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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 June 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 ______
  Tri-County Financial Corporation
  Maryland
(State of other jurisdiction of
incorporation or organization)
    
    52-1652138
(I.R.S. Employer
Identification No.)
 
 
 
 þ o
 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  June 30, 2005
and December 31, 2004
    
    3Consolidated Statements of Income and Comprehensive Income 
Three and Six Months Ended June 30, 2005 and 2004
    
    4 - 5Consolidated Statements of Cash Flows  Six Months
Ended June 30, 2005 and 2004
    
    6 - 7Notes to Consolidated Financial Statements
    
    8 - 10Item 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
    
    19 - 20Item 6  Exhibits
    
    20SIGNATURES
    
    21EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION FO CFOEX-32 SECTION 906 CERTIFICATION OF CEO & CFO
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PART I FINANCIAL STATEMENTS
 
 ITEM I. FINANCIAL STATEMENTS
 TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED BALANCE SHEETS JUNE 30, 2005 AND DECEMBER 31, 2004 (UNAUDITED)
 ASSETSJune 30, 2005
    
    
    December 31, 2004Cash and due from banks
    
    $
    4,963,869
    
    
    $
    6,018,096Federal Funds sold
    
    
    152,811
    
    
    
    777,519Interest-bearing deposits with banks
    
    
    14,263,072
    
    
    
    10,920,164Securities
available for sale  at fair value
    
    
    9,632,508
    
    
    
    12,948,971Securities held to maturity  at amortized cost
    
    
    150,531,067
    
    
    
    162,741,155Federal Home Loan Bank and Federal Reserve Bank stock  at cost
    
    
    6,111,100
    
    
    
    6,144,300Loans receivable  net of allowance for loan losses
of $3,243,481 and $3,057,558, respectively
    
    
    339,241,609
    
    
    
    289,325,051Premises and equipment, net
    
    
    6,841,735
    
    
    
    6,011,913Foreclosed real estate
    
    
    475,561
    
    
    
    475,561Accrued interest receivable
    
    
    2,268,885
    
    
    
    1,870,135Investment in bank owned life insurance
    
    
    6,306,285
    
    
    
    6,182,955Other assets
    
    
    2,566,410
    
    
    
    2,351,303TOTAL ASSETS
    
    $
    543,354,912
    
    
    $
    505,767,123LIABILITIES AND STOCKHOLDERS EQUITYLIABILITIES:Noninterest-bearing deposits
    
    $
    41,846,744
    
    
    $
    35,552,503Interest-bearing deposits
    
    
    276,547,419
    
    
    
    231,202,001Total deposits
    
    
    318,394,163
    
    
    
    266,754,504Short-term borrowings
    
    
    79,884,310
    
    
    
    115,304,210Long-term debt
    
    
    97,840,600
    
    
    
    82,931,113Guaranteed preferred beneficial interest in junior
subordinated debentures
    
    
    12,000,000
    
    
    
    7,000,000Accrued expenses and other liabilities
    
    
    3,027,528
    
    
    
    2,653,721Total liabilities
    
    
    511,146,601
    
    
    
    474,643,548STOCKHOLDERS EQUITY:Common stock
 par value $.01; authorized  15,000,000 shares;
issued 1,155,925 and 1,146,864 shares, respectively
    
    
    11,559
    
    
    
    11,469Additional paid in capital
    
    
    8,447,202
    
    
    
    8,252,152Retained earnings
    
    
    23,773,761
    
    
    
    22,833,112Accumulated other comprehensive income
    
    
    103,070
    
    
    
    186,140Unearned ESOP shares
    
    
    (127,281
    )
    
    
    (159,298
    )Total stockholders equity
    
    
    32,208,311
    
    
    
    31,123,575TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    543,354,912
    
    
    $
    505,767,123
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TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004INTEREST INCOME:Interest and fees on loans
    
    $
    5,504,666
    
    
    $
    3,819,949
    
    
    $
    10,316,319
    
    
    $
    7,366,494Taxable interest and dividends
on investment securities
    
    
    1,763,829
    
    
    
    824,510
    
    
    
    3,503,352
    
    
    
    1,867,160Interest on deposits with banks
    
    
    15,544
    
    
    
    4,159
    
    
    
    29,236
    
    
    
    8,775Total interest income
    
    
    7,284,039
    
    
    
    4,648,618
    
    
    
    13,848,907
    
    
    
    9,242,429INTEREST EXPENSE:Interest on deposits
    
    
    1,488,801
    
    
    
    747,742
    
    
    
    2,500,420
    
    
    
    1,447,912Interest on short term borrowings
    
    
    838,994
    
    
    
    100,619
    
    
    
    1,639,297
    
    
    
    179,241Interest on long term debt
    
    
    1,041,661
    
    
    
    753,674
    
    
    
    2,038,819
    
    
    
    1,539,171Total interest expenses
    
    
    3,369,456
    
    
    
    1,602,035
    
    
    
    6,178,536
    
    
    
    3,166,324NET INTEREST INCOME
    
    
    3,914,583
    
    
    
    3,046,583
    
    
    
    7,670,371
    
    
    
    6,076,105PROVISION FOR LOAN LOSSES
    
    
    126,097
    
    
    
    13,772
    
    
    
    189,124
    
    
    
    83,974NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES
    
    
    3,788,486
    
    
    
    3,032,811
    
    
    
    7,481,247
    
    
    
    5,992,131
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TRI-COUNTY FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)
THREE AND SIX MONTHS ENDED JUNE 30, 2005 AND 2004
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004NONINTEREST INCOME:Loan appraisal, credit, and miscellaneous charges
    
    $
    61,973
    
    
    $
    81,748
    
    
    $
    124,880
    
    
    $
    147,952Net gain on sale of loans held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,404Net gain on the sale of foreclosed property
    
    
    3,756
    
    
    
    
    
    
    
    39,756
    
    
    
    Income from bank owned life insurance
    
    
    62,201
    
    
    
    73,848
    
    
    
    123,330
    
    
    
    147,696Loss on sale of investment securities
    
    
    
    
    
    
    (27,504
    )
    
    
    (14,581
    )
    
    
    (27,504
    )Service charges
    
    
    305,876
    
    
    
    305,933
    
    
    
    561,750
    
    
    
    540,705Total noninterest income
    
    
    433,806
    
    
    
    434,025
    
    
    
    835,135
    
    
    
    830,253NONINTEREST EXPENSE:Salary and employee benefits
    
    
    1,358,491
    
    
    
    1,317,544
    
    
    
    2,822,453
    
    
    
    2,615,924Occupancy
    
    
    293,585
    
    
    
    208,267
    
    
    
    525,458
    
    
    
    390,140Advertising
    
    
    118,158
    
    
    
    97,691
    
    
    
    205,570
    
    
    
    240,230Data processing
    
    
    162,538
    
    
    
    137,222
    
    
    
    323,362
    
    
    
    289,220Legal and professional fees
    
    
    129,723
    
    
    
    37,117
    
    
    
    249,168
    
    
    
    75,272Depreciation of furniture, fixtures, and equipment
    
    
    109,250
    
    
    
    93,000
    
    
    
    196,350
    
    
    
    180,200Telephone communications
    
    
    24,208
    
    
    
    19,480
    
    
    
    53,402
    
    
    
    57,455Valuation allowance on foreclosed real estate
    
    
    
    
    
    
    33,376
    
    
    
    
    
    
    
    147,203ATM expenses
    
    
    80,087
    
    
    
    83,775
    
    
    
    149,881
    
    
    
    163,873Office supplies
    
    
    37,587
    
    
    
    22,346
    
    
    
    67,951
    
    
    
    61,765Office equipment
    
    
    19,974
    
    
    
    19,294
    
    
    
    29,676
    
    
    
    45,685Other
    
    
    256,314
    
    
    
    248,399
    
    
    
    515,358
    
    
    
    446,267Total noninterest expenses
    
    
    2,589,915
    
    
    
    2,317,511
    
    
    
    5,138,629
    
    
    
    4,713,234INCOME BEFORE INCOME TAXES
    
    
    1,632,377
    
    
    
    1,149,325
    
    
    
    3,177,753
    
    
    
    2,109,150Income tax expense
    
    
    553,288
    
    
    
    345,749
    
    
    
    1,074,303
    
    
    
    416,376NET INCOME
    
    
    1,079,089
    
    
    
    803,576
    
    
    
    2,103,450
    
    
    
    1,692,774OTHER COMPREHENSIVE INCOME NET OF TAXNet unrealized holding gains (losses)
    
    
    216,596
    
    
    
    (564,678
    )
    
    
    (83,070
    )
    
    
    (501,656
    )COMPREHENSIVE INCOME
    
    $
    1,295,685
    
    
    $
    238,898
    
    
    $
    2,020,380
    
    
    $
    1,191,118INCOME PER COMMON SHAREBasic
    
    $
    0.93
    
    
    $
    0.70
    
    
    $
    1.82
    
    
    $
    1.48Diluted
    
    
    0.88
    
    
    
    0.67
    
    
    
    1.71
    
    
    
    1.41DIVIDENDS
DECLARED PER SHARE
    
    $
    0.00
    
    
    $
    0.00
    
    
    $
    0.80
    
    
    $
    0.47
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TRI-COUNTY FINANCIAL CORPORATION
 
 CONSOLIDATED STATEMENTS
OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
 Six Months EndedJune 30,2005
    
    
    2004CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,103,450
    
    
    $
    1,692,774Adjustments to reconcile net income to net
cash provided by operating activities:Valuation allowance on foreclosed real estate
    
    
    
    
    
    
    147,203Provision for loan losses
    
    
    189,124
    
    
    
    83,974Loss on sales of investment securities
    
    
    14,581
    
    
    
    27,504Depreciation and amortization
    
    
    373,650
    
    
    
    293,898Net amortization of premium/discount on investment securities
    
    
    180,582
    
    
    
    459,221Increase in cash surrender of bank owned life insurance
    
    
    (123,330
    )
    
    
    (147,696
    )Deferred income tax benefit
    
    
    (100,498
    )
    
    
    (135,000
    )Increase in accrued interest receivable
    
    
    (398,750
    )
    
    
    (82,865
    )(Decrease) increase in deferred loan fees
    
    
    (160,602
    )
    
    
    28,617Increase (decrease) in accounts payable, accrued expenses,
other liabilities
    
    
    373,807
    
    
    
    (202,511
    )(Increase) decrease in other assets
    
    
    (111,572
    )
    
    
    519,216Gain on sales of loans held for sale
    
    
    
    
    
    
    (21,404
    )Proceeds from sale of loans held for sale
    
    
    
    
    
    
    496,284Net cash provided by operating activities
    
    
    2,340,442
    
    
    
    3,159,213CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of investment securities available for sale
    
    
    (7,316
    )
    
    
    (23,764,267
    )Proceeds from sale, redemption or principal payments
of investment securities available for sale
    
    
    3,171,871
    
    
    
    35,625,436Purchase of investment securities held to maturity
    
    
    (25,249,248
    )
    
    
    (31,876,050
    )Proceeds from maturities or principal payments
of investment securities held to maturity
    
    
    37,290,218
    
    
    
    16,756,831Net sale (purchase) of FHLB and federal Reserve stock
    
    
    33,200
    
    
    
    (785,550
    )Loans originated or acquired
    
    
    (131,435,265
    )
    
    
    (100,578,289
    )Principal collected on loans
    
    
    81,490,185
    
    
    
    62,033,664Purchase of premises and equipment
    
    
    (1,203,473
    )
    
    
    (412,508
    )Proceeds from foreclosed real estate
    
    
    39,756
    
    
    
    25,000Net cash used in investing activities
    
    
    (35,870,072
    )
    
    
    (42,975,733
    )
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TRI-COUNTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, 2005 AND 2004
 Six Months EndedJune 30,2005
    
    
    2004CASH FLOWS FROM FINANCING ACTIVITIES:Net increase in deposits
    
    $
    51,639,659
    
    
    $
    27,492,849Proceeds from long-term borrowings
    
    
    20,000,000
    
    
    
    20,000,000Payments of long-term borrowings
    
    
    (5,090,513
    )
    
    
    (10,103,874
    )Trust Preferred Debentures
    
    
    5,000,000
    
    
    
    Net (decrease) increase in short term borrowings
    
    
    (35,419,900
    )
    
    
    5,621,013Exercise of stock options
    
    
    166,815
    
    
    
    207,186Net change in unearned ESOP shares
    
    
    60,395
    
    
    
    74,011Dividends Paid
    
    
    (930,669
    )
    
    
    (541,633
    )Redemption of common stock
    
    
    (232,185
    )
    
    
    (200,881
    )Net cash provided by financing activities
    
    
    35,193,602
    
    
    
    42,548,671INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    1,663,973
    
    
    
    2,732,151CASH AND CASH EQUIVALENTS  JANUARY 1
    
    
    17,715,779
    
    
    
    12,169,798CASH AND CASH EQUIVALENTS  JUNE 30
    
    $
    19,379,752
    
    
    $
    14,901,949SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:Cash paid during the six months for:Interest
    
    $
    6,105,531
    
    
    $
    3,282,864Income taxes
    
    $
    1,002,500
    
    
    $
    367,500
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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 six months ended June 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 SHAREEarnings per common share are computed by dividing net income by the weighted average number
of common shares outstanding during the period. Diluted net income 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 June 30, 2005, there were no shares excluded from the diluted
net income 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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Basic
    
    
    1,156,255
    
    
    
    1,153,211
    
    
    
    1,154,237
    
    
    
    1,143,890Diluted
    
    
    1,231,517
    
    
    
    1,196,994
    
    
    
    1,230,250
    
    
    
    1,196,183
 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 six-month periods ended June 30, 2005 and 2004.
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net Income as reported
    
    $
    1,079,089
    
    
    $
    803,576
    
    
    $
    2,103,450
    
    
    $
    1,692,774Less pro forma stock based
compensation:Expense determined under
the fair value
method, net of tax effects.
    
    
    193,614
    
    
    
    163,579
    
    
    
    193,614
    
    
    
    223,579Pro forma net income
    
    $
    885,475
    
    
    $
    639,997
    
    
    $
    1,909,836
    
    
    $
    1,469,195Net Income per shareBasic  as reported
    
    $
    0.93
    
    
    $
    0.70
    
    
    $
    1.82
    
    
    $
    1.48Basic  pro forma
    
    $
    0.77
    
    
    $
    0.55
    
    
    $
    1.65
    
    
    $
    1.27Diluted  as reported
    
    $
    0.88
    
    
    $
    0.67
    
    
    $
    1.71
    
    
    $
    1.41Diluted  pro forma
    
    $
    0.72
    
    
    $
    0.53
    
    
    $
    1.55
    
    
    $
    1.23
 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 I and the junior
subordinated debentures are scheduled to mature on June 15, 2035, unless called by the
Company not earlier than June 15, 2010.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 is
not expected to have a material impact on 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 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
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, result of operations, or liquidity.
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ITEM 2
MANAGEMENTS DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION
        11




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##### Table of Contents



Six Months EndedJune 30,2005
    
    
    2004Condensed Income StatementInterest Income
    
    $
    13,848,907
    
    
    $
    9,242,429Interest Expense
    
    
    6,178,536
    
    
    
    3,166,324Net Interest Income
    
    
    7,670,371
    
    
    
    6,076,105Provision for Loan Loss
    
    
    189,124
    
    
    
    83,974Noninterest Income
    
    
    835,135
    
    
    
    830,253Noninterest Expense
    
    
    5,138,629
    
    
    
    4,713,234Income Before Income Taxes
    
    
    3,177,753
    
    
    
    2,109,150Income Taxes
    
    
    1,074,303
    
    
    
    416,376Net Income
    
    
    2,103,450
    
    
    
    1,692,774Per Common ShareBasic Earnings
    
    $
    1.82
    
    
    $
    1.48Diluted Earnings
    
    $
    1.71
    
    
    $
    1.41Book Value
    
    $
    27.86
    
    
    $
    24.85
      12




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Loan Portfolio
    
    June 30, 2005
    
    
    December 31, 2004Amount
    
    
    %
    
    
    Amount
    
    
    %Real Estate LoansCommercial
    
    $
    155,010,876
    
    
    
    45.19
    %
    
    $
    136,341,597
    
    
    
    46.51
    %Residential FirstMortgages
    
    
    65,333,046
    
    
    
    19.04
    %
    
    
    59,087,000
    
    
    
    20.16
    %Residential Construction
    
    
    28,081,145
    
    
    
    8.18
    %
    
    
    17,597,911
    
    
    
    6.00
    %Second Mortgage Loans
    
    
    26,406,928
    
    
    
    7.70
    %
    
    
    23,925,108
    
    
    
    8.16
    %Commercial lines of credit
    
    
    49,210,114
    
    
    
    14.34
    %
    
    
    39,136,778
    
    
    
    13.35
    %Consumer loans
    
    
    3,481,174
    
    
    
    1.01
    %
    
    
    3,462,611
    
    
    
    1.18
    %Commercial equipment
    
    
    15,565,580
    
    
    
    4.54
    %
    
    
    13,595,978
    
    
    
    4.64
    %Total Loans
    
    
    343,088,863
    
    
    
    100.00
    %
    
    
    293,146,983
    
    
    
    100.00
    %Less:Deferred loan fees
    
    
    603,773
    
    
    
    0.18
    %
    
    
    764,374
    
    
    
    0.26
    %Allowance for loan losses
    
    
    3,243,481
    
    
    
    0.95
    %
    
    
    3,057,558
    
    
    
    1.04
    %Loans Receivable Net
    
    $
    339,241,609
    
    
    
    
    
    
    $
    289,325,053
  6 Months ended
    
    
    6 Months EndedJune 30, 2005
    
    
    June 30, 2004Beginning Balance
    
    $
    3,057,558
    
    
    $
    2,572,799Charge Offs
    
    
    (3,201
    )
    
    
    (1,040
    )Recoveries
    
    
    
    
    
    
    9,377Net (Charge offs) Recoveries
    
    
    (3,201
    )
    
    
    8,337Additions charged to operations
    
    
    189,124
    
    
    
    83,974Balance at end of period
    
    $
    3,243,481
    
    
    $
    2,665,110Ratio of net charge-offs
during the period to
Loans
    
    
    0.00
    %
    
    
    0.00
    %
  Balances as of
    
    
    Balances as ofJune 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
    
    
    580,386
    
    
    
    674,961Total non-performing loans
    
    $
    580,386
    
    
    $
    674,961Non-performing loans to total loans
    
    
    0.17
    %
    
    
    0.23
    %Allowance for loan losses to non-
performing loans
    
    
    558.85
    %
    
    
    453.00
    %
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17




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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 following table sets forth information regarding the Companys repurchases
of its Common Stock during the quarter ended June 30, 2005.
 (c)
    
    
    (d)Total Number
    
    
    Maximumof Shares
    
    
    Number ofPurchased
    
    
    Shares(a)
    
    
    
    
    
    
    as Part of
    
    
    that May Yet BeTotal
    
    
    (b)
    
    
    Publicly
    
    
    PurchasedNumber of
    
    
    Average
    
    
    Announced Plans
    
    
    UnderShares
    
    
    Price Paid
    
    
    or
    
    
    the Plans orPeriod
    
    Purchased
    
    
    per Share
    
    
    Programs
    
    
    ProgramsApril 1-30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    55,802May 1-31, 2005
    
    
    4,094
    
    
    
    46.51
    
    
    
    4,094
    
    
    
    51,708June 1-30, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    51,708Total
    
    
    4,094
    
    
    
    46.51
    
    
    
    4,094
    
    
    
    51,708
  
  
  
  19




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##### Table of Contents



(1)
    
    Incorporated by reference to the Registrants Proxy Statement for the 2005 Annual
Meeting of Stockholders as filed with the Securities and Exchange Commission on April
11, 2005. 20




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SIGNATURES
  TRI-COUNTY FINANCIAL CORPORATIONDate: August 12, 2005
    
    By:
    
    /s/ Michael L. MiddletonMichael L. Middleton
President and Chairman of the BoardDate: August 12, 2005
    
    By:
    
    /s/ William J. PasenelliWilliam J. Pasenelli, Executive
Vice President and Chief
Financial Officer
 21