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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 
  Maryland
    

52-1652138(State or Other Jurisdiction of
    
    (I.R.S. EmployerIncorporation 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 
  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)




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




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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 2




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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 3




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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. 4




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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 5




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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 LoansThe 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. 6




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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
    
    
    2000Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %
    
    
    Amount
    
    
    %Real Estate LoansCommercial
    
    $
    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
    
    
    
    
    
    
    
    776Loan loss reserve
    
    
    3,058
    
    
    
    
    
    
    
    2,573
    
    
    
    
    
    
    
    2,314
    
    
    
    
    
    
    
    2,282
    
    
    
    
    
    
    
    1,930Loans receivable, net
    
    $
    289,325
    
    
    
    
    
    
    $
    217,740
    
    
    
    
    
    
    $
    197,449
    
    
    
    
    
    
    $
    193,450
    
    
    
    
    
    
    $
    172,090
 7




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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. 8




---



##### Table of Contents



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 thanyear after
    
    
    5 years from
    
    
    5 years fromDecember 31, 2004
    
    
    December 31, 2004
    
    
    December 31, 2004Real Estate LoansCommercial
    
    $
    32,787
    
    
    $
    18,148
    
    
    $
    85,407Residential first mortgage
    
    
    3,022
    
    
    
    11,647
    
    
    
    44,418Construction and land development
    
    
    6,330
    
    
    
    11,268
    
    
    
    Home equity and second mortgage
    
    
    19,792
    
    
    
    1,819
    
    
    
    2,314Commercial loans
    
    
    16,330
    
    
    
    22,807
    
    
    
    Consumer loans
    
    
    405
    
    
    
    2,552
    
    
    
    505Commercial equipment
    
    
    209
    
    
    
    10,791
    
    
    
    2,596Total 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 orFixed Rates
    
    
    Adjustable Rates
    
    
    TotalReal Estate LoansCommercial
    
    $
    10,112
    
    
    $
    93,443
    
    
    $
    103,555Residential first mortgage
    
    
    41,333
    
    
    
    14,732
    
    
    
    56,065Construction and land development
    
    
    
    
    
    
    11,268
    
    
    
    11,268Home equity and second mortgage
    
    
    3,886
    
    
    
    247
    
    
    
    4,133Commercial loans
    
    
    
    
    
    
    22,807
    
    
    
    22,807Consumer loans
    
    
    2,945
    
    
    
    112
    
    
    
    3,057Commercial 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




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##### Table of Contents



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




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##### Table of Contents



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
    
    
    2000Restructured Loans
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Accruing loans which are contractually past
past due 90 days or more:Real Estate LoansCommercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Residential first mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Construction and land development
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Home equity and second mortgage
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    102Commercial loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Consumer loans
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commercial equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    25
    
    
    
    102Loans accounted for on a nonaccrual basis:Real Estate LoansCommercial
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    
    7Commercial equipment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    675
    
    
    
    379
    
    
    
    597
    
    
    
    204
    
    
    
    7Total 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. 11




---



##### Table of Contents



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




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##### Table of Contents



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
    
    
    2002Percent of
    
    
    
    
    
    
    Percent of
    
    
    
    
    
    
    Percent ofLoans in
    
    
    
    
    
    
    Loans in
    
    
    
    
    
    
    Loans inEach
    
    
    
    
    
    
    Each
    
    
    
    
    
    
    EachCategory to
    
    
    
    
    
    
    Category to
    
    
    
    
    
    
    Category toAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total Loans
    
    
    Amount
    
    
    Total LoansReal Estate LoansCommercial
    
    $
    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
    
    
    2000Percent of
    
    
    
    
    
    
    Percent ofLoans in Each
    
    
    
    
    
    
    Loans in EachCategory to
    
    
    
    
    
    
    Category toAmount
    
    
    Total Loans
    
    
    Amount
    
    
    Total LoansReal Estate LoansCommercial
    
    $
    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
    %
 13




---



##### Table of Contents



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
    
    
    2002Asset-backed securities:Freddie Mac and Fannie Mae
    
    $
    155,678
    
    
    $
    84,764
    
    
    $
    29,200Other
    
    
    16,535
    
    
    
    7,284
    
    
    
    7,930Total asset-backed securities
    
    
    172,213
    
    
    
    92,048
    
    
    
    37,130Freddie Mac and Fannie Mae stock
    
    
    766
    
    
    
    756
    
    
    
    734Bond mutual funds
    
    
    630
    
    
    
    2,838
    
    
    
    3,962Treasury bills
    
    
    300
    
    
    
    300
    
    
    
    300Other Investments
    
    
    1,781
    
    
    
    3,954
    
    
    
    2,542Total investment securities
    
    
    175,690
    
    
    
    99,895
    
    
    
    44,668FHLB and Federal Reserve Bank stock
    
    
    6,144
    
    
    
    4,777
    
    
    
    2,737Total investment securities and FHLB
and Federal Reserve Bank stock
    
    $
    181,834
    
    
    $
    104,672
    
    
    $
    47,405
 14




---



##### Table of Contents



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 FiveOne Year or Less
    
    
    Through Five Years
    
    
    Through Ten Years
    
    
    After Ten YearsCarrying
    
    
    Average
    
    
    Carrying
    
    
    Average
    
    
    Carrying
    
    
    Average
    
    
    Carrying
    
    
    AverageValue
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    Yield
    
    
    Value
    
    
    YieldInvestment 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
    
    
    RatingWells Fargo
    
    $
    10,477,241
    
    
    AAAMorgan Stanley
    
    $
    8,650,074
    
    
    AAABear Stearns
    
    $
    4,154,003
    
    
    AAAMaster Alternative Loans Trust
    
    $
    5,989,742
    
    
    AAAFirst Horizon
    
    $
    3,955,335
    
    
    AAACredit Suisse First Boston
    
    $
    3,354,075
    
    
    AAACitigroup
    
    $
    5,830,774
    
    
    AAACountrywide
    
    $
    5,515,513
    
    
    AAA
 15




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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
    
    
    2002Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    Average
    
    
    AverageBalance
    
    
    Rate
    
    
    Balance
    
    
    Rate
    
    
    Balance
    
    
    RateSavings
    
    $
    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)CertificatesMaturity Period
    
    of DepositThree months or less
    
    $
    9,486Three through six months
    
    
    1,943Six through twelve months
    
    
    9,995Over 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




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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 theYear Ended December 31,2004
    
    
    2003
    
    
    2002Long-term debt outstanding at end of period
    
    $
    82,931
    
    
    $
    63,051
    
    
    $
    48,170Weighted 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
    
    
    
    752Weighted 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
    
    
    
    6,500Average outstanding short-term debt
    
    
    64,736
    
    
    
    7,568
    
    
    
    680Approximate 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




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##### Table of Contents



(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




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##### Table of Contents



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
minimisexception) 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




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##### Table of Contents



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




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##### Table of Contents



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 novoby 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




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##### Table of Contents



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




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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




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##### Table of Contents



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. YearFacility
    
    
    Leased
    
    
    ApproximateOffice
    
    Commenced
    
    
    or
    
    
    SquareLocation
    
    Operation
    
    
    Owned
    
    
    FootageMain Office3035 Leonardtown Road
    
    
    1974
    
    
    Owned
    
    
    16,500Waldorf, MarylandBranch Offices22730 Three Notch Rd.
    
    
    1992
    
    
    Owned
    
    
    2,500Lexington Park, Maryland25395 Point Lookout Rd.
    
    
    1961
    
    
    Owned
    
    
    2,500Leonardtown, Maryland101 Drury Drive
    
    
    2001
    
    
    Owned
    
    
    2,645La Plata, Maryland10321 Southern Md. Blvd.
    
    
    1991
    
    
    Leased
    
    
    1,400Dunkirk, Maryland8010 Matthews Road
    
    
    1996
    
    
    Owned
    
    
    2,500Bryans Road, Maryland20 St. Patricks Drive
    
    
    1998
    
    
    Leased (Land)
    
    
    2,840Waldorf, Maryland
    
    
    
    
    
    Owned (Building)30165 Three Notch Road
    
    
    2001
    
    
    Leased (Land)
    
    
    2,500Charlotte 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




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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. 25




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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. 26




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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 availableNumber of securities to be
    
    
    (b)
    
    
    for future issuanceissued
    
    
    Weighted-average exercise
    
    
    under equity compensationupon exercise of outstanding
    
    
    price of outstanding
    
    
    plans (excluding securitiesPlan 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. 27




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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.
    
    Description3.1
    
    
    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, 200414
    
    
    Code of Ethics (6)21
    
    
    Subsidiaries of the Registrant23
    
    
    Consent of Stegman & Company31.1
    
    
    Rule 13a-14a Certification of Chief Executive Officer31.2
    
    
    Rule 13a-14a Certification of Chief Financial Officer32
    
    
    Certification pursuant to 18 U.S.C. Section 1350
 28




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(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




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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 CORPORATIONDate:
March 29, 2005
    
    By:
    
    /s/  Michael L. MiddletonMichael L. MiddletonPresident 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. PasenelliMichael L. Middleton
    
    
    
    William J. Pasenelli(Director, President and Chief
    
    
    
    (Chief Financial and Accounting Officer)Executive Officer)Date: March 29, 2005
    
    Date: March 29, 2005By:
    
    /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, 2005By:
    
    /s/  H. Beaman Smith
    
    By:
    
    /s/  A. Joseph SlaterH. Beaman Smith
    
    
    
    A. Joseph Slater(Director and Secretary/Treasurer)
    
    
    
    (Director)Date: March 29, 2005
    
    Date: March 29, 2005By:
    
    /s/  Louis P. Jenkins, Jr.
    
    By:
    
    /s/  James R. ShepherdLouis P. Jenkins, Jr.
    
    
    
    James R. Shepherd(Director)
    
    
    
    (Director)Date: March 29, 2005
    
    Date: March 29, 2005
 30