
    
    
    3,829,646
    
    
    
    11,537,443
    
    
    
    9,905,751PROVISION FOR LOAN LOSSES
    
    
    11,183
    
    
    
    232,996
    
    
    
    200,307
    
    
    
    316,970NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    3,855,889
    
    
    
    3,596,650
    
    
    
    11,337,136
    
    
    
    9,588,781
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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004NONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    $
    68,666
    
    
    $
    67,071
    
    
    $
    193,546
    
    
    $
    215,023Net gain on sale of loans held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,404Net gain on the sale of foreclosed property
    
    
    
    
    
    
    
    
    
    
    39,756
    
    
    
    Income from bank owned life insurance
    
    
    63,624
    
    
    
    73,848
    
    
    
    186,954
    
    
    
    221,544Loss on sale of investment securities
    
    
    
    
    
    
    (99,371
    )
    
    
    (14,581
    )
    
    
    (126,875
    )Service charges
    
    
    334,360
    
    
    
    280,078
    
    
    
    896,110
    
    
    
    820,783Other income
    
    
    
    
    
    
    8,250
    
    
    
    
    
    
    
    8,250Total noninterest income
    
    
    466,650
    
    
    
    329,876
    
    
    
    1,301,785
    
    
    
    1,160,129NONINTEREST EXPENSE:Salary and employee benefits
    
    
    1,547,190
    
    
    
    1,305,832
    
    
    
    4,369,643
    
    
    
    3,921,756Occupancy
    
    
    309,796
    
    
    
    185,484
    
    
    
    835,254
    
    
    
    575,624Advertising
    
    
    112,982
    
    
    
    128,084
    
    
    
    318,552
    
    
    
    368,314Data processing
    
    
    152,285
    
    
    
    122,348
    
    
    
    475,647
    
    
    
    411,568Legal and professional fees
    
    
    201,260
    
    
    
    66,220
    
    
    
    450,428
    
    
    
    141,492Depreciation of furniture, fixtures, and equipment
    
    
    118,161
    
    
    
    107,700
    
    
    
    314,511
    
    
    
    287,900Telephone communications
    
    
    12,381
    
    
    
    26,961
    
    
    
    65,783
    
    
    
    84,416Valuation allowance on foreclosed real estate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    147,203ATM expenses
    
    
    61,346
    
    
    
    87,345
    
    
    
    211,227
    
    
    
    251,218Office supplies
    
    
    33,567
    
    
    
    43,572
    
    
    
    101,518
    
    
    
    105,337Office equipment
    
    
    10,010
    
    
    
    23,120
    
    
    
    39,686
    
    
    
    68,805Other
    
    
    210,586
    
    
    
    210,896
    
    
    
    725,944
    
    
    
    657,163Total noninterest expense
    
    
    2,769,564
    
    
    
    2,307,562
    
    
    
    7,908,193
    
    
    
    7,020,796INCOME BEFORE INCOME TAXES
    
    
    1,552,975
    
    
    
    1,618,964
    
    
    
    4,730,728
    
    
    
    3,728,114Income tax expense
    
    
    562,908
    
    
    
    537,658
    
    
    
    1,637,211
    
    
    
    954,034NET INCOME
    
    
    990,067
    
    
    
    1,081,306
    
    
    
    3,093,517
    
    
    
    2,774,080OTHER COMPREHENSIVE INCOME NET OF TAXNet unrealized holding (losses) gains arising during
period
    
    
    (33,443
    )
    
    
    481,926
    
    
    
    (125,462
    )
    
    
    (33,482
    )Loss:
Reclassification adjustment for losses (net of taxes of $0,$38,377,$5,631 and $48,999)
    
    
    
    
    
    
    60,994
    
    
    
    8,950
    
    
    
    77,876COMPREHENSIVE INCOME
    
    $
    956,624
    
    
    $
    1,624,226
    
    
    $
    2,977,005
    
    
    $
    2,818,474EARNINGS PER COMMON SHAREBasic
    
    $
    0.86
    
    
    $
    0.94
    
    
    $
    2.68
    
    
    $
    2.42Diluted
    
    
    0.80
    
    
    
    0.90
    
    
    
    2.51
    
    
    
    2.32
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TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
 Nine Months EndedSeptember 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    3,093,517
    
    
    $
    2,774,080Adjustments to reconcile net income to net
cash provided by operating activities:Valuation allowance on foreclosed real estate
    
    
    
    
    
    
    147,203Provision for loan losses
    
    
    200,307
    
    
    
    316,970Loss on sales of investment securities
    
    
    14,581
    
    
    
    126,875Depreciation and amortization
    
    
    594,906
    
    
    
    450,764Net amortization of premium/discount on investment securities
    
    
    288,210
    
    
    
    189,666Increase in cash surrender of bank owned life insurance
    
    
    (186,954
    )
    
    
    (147,696
    )Deferred income tax benefit
    
    
    (111,680
    )
    
    
    (37,788
    )Increase in accrued interest receivable
    
    
    (321,837
    )
    
    
    (468,852
    )(Decrease) Increase in deferred loan fees
    
    
    (210,792
    )
    
    
    65,278Increase in accrued expenses and other liabilities
    
    
    381,764
    
    
    
    72,716Decrease in other assets
    
    
    112,499
    
    
    
    620,292Gain on sales of loans held for sale
    
    
    
    
    
    
    (21,404
    )Proceeds from sale of loans held for sale
    
    
    
    
    
    
    496,284Net cash provided by operating activities
    
    
    3,854,521
    
    
    
    4,584,388CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investment securities available for sale
    
    
    (8,439
    )
    
    
    (27,914,392
    )Proceeds from sale, redemption or principal payments
of investment securities available for sale
    
    
    4,754,373
    
    
    
    48,498,352Purchase of investment securities held to maturity
    
    
    (25,749,248
    )
    
    
    (132,068,945
    )Proceeds from maturities or principal payments
of investment securities held to maturity
    
    
    60,124,155
    
    
    
    25,716,946Net purchase of FHLB and Federal Reserve stock
    
    
    (393,900
    )
    
    
    (1,335,150
    )Loans originated or purchased
    
    
    (157,502,581
    )
    
    
    (148,832,804
    )Principal collected on loans
    
    
    98,185,118
    
    
    
    90,749,534Purchase of premises and equipment
    
    
    (1,258,360
    )
    
    
    (685,956
    )Proceeds from foreclosed real estate
    
    
    39,756
    
    
    
    25,000Net cash used in investing activities
    
    
    (21,809,126
    )
    
    
    (145,847,415
    )
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##### Table of Contents



TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
 Nine Months EndedSeptember 30,2005
    
    
    2004CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    $
    65,439,233
    
    
    $
    29,018,383Proceeds from long-term borrowings
    
    
    20,000,000
    
    
    
    25,000,000Payments of long-term borrowings
    
    
    (5,098,892
    )
    
    
    (10,111,929
    )Trust preferred debentures
    
    
    5,000,000
    
    
    
    7,000,000Net (decrease) increase in short term borrowings
    
    
    (64,808,090
    )
    
    
    91,508,528Exercise of stock options
    
    
    166,815
    
    
    
    223,474Net change in unearned ESOP shares
    
    
    60,395
    
    
    
    52,532Dividends paid
    
    
    (930,669
    )
    
    
    (541,633
    )Redemption of common stock
    
    
    (232,185
    )
    
    
    (408,827
    )Net cash provided by financing activities
    
    
    19,596,607
    
    
    
    141,740,528INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    1,642,002
    
    
    
    477,501CASH AND CASH EQUIVALENTS  JANUARY 1
    
    
    17,715,779
    
    
    
    12,169,798CASH AND CASH EQUIVALENTS  SEPTEMBER 30
    
    $
    19,357,781
    
    
    $
    12,647,299SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the nine months for:Interest
    
    $
    9,693,637
    
    
    $
    5,305,519Income taxes
    
    $
    1,447,500
    
    
    $
    437,500
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 1.
    
    BASIS OF PRESENTATIONGeneral- The consolidated financial statements of Tri-County Financial Corporation (the
Company) and its wholly owned subsidiary, Community Bank of Tri-County (the Bank)
included herein are unaudited; however, they reflect all adjustments consisting only of
normal recurring accruals that, in the opinion of Management, are necessary to present
fairly the Companys financial condition, results of operations, and cash flows for the
periods presented. Certain information and note disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The Company believes that the
disclosures are adequate to make the information presented not misleading. The balances as
of December 31, 2004 have been derived from audited financial statements. There have been no
significant changes to the Companys accounting policies as disclosed in the Companys 2004
Annual Report. The results of operations for the three and nine months ended September 30,
2005 are not necessarily indicative of the results of operations to be expected for the
remainder of the year or any other period. Certain previously reported amounts have been
restated to conform to the 2005 presentation.These consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes included in the Companys 2004 Annual Report.2.
    
    NATURE OF BUSINESSThe Company, through its bank subsidiary, provides financial services primarily in southern
Maryland. The primary financial services include real estate, commercial and consumer
lending, as well as traditional demand deposits and savings products.3.
    
    INCOME TAXESThe Company uses the liability method of accounting for income taxes as required by SFAS No.
109, Accounting for Income Taxes. Under the liability method, deferred-tax assets and
liabilities are determined based on differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities (i.e., temporary differences)
and are measured at the enacted rates that will be in effect when these differences reverse.4.
    
    EARNINGS PER SHAREBasic earnings per common share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted earnings per common share is
computed by dividing net income by the weighted average number of common shares outstanding
during the period, including any potential dilutive common shares outstanding, such as
options and warrants. As of September 30, 2005, there were no shares excluded from the
diluted earnings per share computation because the average market price exceeded the
exercise price of all outstanding options. Basic and diluted earnings per share have been
computed based on weighted-average common and common equivalent shares outstanding as
follows:
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Basic
    
    
    1,155,926
    
    
    
    1,150,308
    
    
    
    1,154,806
    
    
    
    1,146,044Diluted
    
    
    1,230,351
    
    
    
    1,200,576
    
    
    
    1,230,874
    
    
    
    1,197,512
 Share and per share data have been retroactively adjusted to effect a three for two common
stock split declared on October 22, 2004 as if it had occurred on January 1, 2004.
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5. STOCKBASED COMPENSATIONStatement 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.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 January 1, 2006. 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 January 1, 2006. 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
January 1, 2006 over the remaining requisite service period of the awards. The compensation
expense to be recognized for the non-vested 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 below.Under the terms of the incentive stock plan, management will be compensated for performance
based upon a percentage of net income after tax but before incentive accrual. This
percentage will be determined by the Board of Directors annually. For 2005, the total
incentive payout in both cash and stock based compensation will be based upon 14% of net
income. Total cash incentive compensation will be capped at approximately $300,000.
Remaining amounts due under the incentive compensation plan will be awarded in the form of
stock options. For plan purposes these options will be valued using the Black-Scholes
method. Actual option awards will be made at year end.If the Company had elected to recognize stock-based compensation cost based on fair value at
the grant dates for awards consistent with the method prescribed by SFAS No. 123, net income
and earnings per share would have been changed to the pro-forma amounts shown below for the
three- and nine-month periods ended September 30, 2005 and 2004.
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net Income as reported
    
    $
    990,067
    
    
    $
    1,081,306
    
    
    $
    3,093,517
    
    
    $
    2,774,080Less pro forma stock based compensation
expense determined under
the fair value method, net of tax effect
    
    
    45,979
    
    
    
    60,000
    
    
    
    239,592
    
    
    
    308,579Pro forma net income
    
    $
    944,088
    
    
    $
    1,021,306
    
    
    $
    2,853,925
    
    
    $
    2,465,501Net Income per shareBasic  as reported
    
    $
    0.86
    
    
    $
    0.94
    
    
    $
    2.68
    
    
    $
    2.42Basic  pro forma
    
    $
    0.82
    
    
    $
    0.89
    
    
    $
    2.47
    
    
    $
    2.15Diluted  as reported
    
    $
    0.80
    
    
    $
    0.90
    
    
    $
    2.51
    
    
    $
    2.32Diluted  pro forma
    
    $
    0.77
    
    
    $
    0.85
    
    
    $
    2.32
    
    
    $
    2.06
 Share and per share data have been retroactively adjusted to effect a three for two common
stock split declared on October 22, 2004 as if it had occurred on January 1, 2004.
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6. GUARANTEED PREFERRED BENEFICIAL INTEREST IN JUNIOR SUBORDINATED DEBENTURESOn June 15, 2005, Tri County Capital Trust II (Capital Trust II), a Delaware business
trust formed, funded and wholly owned by the Company, issued $5,000,000 of variable-rate
capital securities with an interest rate of 5.07% in a private pooled transaction. The
variable rate is based on the 90-day LIBOR rate plus 1.70%. The Trust used the proceeds from
this issuance to purchase $5.2 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 IIs obligations with respect to the capital
securities. These capital securities qualify as Tier I capital and are presented in the
Consolidated Balance Sheets as Guaranteed Preferred Beneficial Interests in Junior
Subordinated Debentures. Both the capital securities of Capital Trust II and the junior
subordinated debentures are scheduled to mature on June 15, 2035, unless called by the
Company not earlier than June 15, 2010.On July 22, 2004, Tri County Capital Trust I (Capital Trust I), a Delaware business trust
formed, funded and wholly owned by the Company, issued $7,000,000 of variable-rate capital
securities 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 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 capital securities qualify as Tier I capital and are presented in the
Consolidated Balance Sheets as Guaranteed Preferred Beneficial Interests in Junior
Subordinated Debentures. Both the capital securities of Capital Trust 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.7.
    
    NEW ACCOUNTING STANDARDSIn December 2004, the Financial Accounting Standards Board (FASB) issued SAFS No. 153,
Exchanges of Non-monetary Assets, an amendment of APB Opinion No. 29, Accounting for
Non-monetary Transactions. This statement amends the principal that exchanges of
non-monetary assets should be measured based on the fair value of the assets exchanged and
more broadly provides for exceptions regarding exchanges of non-monetary assets that do not
have commercial substance. This Statement is effective for non-monetary asset exchanges
occurring in fiscal periods beginning after June 15, 2005. The adoption of this standard
has not had a material impact on the Companys financial condition, results of operations,
or liquidity.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 the Companys financial condition, results of operations, or
liquidity.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 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
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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 did not have a material impact on the Companys financial condition, results of
operations, or liquidity.
 
 ITEM
2
 MANAGEMENTS DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
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##### Table of Contents



SELECTED FINANCIAL DATA
 Nine Months Ended
    
    Three Months EndedSeptember 30,
    
    September 30,2005
    
    2004
    
    2005
    
    2004Condensed Income StatementInterest Income
    
    $
    21,282,609
    
    
    $
    15,158,283
    
    
    $
    7,433,702
    
    
    $
    5,915,854Interest Expense
    
    
    9,745,166
    
    
    
    5,252,532
    
    
    
    3,566,630
    
    
    
    2,086,208Net Interest Income
    
    
    11,537,443
    
    
    
    9,905,751
    
    
    
    3,867,072
    
    
    
    3,829,646Provision for Loan Loss
    
    
    200,307
    
    
    
    316,970
    
    
    
    11,183
    
    
    
    232,996Noninterest Income
    
    
    1,301,785
    
    
    
    1,160,129
    
    
    
    466,650
    
    
    
    329,876Noninterest Expense
    
    
    7,908,193
    
    
    
    7,020,796
    
    
    
    2,769,564
    
    
    
    2,307,562Income Before Income Taxes
    
    
    4,730,728
    
    
    
    3,728,114
    
    
    
    1,552,975
    
    
    
    1,618,964Income Taxes
    
    
    1,637,211
    
    
    
    954,034
    
    
    
    562,908
    
    
    
    537,658Net Income
    
    
    3,093,517
    
    
    
    2,774,080
    
    
    
    990,067
    
    
    
    1,081,306Per Common ShareBasic Earnings
    
    $
    2.68
    
    
    $
    2.42
    
    
    $
    0.86
    
    
    $
    0.94Diluted Earnings
    
    $
    2.51
    
    
    $
    2.32
    
    
    $
    0.80
    
    
    $
    0.90Book Value
    
    $
    28.69
    
    
    $
    26.20
    
    
    $
    28.69
    
    
    $
    26.20
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September 30, 2005
    
    
    December 31, 2004Amount
    
    
    %
    
    
    Amount
    
    
    %Loan PortfolioReal Estate LoansCommercial
    
    $
    158,953,882
    
    
    
    45.10
    %
    
    $
    136,341,597
    
    
    
    46.51
    %Residential First
Mortgages
    
    
    67,353,456
    
    
    
    19.11
    %
    
    
    59,087,000
    
    
    
    20.16
    %Residential Construction
    
    
    31,229,856
    
    
    
    8.86
    %
    
    
    17,597,911
    
    
    
    6.00
    %Second Mortgage Loans
    
    
    27,034,735
    
    
    
    7.67
    %
    
    
    23,925,108
    
    
    
    8.16
    %Commercial lines of credit
    
    
    48,857,727
    
    
    
    13.86
    %
    
    
    39,136,778
    
    
    
    13.35
    %Consumer loans
    
    
    3,357,785
    
    
    
    0.95
    %
    
    
    3,462,613
    
    
    
    1.18
    %Commercial equipment
    
    
    15,677,722
    
    
    
    4.45
    %
    
    
    13,595,978
    
    
    
    4.64
    %Total Loans
    
    
    352,465,163
    
    
    
    100.00
    %
    
    
    293,146,985
    
    
    
    100.00
    %Less:Deferred loan fees, net
    
    
    553,582
    
    
    
    0.16
    %
    
    
    764,374
    
    
    
    0.26
    %Allowance for loan losses
    
    
    3,258,582
    
    
    
    0.92
    %
    
    
    3,057,558
    
    
    
    1.04
    %Loans Receivable, net
    
    $
    348,652,999
    
    
    
    
    
    
    $
    289,325,053
  9 Months Ended
    
    
    9 Months EndedSeptember 30, 2005
    
    
    September 30, 2004Beginning Balance
    
    $
    3,057,558
    
    
    $
    2,572,799Charge Offs
    
    
    (4,468
    )
    
    
    (1,040
    )Recoveries
    
    
    5,185
    
    
    
    42,487Net Recoveries
    
    
    717
    
    
    
    41,447Additions charged to operations
    
    
    200,307
    
    
    
    316,970Balance at end of period
    
    $
    3,258,582
    
    
    $
    2,931,216Ratio of net recoveries during
the period to
loans
    
    
    0.00
    %
    
    
    0.02
    %
  Balances as of
    
    
    Balances as ofSeptember 30, 2005
    
    
    December 31, 2004Restructured Loans
    
    $
    
    
    
    $
    Accruing loans which are contractually
past due 90 days or more:
    
    $
    
    
    
    $
    Loans accounted for on a non-accrual basis
    
    $
    608,164
    
    
    $
    674,961Total non-performing loans
    
    $
    608,164
    
    
    $
    674,961Non-performing loans to total loans
    
    
    0.17
    %
    
    
    0.23
    %Allowance for loan losses to non-performing loans
    
    
    535.81
    %
    
    
    453.00
    %
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
  18




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PART II  OTHER INFORMATION
 
  
  (a)
    
    Not applicable(b)
    
    Not applicable(c)
    
    The Company did not repurchase any shares of its Common Stock during the
quarter ended September 30, 2005. On October 25, 2004, Tri-County Financial
Corporation announced a repurchase program under which it would repurchase
approximately 5% of the outstanding shares of its stock (57,000 shares of common stock
after adjusting for the three for two stock split announced at the same time). The
program will continue until it is completed or terminated by the Board of Directors.
At September 30, 2005, 51,708 shares may yet be repurchased under this program.
 
  
 
 
  
  Exhibit 10.1
    Amendment to the Community Bank of Tri-County Employment Agreement with
C. Marie BrownExhibit 10.2
    Amendment to the Community Bank of Tri-County Employment Agreement with
Gregory C. CockerhamExhibit 10.3
    Amendment to the Community Bank of Tri-County Employment Agreement with
William J. PasenelliExhibit 31
    Rule 13a-14(a) CertificationsExhibit 32
    Section 1350 Certifications
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SIGNATURES
   TRI-COUNTY FINANCIAL CORPORATION:Date:
    
    November 10, 2005
    
    
    
    By:
    
    /s/ Michael L. MiddletonMichael L. Middleton, President
and Chairman of the BoardDate:
    
    November 10, 2005
    
    
    
    By:
    
    /s/ William J. PasenelliWilliam J. Pasenelli, ExecutiveVice President and Chief Financial Officer
 20