================================================================================

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

                        FOR ANNUAL AND TRANSITION REPORTS
                     PURSUANT TO SECTIONS 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

For the fiscal year ended December 31, 2002
                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from ___________ to __________

                           Commission File No. 0-18279

                        TRI-COUNTY FINANCIAL CORPORATION
             ------------------------------------------------------
             (Exact name of registrant as specified in its charter)


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


3035 LEONARDTOWN ROAD, WALDORF, MARYLAND                           20601
----------------------------------------                         ----------
(Address of principal executive offices)                         (Zip Code)

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

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

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

                     COMMON STOCK, PAR VALUE $.01 PER SHARE
                     --------------------------------------
                                (Title of Class)

Indicate by check mark whether the registrant (1) has filed all reports required
by  Section  13 or 15(d)  of the  Securities  Exchange  Act of 1934  during  the
preceding 12 months (or such shorter  period that the registrant was required to
file such reports) and (2) has been subject to such filing  requirements for the
past 90 days. Yes X    No
                 ---      ---

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. [ X ]

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

At December 31, 2002,  the  registrant  had 767,549  shares of its Common Stock,
$0.01 par value, outstanding. The aggregate market value of voting stock held by
non-affiliates  of the  registrant at March 26, 2003,  was  approximately  $26.2
million based on the price at which the Common Stock was last sold. 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  3, 2003: 767,649

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions of Proxy Statement for 2003 Annual Meeting of Stockholders.  (Part
     III)

================================================================================
<PAGE>

                                     PART I

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  through its main office and seven  branches  located in Waldorf,  Bryans
Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, and California,  Maryland.
During 2002, the Bank closed one of its Waldorf branches. The Bank also operates
fourteen Automated Teller Machines ("ATMs") including six stand-alone  locations
in the Tri-County area. 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 demand and time
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.  The Bank also  maintains a
website at www.communitybktricounty.com.
           ----------------------------

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 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 is expected to be
fully implemented in 2003. Future developments in this area may adversely affect
the Bank's loan growth.

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  demand and  installment  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

                                       2
<PAGE>

service,  flexibility,  and competitive  pricing, as well as by leveraging
other banking relationships such as soliciting deposit customers for loans.

The Bank's  previous  savings and loan  charter  restricted  its ability to hold
certain loan types in its portfolio.  As a result,  prior to its conversion to a
state  chartered  commercial  bank,  the Bank's  loan  portfolio  was  primarily
comprised of residential mortgage loans. Since conversion, the Bank has moved to
diversify  its lending by adding a larger  portion of  commercial  real  estate,
commercial,  and consumer loans to its portfolio.  Management believes that this
diversification of the loan portfolio will increase the Bank's overall long-term
financial  performance.  Management  recognizes  that  these new loan  types may
increase the Bank's risk of losses due to loan default.

RESIDENTIAL  FIRST MORTGAGE LOANS.  Prior to its conversion to a commercial bank
on March 29,  1997,  residential  first  mortgages  made up the  majority of the
Bank's loan portfolio.  Since that date,  residential  first mortgage loans have
represented a progressively smaller portion of the Bank's loan portfolio.  Since
December 31, 1997,  residential  first  mortgage  loans have decreased in dollar
amount to $50.0 million from $62.2 million, while falling as a percentage of the
loan portfolio to 24.4% from 50%.

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  emphasizes  the  origination  of  adjustable-rate  mortgages  for its
portfolio.  The Bank offers  mortgages which are adjustable on a one, three, and
five-year  basis  generally  with  limitations  on  upward  adjustments  of  two
percentage  points per year and six percentage points over the life of the loan.
The Bank markets adjustable-rate loans with rate adjustments based upon a United
States  Treasury bill index. As of December 31, 2002, the Bank had $19.4 million
in residential mortgage loans using a U.S. Treasury bill index. In the past, the
Bank also  offered  adjustable-rate  mortgage  loans  based upon  other  indices
including  various cost of funds indices.  These  adjustable  rate loans totaled
$148  thousand  as of  December  31,  2002.  The  Bank  also  offers  long-term,
fixed-rate  loans.  Fixed-rate  loans may be packaged and sold in the  secondary
market,  primarily  to the Federal  Home Loan  Mortgage  Corporation  ("FHLMC"),
private  mortgage  correspondents,  the Federal  National  Mortgage  Association
("FNMA") and the Mortgage  Partnership  Finance  program of the FHLB of Atlanta.
The Bank may  also  add  these  loans  to its  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, 2002, the Bank serviced $73.2 million in residential mortgage loans
for various organizations.

The 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. It is foreseeable that 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,   depending  on  market  conditions,  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  loans  up to 95% 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  70%  loan-to-value  of the  appraised  value  depending  on the overall
strength of the application.  The Bank currently requires that substantially all
residential  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.

                                       3
<PAGE>

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,  to a limited  extent,  office
buildings,  as well as churches and other special purpose projects. As a result,
commercial  real estate loans  increased  $8.7 million or 13.2% during 2002. The
primary  security on a commercial  real estate loan is the real property and the
leases which produce income for the real property.  Commercial real estate loans
amounted to approximately $74.3 million or 37.1% of the Bank's loan portfolio at
December 31, 2002. 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 appraised  value 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.

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  under  its  business  plan  as a  commercial  bank,  the  Bank is
increasingly exposed to the risks posed by this type of lending.

CONSTRUCTION AND LAND DEVELOPMENT  LOANS. The Bank offers  construction loans to
individuals and building  contractors  primarily for the construction of one- to
four-family    dwellings.    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  construction/permanent  loans provide for  disbursement of
loan funds based on draw requests  submitted by the builder during  construction
and site  inspections  by  independent  inspectors.  The Bank  will  also make a
construction  loan if the borrower has a  commitment  from another  lender for a
permanent loan at the completion of the construction. These loans typically have
terms of six months.  The application  process includes the same items which are
required for other  mortgage  loans and also  requires the borrower to submit to
the  Bank  accurate  plans,  specifications,  and  costs of the  property  to be
constructed. These items are used as a basis to determine the appraised value of
the subject property.

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 pre-defined stages of
construction  or  development.  The Bank  will  lend up to 80% of the  appraised
value.

The Bank  also  offers  builders  lines of  credit,  which are  revolving  notes
generally  secured  by real  property.  Outstanding  builders  lines  of  credit
amounted to  approximately  $9.0 million at December 31, 2002. The Bank offers a
builder's  master note program in which the builder receives a revolving line of
credit at a market  rate and the Bank  obtains  security  in the form of a first
lien on home sites under construction.

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 $5.4 million at December 31, 2002.
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.

                                       4
<PAGE>
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.  As these  projects  may take an extended  period of time to  complete,
market,  economic,  and regulatory conditions may change during the construction
or development period.

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 $14.3 million at December 31, 2002, 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 $4.7 million at December 31,
2002 are fixed and variable rate loans which have  original  terms between 5 and
15 years.  Loan-to-value ratios of up to 80% or 90% are allowed depending on the
specific loan program.

These  products  represent  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.

CONSUMER AND  COMMERCIAL  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 and heavy equipment. The
Bank also makes home  improvement  loans and offers both  secured and  unsecured
lines of credit.

The Bank also offers a variety of commercial loan services including term loans,
lines of  credit  and  equipment  financing.  The  Bank's  commercial  loans are
primarily  underwritten  on the basis of the  borrower's  ability to service the
debt from income.  Such loans are generally made for terms of five years or less
at interest rates which adjust periodically.

The higher  interest  rates and shorter loan terms  available on commercial  and
consumer lending make these products attractive to the Bank. In particular,  the
consumer and commercial loan portfolio will increase its yield as interest rates
increase.  Consumer and commercial business loans, however,  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 as a result of the
greater  likelihood of damage,  loss or depreciation.  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.

                                       5
<PAGE>

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.
<TABLE>
<CAPTION>
                                                                      AT DECEMBER 31,
                                            -------------------------------------------------------------------
                                                    2002                    2001                     2000
                                                    ----                    ----                     ----
                                            AMOUNT         %        AMOUNT         %         AMOUNT         %
                                            ------      ------      ------       ------      ------      ------
<S>                                        <C>           <C>       <C>            <C>       <C>           <C>
Real Estate Loans
  Residential first mortgage               $ 48,976      24.44%    $ 61,430       31.26%    $ 67,975      38.89%
  Commercial                                 74,292      37.07%      65,617       33.39%      42,226      24.16%
  Construction and land development          14,579       7.27%      18,136        9.23%      17,301       9.90%
  Home equity and second mortgage            19,007       9.48%      18,580        9.46%      18,637      10.66%
Commercial loans                             29,947      14.94%      18,539        9.44%      15,047       8.61%
Consumer loans                               13,630       6.80%      14,187        7.22%      13,610       7.79%
                                           --------     ------     --------      ------     --------     ------
         Total loans                        200,431     100.00%     196,489      100.00%     174,796     100.00%
                                                        ======                   ======                  ======
   Less:  Deferred loan fees                    668                     757                      776
          Loan loss reserve                   2,314                   2,282                    1,930
                                           --------                --------                 --------
        Loans receivable, net              $197,449                $193,450                 $172,090
                                           ========                ========                 ========

<CAPTION>
                                                       AT DECEMBER 31,
                                          ---------------------------------------------
                                                   1999                    1998
                                                   ----                    ----
                                           AMOUNT         %        AMOUNT         %
                                           ------      ------      ------       ------
<S>                                       <C>           <C>       <C>            <C>
Real Estate Loans
  Residential first mortgage              $ 66,263      44.42%    $ 64,243       47.55%
  Commercial                                29,947      20.08%      19,733       14.60%
  Construction and land development         17,142      11.49%      20,776       15.38%
  Home equity and second mortgage           16,691      11.19%      16,314       12.07%
Commercial loans                            10,025       6.72%       6,161        4.56%
Consumer loans                               9,102       6.10%       7,889        5.84%
                                          --------     ------     --------      -------
         Total loans                       149,170     100.00%     135,116      100.00%
                                                       ======                   ======
   Less:  Deferred loan fees                   808                     930
          Loan loss reserve                  1,653                   1,540
                                          --------                --------
        Loans receivable, net             $146,710                $132,646
                                          ========                ========
</TABLE>

                                       6
<PAGE>
     LOAN ORIGINATIONS, PURCHASES AND SALES. The Bank solicits loan applications
through its branch network,  direct  solicitation  of customers,  referrals from
customers,  and 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, credit reports, etc. vary by loan type. Loan processing functions are
generally  centralized  except for small consumer loans. 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 real  estate  mortgages  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 FNMA or FHLMC. During the year 2002,
the Bank sold $23.9 million of mortgage loans which were  originated  during the
year  generating  $499 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,  whole 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.  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 $2.8  million to any one borrower at December 31, 2002.
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 $4.4 million to any
one  borrower at December 31, 2002.  At December  31, 2002,  the largest  amount
outstanding to any one borrower and their related interests was $3.0 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, 2002,  was  approximately  $4.0
million,  excluding  undisbursed  portions of loans in process.  It has been the
Bank's experience that few commitments expire unfunded.

MATURITY OF LOAN PORTFOLIO.  The following table sets forth certain  information
at December 31, 2002 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.


                                       7
<PAGE>
<TABLE>
<CAPTION>
                                         Due within 1        Due after 1through        Due more than
                                          year after            5 years from            5 years from
                                       December 31, 2002      December 31, 2002      December 31, 2002      Total
                                       -----------------     ------------------      -----------------      -----
<S>                                        <C>                  <C>                      <C>              <C>
Real estate loans--
  Residential first mortgages              $ 2,478              $ 10,717                 $ 35,781         $ 48,976
  Commercial                                 4,078                10,842                   59,372           74,292
  Construction                              10,782                 3,798                       --           14,580
  Home equity and second mortgage           15,042                 1,792                    2,173           19,007
Commercial loans                            24,907                 5,040                       --           29,947
Consumer loans                               3,188                10,139                      302           13,629
                                          --------              --------                 --------        ---------
                                          $ 60,475              $ 42,328                 $ 97,628        $ 200,431
                                          ========              ========                 ========        =========
</TABLE>

The following table sets forth the dollar amount of all loans due after one year
from December 31, 2002 which have predetermined interest rates and have floating
or adjustable interest rates.
<TABLE>
<CAPTION>
                                                            Floating or
                                            Fixed Rates   Adjustable Rates    Total
                                            -----------   ----------------    -----
<S>                                          <C>               <C>          <C>
Real estate loans--
  Residential first mortgages                $ 27,329          $ 19,169     $ 46,498
  Commercial                                    4,007            66,207       70,214
  Construction                                    883             2,915        3,798
  Home equity and second mortgage               3,965                --        3,965
Commercial loans                                   --             5,040        5,040
Consumer loans                                 10,229               212       10,441
                                             --------          --------     --------
                                             $ 46,413          $ 93,543     $139,956
                                             ========          ========     ========
</TABLE>

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.

                                       8
<PAGE>
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 fair market value of  approximately  $716
thousand at December 31, 2002.

FORECLOSED REAL ESTATE

The largest portion of the foreclosed real estate, $450 thousand,  is related to
one development  project.  This development project was acquired in July 2001 by
deed in lieu of foreclosure and had an original  carrying value of $1.3 million.
The property  consisted of 54 acres in Charles County that the borrower  planned
to  develop  into 150  single-family  lots.  After  the  borrower  had  received
preliminary  approval for the project's  first phase  (consisting of 41 lots) in
July  1999,  the  County  sought  to   retroactively   impose  more  restrictive
requirements for preliminary approvals.  The borrower had another project in the
County (not  financed by the Bank) for which  preliminary  approval had not been
received. The borrower did not challenge the retroactive  application of the new
rules to the subject  parcel and attempted to secure  preliminary  approvals for
both  projects  under  the  new  regime.   When  the  second  lender  threatened
foreclosure on the other parcel,  however, the borrower conveyed the development
project to the Bank by deed in lieu of foreclosure.

When the Bank acquired the property,  it consulted with counsel who advised that
the prior grant of preliminary  approval was binding on the County. In addition,
the County had announced  that it would adopt a fee-based  permitting  scheme in
2003 that would  facilitate the development of Phase 2 of the project.  In light
of these circumstances,  an independent appraisal determined that the property's
market value exceeded its carrying value.  Accordingly,  no valuation allowances
were established with respect to the property at that time.

After  obtaining  title,  the Bank  challenged  the county's  position  that its
preliminary approval of the first phase was no longer in force and in June 2002,
secured  a  clarification  in  the  rules  that  accepted  the  validity  of the
preliminary  approval.  The Bank  thereupon  put the parcel out for bid and bids
received were substantially below the Bank's price target.  Based on the results
of the bidding,  the Bank determined that a valuation allowance of $776 thousand
was required to adjust the carrying  value of the property to the $500  thousand
indicated by the bids.  Subsequently,  the Bank contacted other potential buyers
and entered into a sales  agreement  for the  property.  Terms of the  agreement
called for an  immediate  purchase of Phase 1 of the project for $204  thousand.
The  agreement  also  provided  that  Phase 2,  consisting  of 112 lots would be
purchased by the buyer as preliminary  approval was received,  at a price of $15
thousand  per lot.  Total sales price for Phase 2 would be $1.7  million and the
total sales price for both phases would be $1.9 million.  Under the terms of the
agreement,  the buyer is responsible for all development  costs  associated with
both  phases.  The buyer paid for all of Phase 1 in  December  2002,  and made a
minimal  down payment on Phase 2. 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 and reduced the balance in foreclosed  real
estate by a portion of the $204  thousand  proceeds.  The remainder of the sales
price was recognized as a partial recovery of the valuation allowance and profit
on the sale of the property.  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 will be  periodically
evaluated for possible impairment.

Another  foreclosed  property had been  previously  acquired by the Bank with an
original carrying value of $275,000.  In evaluating the property for sale during
the  second  quarter  of  2002,  it was  discovered  that  there  was a  special
geological  formation known as a "vernal pool" on the property  causing it to be
treated as wetland  under state and federal  law.  Since the  property  could no
longer be  developed  as  planned,  the Bank

                                       9
<PAGE>

established a $250,000 valuation allowance to bring its carrying value down to a
nominal  $25,000.  Other properties in the foreclosed real estate section of the
balance  sheet consist of various  properties  currently  being  marketed by the
Bank.


The  following  table  sets  forth   information  with  respect  to  the  Bank's
non-performing  loans for the years indicated.  During the years shown, the Bank
had no impaired  loans within the meaning of  Statement of Financial  Accounting
Standards No. 114 and 118.
<TABLE>
<CAPTION>
                                                                              AT DECEMBER 31,
                                                           ---------------------------------------------------------
                                                             2002        2001        2000         1999        1998
                                                           --------     -------    --------      -------     -------
                                                                          (DOLLARS IN THOUSANDS)
<S>                                                        <C>          <C>        <C>           <C>         <C>
Restructured Loans                                         $     --     $    --    $     --      $    --     $    --
                                                           --------     -------    --------      -------     -------
Accruing loans which are contractually past
  past due 90 days or more:
    Real estate
      Residential First Mortgage                           $     --     $    --    $     --      $    --     $    --
      Commercial                                                 --          --          --           --          --
      Construction and land development                          --          --          --           --          --
      Home equity and second mortgage                            --          25         102          171         196
    Commercial                                                   --          --          --           --          --
    Consumer                                                     --          --          --           --          --
                                                           --------     -------    --------      -------     -------
      Total                                                      --          25         102          171         196
                                                           --------     -------    --------      -------     -------

Loans accounted for on a nonaccrual basis:
    Real estate
      Residential First Mortgage                           $    278     $   134    $     --      $    20     $   126
      Commercial                                                 --          --          --           --          --
      Construction and land development                          --          --          --           --          --
      Home equity and second mortgage                            49          --          --           --          --
    Commercial                                                  269          --          --           --          85
    Consumer                                                      1          70           7          198          58
                                                           --------     -------    --------      -------     -------
      Total                                                     597         204           7          218         269
                                                           --------     -------    --------      -------     -------
Total non-performing loans                                 $    597     $   229    $    109      $   389     $   465
                                                           ========     =======    ========      =======     =======
Non-performing loans to total loans                            0.30%       0.12%       0.06%        0.26%       0.34%
                                                           ========     =======    ========      =======     =======
Allowance for loan losses to non-performing loans            387.60%     996.07%    1770.55%      424.94%     333.18%
                                                           ========     =======    ========      =======     =======
</TABLE>

For a detailed discussion of foreclosed real estate at December 31, 2002 see the
"Foreclosed Real Estate" section discussed previously.

                                       10
<PAGE>

During the year ended December 31, 2002,  gross interest  income of $66 thousand
would have been recorded on loans  accounted  for on a non-accrual  basis if the
loans had been current throughout the period.  During the year 2002, the Company
recognized $33 thousand in interest on these loans.

At December 31, 2002, 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.

The following  table sets forth an analysis of activity in the Bank's  allowance
for possible loan losses for the periods indicated.
<TABLE>
<CAPTION>
                                                               AT DECEMBER 31,
                                              -----------------------------------------------------
                                                2002        2001       2000        1999       1998
                                              -------     -------    -------     -------    -------
                                                            (DOLLARS IN THOUSANDS)
<S>                                           <C>         <C>        <C>         <C>        <C>
Balance at beginning of period                $ 2,282     $ 1,930    $ 1,653     $ 1,540    $ 1,310
                                              =======     =======    =======     =======    =======
Charge-offs:
  Real estate
    Residential first mortgage                     --          --         56          --         --
    Commercial                                     --          --         --          --         --
    Construction and land development              36          --         --          --         --
    Home equity and second mortgage                21          --         --          --         --
  Commercial                                       59          --         33         102         --
  Consumer                                         15          39          6          32         10
                                              -------     -------    -------     -------    -------
      Total charge-offs:                          131          39         95         134         10
                                              -------     -------    -------     -------    -------
Recoveries:
  Real estate
    Residential first mortgage                     --          --         --          --         --
    Commercial                                     --          --         --          --         --
    Construction and land development              --          --         --          --         --
    Home equity and second mortgage                --          --         --          --         --
  Commercial                                       --          --         --          --         --
  Consumer                                          3          31         12           7         --
                                              -------     -------    -------     -------    -------
      Total Recoveries                              3          31         12           7         --
                                              -------     -------    -------     -------    -------
      Net charge-offs                             128           8         83         127         10

Provision for Possible Loan Losses                160         360        360         240        240
                                              -------     -------    -------     -------    -------
Balance at End of Period                      $ 2,314     $ 2,282    $ 1,930     $ 1,653    $ 1,540
                                              =======     =======    =======     =======    =======
Ratio of net charge-offs to average loans
outstanding during the year                     0.06%       0.01%      0.05%       0.09%      0.01%
                                              =======     =======    =======     =======    =======
</TABLE>


                                       11
<PAGE>

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.
<TABLE>
<CAPTION>
                                                                         AT DECEMBER 31,
                                         ------------------------------------------------------------------------------------
                                              2002                          2001                         2000
                                         ----------------------------   -----------------------     -------------------------
                                                  PERCENT OF LOANS              PERCENT OF LOANS             PERCENT OF LOANS
                                                  IN EACH CATEGORY              IN EACH CATEGORY             IN EACH CATEGORY
                                         AMOUNT   TO TOTAL LOANS        AMOUNT  TO TOTAL LOANS      AMOUNT   TO TOTAL LOANS
                                         ------   --------------        ------  --------------      ------   ---------------
<S>                                       <C>           <C>             <C>          <C>             <C>            <C>
Real Estate Loans
  Residential first mortgage             $  118         24.44%          $  160       31.26%          $  192         38.89%
  Commercial                              1,077         37.07%             923       33.39%             645         24.16%
  Construction and land development         211          7.27%             355        9.23%             285          9.90%
  Home equity and second mortgage           276          9.48%             373        9.46%             394         10.66%
Commercial loans                            434         14.94%             186        9.44%             138          8.61%
Consumer loans                              198          6.80%             285        7.22%             276          7.79%
                                         ------        ------          -------      ------           ------        ------
         Total allowance for loan losses  2,314        100.00%           2,282      100.00%           1,930        100.01%
                                         ======        ======          =======      ======           ======        ======
<CAPTION>

                                                           AT DECEMBER 31,
                                         ------------------------------------------------------
                                              1999                          1998
                                         ----------------------------   -----------------------
                                                  PERCENT OF LOANS              PERCENT OF LOANS
                                                  IN EACH CATEGORY              IN EACH CATEGORY
                                         AMOUNT   TO TOTAL LOANS        AMOUNT  TO TOTAL LOANS
                                         ------   --------------        ------  --------------
<S>                                       <C>         <C>              <C>         <C>
Real Estate Loans
  Residential first mortgage             $  632       44.42%          $  652       47.55%
  Commercial                                399       20.08%             281       14.60%
  Construction and land development         164       11.49%             211       15.38%
  Home equity and second mortgage           159       11.19%             166       12.07%
Commercial loans                            178        6.72%             117        4.56%
Consumer loans                              121        6.10%             113        5.84%
                                         ------      ------           ------      ------
         Total allowance for loan losses  1,653      100.00%           1,540      100.00%
                                         ======      ======           ======      ======
</TABLE>

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 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.

                                       12
<PAGE>

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 FHLMC, FNMA, SLMA and the
FHLB  System.   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.

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, 2002, their market value was $47.4 million.
<TABLE>
<CAPTION>
                                                                          AT DECEMBER 31,
                                                             ------------------------------------------
                                                               2002              2001             2000
                                                             --------          -------          -------
                                                                            (IN THOUSANDS)
<S>                                                          <C>               <C>              <C>
Asset-backed securities:
     FHLMC and FNMA                                          $ 29,200          $26,084          $30,577
     Other                                                      7,930            8,993           16,855
                                                             --------          -------          -------
          Total asset-backed Secutiries                        37,130           35,077           47,432
FHLMC, FNMA, SLMA and FHLB notes                                   --               --            7,912
FHLMC and FNMA Stock                                              734              727              764
Mutual Funds                                                    3,962               --               --
Treasury bills                                                    300              300              200
Other Investments                                               2,542            1,989            1,514
                                                             --------          -------          -------
     Total investment securities                               44,668           38,093           57,822
          FHLB and Federal Reserve Bank stock                   2,737            3,036            3,036
                                                             --------          -------          -------
     Total investment securities and FHLB and
        Federal Reserve Bank stock                           $ 47,405          $41,129          $60,858
                                                             ========          =======          =======
</TABLE>

                                       13
<PAGE>


The maturities and weighted average yields for investment  securities  available
for sale and held to maturity at December 31, 2002 are shown below.
<TABLE>
<CAPTION>
                                                             AFTER ONE         AFTER FIVE
                                    ONE YEAR OR LESS    THROUGH FIVE YEARS  THROUGH TEN YEARS    AFTER TEN YEARS
                                    ------------------  ------------------  ------------------  -----------------
                                    CARRYING   AVERAGE   CARRYING   AVERAGE  CARRYING  AVERAGE  CARRYING  AVERAGE
                                     VALUE      YIELD      VALUE     YIELD     VALUE    YIELD    VALUE     YIELD
                                    --------   -------   --------   -------  --------  -------  --------  -------
                                                              (DOLLARS IN THOUSANDS)
<S>                                 <C>         <C>       <C>                   <C>     <C>       <C>       <C>
Investment securities available
  for sale:
     Corporate equity securities    $   509     7.50%     $    --               $ --              $   --
     Asset-backed securities         18,216     5.50%      15,067    5.88%       823     6.45%     2,318    6.12%
     Mutual Funds                     3,962     2.52%          --                 --                  --
                                    -------     ----      -------               ----              ------
       Total investment securities
         available for sale         $22,687     4.59%     $15,067    5.88%      $823     6.45%    $2,318    6.12%
                                    =======     ====      =======    ====       ====     ====     ======    ====

Investment securities held-to-
  maturity:
     Treasury bills                 $   300     1.22%     $    --               $ --              $   --
     Other investments                   --                 2,542    5.98%        --                  --
                                    -------               -------               ----              ------
      Total investment securities
         held-to-maturity           $   300     1.22%     $ 2,542    5.98%      $ --              $   --
                                    =======     ====      =======    ====       ====              ======
</TABLE>

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).  The Company generally limits its
exposure  to private  issuers to total  investments  from any one issuer to less
than 10% of equity. For further information  regarding the Company's  investment
securities, see Note 2 of Notes to Consolidated Financial Statements.

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.  Consolidated  total deposits were
$203,025,112  as of December 31, 2002. The Bank uses borrowings from the FHLB of
Atlanta and other sources to supplement funding from deposits.

DEPOSITS.   The  Bank's  deposit   products  include  regular  savings  accounts
(statements),   money  market  deposit   accounts,   demand  deposit   accounts,
interest-bearing  demand deposit accounts, IRA and SEP accounts,  Christmas club
accounts and certificates of deposit.  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,  money orders and
travelers checks, night depositories, automated clearinghouse transactions, wire
transfers,  ATMs, 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 year end 2002, no brokered deposits were held.

                                       14
<PAGE>
The following  table sets forth for the periods  indicated the average  balances
outstanding and average interest rates for each major category of deposits.
<TABLE>
<CAPTION>
                                                                  FOR THE YEAR ENDED DECEMBER 31,
                                            ----------------------------------------------------------------------------
                                                    2002                        2001                         2000
                                            --------------------       --------------------         --------------------
                                            AVERAGE      AVERAGE        AVERAGE     AVERAGE         AVERAGE      AVERAGE
                                            BALANCE       RATE          BALANCE      RATE           BALANCE       RATE
                                            -------      -------        -------     -------         -------      -------
                                                                      (Dollars in thousands)
<S>                                         <C>            <C>         <C>            <C>           <C>            <C>
Savings                                     $ 23,334       0.86%       $ 19,723       2.01%         $ 20,051       2.37%
Interest-bearing demand and money
  market accounts                             73,668       0.47%         72,052       2.35%           59,720       3.58%
Certificates of deposit                       70,885       4.10%         70,453       5.45%           69,592       5.32%
                                            --------       ----        --------       ----          --------       ----
     Total interest-bearing deposits         167,887       2.06%        162,228       3.65%          149,363       4.23%
Noninterest-bearing demand deposits           21,631                     13,691                       10,961
                                            --------                   --------                     --------
                                            $189,518       1.82%       $175,919       3.37%         $160,324       3.94%
                                            ========       ====        ========       ====          ========       ====
</TABLE>
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, 2002.
                                                  CERTIFICATES
                       MATURITY PERIOD             OF DEPOSIT
                       ---------------            --------------
                                                  (IN THOUSANDS)

                      Three months or less .......   $ 5,137
                      Three through six months....     8,665
                      Six through twelve months...     2,654
                      Over twelve months .........     2,334
                                                     -------
                             Total ...............   $18,790
                                                     =======

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 35% of assets.  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 (which consisted almost entirely of FHLB advances) is as follows:
<TABLE>
<CAPTION>
                                                                            AT OR FOR THE
                                                                       YEAR ENDED DECEMBER 31,
                                                                     ------------------------------
                                                                      2002       2001        2000
                                                                      ----       ----        ----
                                                                        (DOLLARS IN THOUSANDS)
<S>                                                                  <C>        <C>        <C>
Long term amounts outstanding at end of period                       $ 48,170   $ 48,650   $ 41,400
Weighted average rate on outstanding long-term                          4.99%      5.41%      5.91%
Short-term borrowing outstanding at end of period                         752      1,813     13,551
Weighted average rate on outstanding short-term                         0.89%      1.83%      6.35%
Maximum outstanding short-term debt at any month end                    6,500     15,725     35,100
Average outstanding short-term debt                                       680      6,213     25,810
Approximate average rate paid on short term debt (1)                    1.04%      5.75%      6.62%
</TABLE>

                                       15
<PAGE>
For more  information  regarding  the Bank's  borrowings,  see Note7of  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.

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  sixth in deposit  market
share in the Tri-County area as of June 30, 2001, 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.

                           SUPERVISION AND REGULATION

REGULATION OF THE BANK

GENERAL.  The Bank is a Maryland  commercial  bank and its deposit  accounts are
insured  by the  SAIF.  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 Board of Governors of the Federal  Reserve  System (the
"FRB") and to Maryland and federal statutory and regulatory provisions governing
such matters as capital standards,  mergers and establishment of branch offices.
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 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

                                       16
<PAGE>
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.

SARBANES-OXLEY  ACT OF 2002. On July 30, 2002,  the  Sarbanes-Oxley  Act of 2002
(the "Act") was signed into law which mandated a variety of reforms  intended to
address  corporate and accounting  fraud. The Act provides for the establishment
of a new Public Company Accounting Oversight Board ("PCAOB"), which will enforce
auditing,  quality  control  and  independence  standards  for firms  that audit
Securities Exchange Commission ("SEC")-reporting companies and will be funded by
fees from all  SEC-reporting  companies.  The Act imposes  higher  standards for
auditor  independence and restricts provision of consulting services by auditing
firms to companies they audit. Any non-audit services being provided to an audit
client will require  preapproval by the Company's  audit committee  members.  In
addition, certain audit partners must be rotated periodically.  The Act 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.  In  addition,  under the Act,  counsel  will be required to report
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company to its chief  executive  officer or its chief  legal  officer,
and, if such officer does not appropriately  respond, to report such evidence to
the audit committee or other similar  committee of the board of directors or the
board itself.

Longer  prison  terms will also 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.  Directors and executive  officers must also report
most changes in their  ownership of a company's  securities  within two business
days of the change.

The Act also  increases  the  oversight  and  authority of audit  committees  of
publicly traded  companies.  Audit committee members must be independent and are
barred from accepting  consulting,  advisory or other compensatory fees from the
issuer. In addition, all SEC-reporting  companies must disclose whether at least
one member of the committee is a "financial  expert" (as such term is defined by
the SEC  rules)  and if not,  why  not.  Audit  committees  of  publicly  traded
companies  will have  authority to retain  their own counsel and other  advisors
funded by the  company.  Audit  committees  must  establish  procedures  for the
receipt, retention and treatment of complaints regarding accounting and auditing
matters  and  procedures  for  confidential,  anonymous  submission  of employee
concerns regarding questionable accounting or auditing matters.

Beginning  six months after the SEC  determines  that the PCAOB is able to carry
out its  functions,  it will be unlawful for any person that is not a registered
public  accounting firm ("RPAF") to audit an  SEC-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 Act also  prohibits any officer or director of a company or any other
person  acting  under their  direction  from  taking any action to  fraudulently
influence,  coerce,  manipulate or mislead any  independent  public or certified
accountant  engaged in the audit of the Company's  financial  statements for the
purpose of rendering the financial statement's  materially  misleading.  The Act
also  requires the SEC to  prescribe  rules  requiring  inclusion of an internal
control   report  and   assessment   by  management  in  the  annual  report  to
shareholders.  The Act  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, the Act 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.

                                       17
<PAGE>

Although the Company  anticipates it will incur additional  expense in complying
with the provisions of the Act and the related rules, management does not expect
that such  compliance  will have a material  impact on the  Company's  financial
condition or results of operations.

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 1% to 2% above the minimum
ratio,  depending on the  assessment  of an  individual  organization's  capital
adequacy by its primary regulator. 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  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; and
subordinated debt and intermediate-term preferred stock.

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 federal banking agencies,  including the FRB, have proposed a system
for  measuring  and  assessing  the exposure of a bank's net  economic  value to
changes in interest rates. The federal banking agencies, including the FRB, have
stated their intention to propose a rule establishing an explicit capital charge
for interest rate risk based upon the level of a bank's  measured  interest rate
risk  exposure  after  more   experience  has  been  gained  with  the  proposed
measurement  process.  FRB  regulations  do

                                       18
<PAGE>

not  specifically  take into account interest rate risk in measuring the capital
adequacy of bank holding companies.

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, 2002, the Bank was well capitalized as
defined by the FRB's regulations.

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

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

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

                                       19
<PAGE>

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  (up to
$500,000) 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 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.

REGULATION OF THE COMPANY

GENERAL.  The Company,  as the sole  shareholder  of the Bank, is a bank holding
company and registered as such with 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 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

                                       20
<PAGE>

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.

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);  (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
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


                                       21
<PAGE>

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  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 earning 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,  the FRB may prohibit a bank
holding  company  from  paying  any  dividends  if the  holding  company's  bank
subsidiary is classified as "undercapitalized".

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  described  above,  for bank
holding  companies  with  consolidated  assets of $150  million  or more.  As of
December 31, 2002,  the  Company's  levels of  consolidated  regulatory  capital
exceeded the FRB's minimum requirements.

PERSONNEL

As of December 31, 2002,  the Bank had 82 full-time  employees  and 14 part-time
employees.  The  employees  are  not  represented  by  a  collective  bargaining
agreement. The Bank believes its employee relations are good.

                                       22

<PAGE>

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,
2002.

<TABLE>
<CAPTION>
                                    YEAR
                                   FACILITY                    LEASED              APPROXIMATE
 OFFICE                            COMMENCED                     OR                  SQUARE
LOCATION                           OPERATION                    OWNED                FOOTAGE
--------                           ---------                   ------              -----------
<C>                                  <C>                        <C>                  <C>
MAIN OFFICE
3035 Leonardtown Road                1974                       Owned                16,500
Waldorf, Maryland

BRANCH OFFICES
22730 Three Notch Rd.                1992                       Owned                 2,500
California, Maryland

25395 Point Lookout Rd.              1961                       Owned                 2,500
Leonardtown, Maryland

101 Drury Drive                      2001                       Owned                 2,645
La Plata, Maryland

10321 Southern Md. Blvd.             1991                      Leased                 1,400
Dunkirk, Maryland

8010 Matthews Road                   1996                       Owned                 2,500
Bryans Road, Maryland

20 St. Patrick's Drive               1998                      Leased (Land)          2,840
Waldorf, Maryland                                              Owned (Building)

30165 Three Notch Road                2001                     Leased (Land)          2,500
Charlotte Hall, Maryland                                       Owned (Building)
</TABLE>


ITEM 3.  LEGAL PROCEEDINGS
--------------------------

Neither  the  Company,  the Bank,  nor 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, 2002.

                                       23
<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE  REGISTRANT'S  COMMON STOCK AND RELATED  SECURITY  HOLDER
        MATTERS
--------------------------------------------------------------------------------

MARKET  INFORMATION.  Effective  January 30, 2002, bid and asked quotes and last
sale  information  became  available for the  Company's  common stock on the OTC
Bulletin  Board  under  the  symbol  "TCFC."  Prior to that  time,  there was no
established  trading  market for the Common  Stock and bid and asked quotes were
not  regularly  available.  The  following  table  sets  forth  high and low bid
quotations  reported on the OTC  Bulletin  for the Common Stock for each quarter
during 2002.  These quotes reflect  inter-dealer  prices without retail mark-up,
mark-down or commission and may not necessarily reflect actual transactions.

        2002                                  High             Low
                                              ----             ---

        Fourth Quarter                       $39.38           $36.50
        Third Quarter                         37.00            30.25
        Second Quarter                        30.25            28.00
        First Quarter                         28.50            23.40


The Company has  maintained a list of persons who have  expressed an interest in
buying or selling the Common  Stock and has made this  information  available to
persons seeking to sell or buy shares,  as the case may be. During 2002, a total
of 14,107 shares traded,  with a high price of $39.00 and a low price of $28.50.
The  weighted  average  price  was  $35.94.  The  Company  expects  to  continue
maintaining a list of potential buyers and sellers.

HOLDERS.  As of March 3, 2003, the number of stockholders  was 532 and the total
outstanding shares were 767,649.

DIVIDENDS.  The Company has paid annual cash dividends since 1994. During fiscal
year  2002 and  2001,  the  Company  paid cash  dividends  of $0.50  and  $0.40,
respectively.  On February 28, 2003, the Board of Directors declared a $0.55 per
share cash dividend to be  distributed  on April 7, 2003 to holders of record as
of March 24, 2003.

The  Company's  ability  to  pay  dividends  is  governed  by the  policies  and
regulations  of the FRB which  prohibit the payment of dividends  under  certain
circumstances  involving  the bank holding  company's  financial  condition  and
capital  adequacy.  The Company's  ability to pay dividends is also dependent on
the receipt of dividends from the Bank.

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

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

                                       24
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA
--------------------------------

The  following  table  presents  consolidated  selected  financial  data for the
Company and its  subsidiaries for each of the periods  indicated.  Dividends and
earnings per share have been adjusted to give retroactive effect to stock splits
and stock dividends accounted for as stock splits.
<TABLE>
<CAPTION>
                                                                        YEAR ENDED DECEMBER 31,
                                                    -----------------------------------------------------------
                                                            (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
                                                      2002         2001        2000          1999        1998
                                                      ----         ----        ----          ----        ----
<S>                                                  <C>          <C>         <C>          <C>         <C>
OPERATIONS DATA:
Net Interest Income                                  $ 10,794     $  9,757    $  8,862     $  8,412    $  8,125
Provision for Loan Losses                                 160          360         360          240         240
Noninterest Income                                      1,847        1,402       1,373        1,271       1,421
Noninterest Expense                                     9,446        6,995       6,332        6,276       5,467
Net Income                                           $  1,968     $  2,486    $  2,336     $  2,153    $  2,382
SHARE DATA:
Basic Net Income Per Common Share                    $   2.58     $   3.24    $   2.98     $   2.75    $   3.00
Diluted Net Income Per Common Share                      2.45         3.11        2.85         2.59        2.79
Cash Dividends Paid  Per  Common Share               $   0.50     $   0.40    $   0.30     $   0.20        0.13
Weighted Average Common
   Shares  Outstanding:
        Basic                                         761,417      766,927     784,605      782,950     793,458
        Diluted                                       804,122      798,787     821,139      832,283     853,145
FINANCIAL CONDITION DATA:
Total Assets                                         $282,128     $261,957    $248,339     $222,897    $206,863
Loans Receivable, Net                                 197,449      193,450     172,090      146,710     132,646
Total Deposits                                        203,025      183,117     167,806      155,742     151,815
Long and Short Term Debt                               48,922       50,463      54,951       44,798      33,434
Total Stockholders' Equity                           $ 26,873     $ 25,586    $ 23,430     $ 21,115      20,975
PERFORMANCE RATIOS:
Return on Average Assets                                 0.72%        0.97%       1.00%        1.00%       1.20%
Return on Average Equity                                 7.50%       10.09%      10.65%       10.23%      11.87%
Net Interest Margin                                      4.18%        4.02%       3.98%        4.11%       4.21%
Efficiency Ratio                                        74.73%       62.68%      61.86%       64.81%      57.27%
Dividend Payout Ratio                                   20.04%       12.44%      10.13%        7.29%       4.10%

CAPITAL RATIOS:
Average Equity to Average
  Assets                                                 9.53%        9.64%       9.37%        9.79%      10.10%
Leverage Ratio                                           9.53%        9.64%       9.61%        9.86%      10.28%
Total Risk-Based Capital Ratio                          13.75%       14.08%      13.53%       17.23%      18.27%

ASSET QUALITY RATIOS:
Allowance for Loan Losses to
  Total Loans                                            1.15%        1.16%      1.10%         1.11%       1.14%
Nonperforming Loans to Total Loans                       0.30%        0.12%      0.06%         0.26%       0.34%
Allowance for Loan Losses to
  Nonperforming Loans                                  387.60%      996.07%   1770.55%       424.94%     331.18%
Net Charge-offs to Average Loans                         0.06%        0.01%      0.05%         0.09%       0.01%
</TABLE>

                                       25
<PAGE>
ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
--------------------------------------------------------------------------------

OVERVIEW

Since its  conversion to a commercial  bank charter in 1997, the Bank has sought
to increase  total assets as well as the  percentage  of assets  represented  by
certain  targeted  loan  types.  The Bank feels that its  ability to offer fast,
flexible and local  decision-making  in the commercial,  commercial real estate,
and consumer loan areas will continue to attract  significant new loans and spur
asset growth.  Since December 31, 1997,  total loan assets have increased by $76
million  or  62%,  with  increases   concentrated  in  commercial  real  estate,
commercial,  and consumer lending. The Bank's local focus and targeted marketing
is also  directed  towards  increasing  its  balances of consumer  and  business
deposit  accounts such as  interest-bearing  and  noninterest  bearing  checking
accounts,  money market accounts, and other  transaction-oriented  accounts. The
Bank  believes  that  increases  in these  account  types will lessen the Bank's
dependence on time deposits such as certificates of deposit to fund loan growth.
Although  management  believes  that the strategy  outlined  above will increase
financial  performance  over time, we recognize that products such as commercial
lending and transaction  accounts will increase the Bank's  noninterest  expense
also. We also recognize that certain lending and deposit  products also increase
the possibility of losses from credit and other risks.

FORWARD-LOOKING STATEMENTS

When used in this  discussion  and elsewhere in this Annual Report on Form 10-K,
the words or phrases "will likely  result," "are expected to," "will  continue,"
"is anticipated,"  "estimate,"  "project" or similar expressions are intended to
identify  "forward-looking   statements"  within  the  meaning  of  the  Private
Securities  Litigation  Reform Act of 1995. The Company  cautions readers not to
place undue reliance on any such forward-looking statements, which speak only as
of the date made, and to advise readers that various factors, including regional
and national economic conditions,  unfavorable  judicial decisions,  substantial
changes in levels of market  interest  rates,  credit and other risks of lending
and investment  activities and competitive  and regulatory  factors could affect
the Company's financial performance and could cause the Company's actual results
for future periods to differ materially from those anticipated or projected.

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

CRITICAL ACCOUNTING POLICIES

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

                                       26
<PAGE>

The allowance for loan losses is an estimate of the losses that may be sustained
in our loan  portfolio.  The allowance is based on two principles of accounting:
(a) Statement on Financial  Accounting  Standards  ("SFAS") 5,  "Accounting  for
Contingencies",  which requires that losses be accrued when they are probable of
occurring and are estimable and (b) SFAS No. 114,  "Accounting  by Creditors for
Impairment of a Loan", which requires that losses be accrued when it is probable
that the Company will not collect all principal and interest payments  according
to the  contractual  terms of the loan.  The loss,  if any, is determined by the
difference  between the loan  balance and the value of  collateral,  the present
value of expected  future  cash flows,  or values  observable  in the  secondary
markets.

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

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

Management has  significant  discretion in making the judgments  inherent in the
determination  of the  provision  and  allowance  for loan losses,  including in
connection  with  the  valuation  of  collateral,   a  borrower's  prospects  of
repayment, and in establishing allowance factors on the nonspecific component of
the  allowance.  Changes in allowance  factors will have a direct  impact on the
amount of the provision,  and a  corresponding  effect on net income.  Errors in
management's perception and assessment of the global factors and their impact on
the portfolio  could result in the allowance not being  adequate to cover losses
in the portfolio,  and may result in additional  provisions or charge-offs.  For
additional information regarding the allowance for credit losses, refer to Notes
1 and 3 to the  Consolidated  Financial  Statements and the discussion under the
caption "Provision for Loan Losses" below.

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

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

                                       27
<PAGE>
allowance  being  inadequate  to  reduce  carrying  costs to fair  value and may
require an additional provision for valuation allowances.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2002,  2001
AND 2000

GENERAL. For the year ended December 31, 2002, the Company reported consolidated
net income of  $1,967,821  ($2.58  basic and $2.45 fully  diluted  earnings  per
share) compared to consolidated net income of $2,485,535  ($3.24 basic and $3.11
fully  diluted  earnings per share) for the year ended  December  31, 2001,  and
consolidated  net income of  $2,336,196  ($2.98  basic and $2.85  fully  diluted
earnings per share) for the year ended  December  31, 2000.  The decrease in net
income for 2002 compared to 2001 was  attributable to several factors  including
the establishment of a valuation  allowance on foreclosed real estate in 2002; a
core data systems  conversion  in 2002;  and the  increase in other  noninterest
expenses in 2002. These negative factors were partially offset by an increase in
net interest income, a decrease in provision for loan losses, and an increase in
noninterest  income.  For the year ended December 31, 2002, net interest  income
was $10,793,626  compared to $9,756,865 for the year ended December 31, 2001, an
increase of $1,036,761 or 10.63%.  The Company also increased total  noninterest
income to $1,847,061 in 2002 from  $1,401,520 in 2001, an increase of $445,541or
31.79%. Noninterest expenses increased to $9,445,866 for the year ended December
31, 2002,  compared to $6,994,500  an increase of  $2,451,366 or 35.05%.  Income
before  income taxes  decreased to  $3,034,821  for the year ended  December 31,
2002, compared to $3,803,885 for the year ended December 31, 2001, a decrease of
$769,064 or 20.22%.  Income tax expense for 2002  decreased to  $1,067,000  from
$1,318,350 for the year ended December 31, 2001.

For the year ended  December  31,  2001,  net  interest  income  was  $9,756,865
compared to  $8,862,072  for the year ended  December 31,  2000,  an increase of
$894,793 or 10.1%.  The  Company  also  increased  total  noninterest  income to
$1,401,520  in 2001 from  $1,372,988  in 2000,  an  increase of $28,532 or 2.1%.
Noninterest  expenses  increased to $6,994,500  for the year ended  December 31,
2001,  compared to  $6,331,864  an increase of $662,636 or 10.5%.  Income before
income  taxes  increased  to  $3,803,885  for the year ended  December 31, 2001,
compared to  $3,543,196  for the year ended  December 31,  2000,  an increase of
$260,689 or 7.4%.  Income tax  expense for 2001  increased  to  $1,318,350  from
$1,207,000 for the year ended December 31, 2000.

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

Consolidated  net  interest  income for the year  ended  December  31,  2002 was
$10,793,626  compared to  $9,756,865  for the year ended  December  31, 2001 and
$8,862,072 for the year ended December 31, 2000. The $1,036,761  increase in the
most recent  year was due to  decreases  in both  interest  income and  interest
expense  with the  decrease in interest  expense of  $2,789,183  only  partially
offset by the  decrease in  interest  income of  $1,752,422.  For the year ended
December 31, 2001,  the $894,793  increase was due to an increase of $225,114 in
interest income combined with a decrease of $669,679 in interest expense for the
same period.  Changes in the components of net interest income due to changes in
average  balances of assets and  liabilities and to changes caused by changes in
interest rates are presented in the rate volume analysis below.

During 2002, the Company's  interest rate spread increased  slightly because the
Bank  was  able to  decrease  the  relative  share  of its  assets  invested  in
investments and move these assets into higher yielding loans.  The Bank was also
able to continue  its shift from lower  yielding  loan types to higher  yielding
loan types.  The Bank was able to reduce its  borrowing  and deposit  costs to a
greater extent than  decreases in loan rates,  and the Bank was able to increase
the share of its funding provided by deposits as opposed to borrowings.

                                       28
<PAGE>
The  following  table  presents  information  on  the  average  balances  of the
Company's interest-earning assets and interest-bearing  liabilities and interest
earned or paid thereon for the past three  fiscal  years.  Average  balances are
computed on the basis of month-end balances.
<TABLE>
<CAPTION>
                                                      FOR THE YEAR ENDED DECEMBER 31,
                                    -------------------------------------------------------------------------
                                                  2002                                   2001
                                    --------------------------------         --------------------------------
                                                             AVERAGE                                  AVERAGE
                                    AVERAGE                   YIELD/         AVERAGE                   YIELD/
                                    BALANCE      INTEREST      COST          BALANCE    INTEREST       COST
                                    -------      --------    -------         -------    --------      -------
<S>                                 <C>           <C>            <C>        <C>          <C>             <C>
Interest-earning assets:
  Loan portfolio (1)                $ 195,280     $ 14,221       7.28%      $ 184,370    $ 15,223        8.26%
  Cash and investment securities       60,637        2,541       4.19%         58,276       3,291        5.65%
                                    ---------     --------     ------       ---------    --------      ------
    Total interest-earning assets     255,917       16,762       6.55%        242,646      18,514        7.63%
                                    ---------     --------     ------       ---------    --------      ------
Interest-bearing liabilities:
  Savings deposits and escrow       $ 189,518      $ 3,453       1.82%      $ 175,919     $ 5,935        3.37%
  FHLB advances and other
    borrowings                         48,487        2,515       5.19%         52,387       2,822        5.39%
                                    ---------     --------     ------       ---------    --------      ------
                                      238,005        5,968       2.51%      $ 228,306       8,757        3.84%
                                    =========     ========     ======       =========    ========      ======

Net interest income                               $ 10,794                                $ 9,757
                                                  ========                                =======
Interest rate spread                                             4.04%                                   3.79%
                                                               ======                                  ======
Net yield on interest-earning assets                             4.18%                                   4.02%
                                                               ======                                  ======
Ratio of average interest-earning
  assets to average interest bearing
  liabilities                                                  107.53%                                 106.28%
                                                               ======                                  ======

<CAPTION>
                                         FOR THE YEAR ENDED DECEMBER 31,
                                         ---------------------------------
                                                     2000
                                         ---------------------------------
                                                                  AVERAGE
                                         AVERAGE                  YIELD/
                                         BALANCE    INTEREST       COST
                                         -------    --------      --------
<S>                                     <C>          <C>             <C>
Interest-earning assets:
  Loan portfolio                        $ 159,989    $ 13,950        8.72%
  Cash and investment securities           62,673       4,340        6.92%
                                        ---------    --------      ------
    Total interest-earning assets         222,662      18,290        8.21%
                                        ---------    --------      ------
Interest-bearing liabilities:
  Savings deposits and escrow           $ 160,324     $ 6,315        3.94%
  FHLB advances and other
    borrowings                             49,664       3,113        6.26%
                                        ---------    --------      ------
                                        $ 209,988       9,428        4.49%
                                        =========    ========      ======

Net interest income                                   $ 8,862
                                                      ========
Interest rate spread                                                 3.72%
                                                                   ======
Net yield on interest-earning assets                                 3.98%
                                                                   ======
Ratio of average interest-earning
  assets to average interest bearing
  liabilities                                                      106.04%
                                                                   ======
<FN>
_________
(1) Average balance includes non-accrual loans.
</FN>
</TABLE>
                                       29
<PAGE>

The table below sets forth  certain  information  regarding  changes in interest
income and  interest  expense of the Bank for the  periods  indicated.  For each
category of interest-earning asset and interest-bearing  liability,  information
is provided on changes attributable to: (1) changes in volume (changes in volume
multiplied by old rate);  and (2) changes in rate (changes in rate multiplied by
old volume). Changes in rate-volume (changes in rate multiplied by the change in
volume) have been allocated to changes due to volume.
<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31
                                         -----------------------------------------------------------------------
                                            2002      VS.        2001              2001        VS.         2000
                                         -------------------------------        --------------------------------
                                              INCREASE (DECREASE)                     INCREASE (DECREASE)
                                                    DUE TO                                   DUE TO
                                         -------------------------------        --------------------------------
                                         VOLUME      RATE         TOTAL         VOLUME        RATE        TOTAL
                                         ------    --------     --------        -------     --------     -------
                                                                         (IN THOUSANDS)
<S>                                       <C>      <C>          <C>             <C>         <C>          <C>
Interest income:
  Loan portfolio                          $ 801    $ (1,803)    $ (1,002)       $ 2,126     $   (853)    $ 1,273
  Interest-earning cash and
    investment portfolio                     99        (849)        (750)          (304)        (745)     (1,049)
                                          -----    --------     --------        -------     --------     -------
Total interest-earning assets             $ 900    $ (2,652)    $ (1,752)       $ 1,822     $ (1,598)    $   224
                                          =====    ========     ========        =======     ========     =======

Interest expense:
  Savings deposits and escrows            $ 241    $ (2,723)    $ (2,482)       $   614     $   (994)    $  (380)
  FHLB advances and other
    borrowings                             (201)       (106)        (307)           170         (461)       (291)
                                          -----    --------     --------        -------     --------     -------
                                          $  40    $ (2,829)    $ (2,789)       $   784     $ (1,455)    $  (671)
                                          =====    ========     ========        =======     ========     =======
</TABLE>

PROVISION FOR LOAN LOSSES. Provision for loan losses for the year ended December
31, 2002 was $160,000  compared to $360,000 for December 31, 2001 and 2000.  The
lower provision for loan losses in 2002 is due to the relatively  small increase
in the  size  of the  loan  portfolio  and  the  continued  low  level  of  loan
charge-offs.  The loan  loss  allowance  and the  provision  for loan  losses is
determined  based upon an analysis of individual  loans and the  application  of
certain loss factors to different loan categories. Individual loans are analyzed
for  impairment  as  the  facts  and  circumstances   warrant.  In  addition,  a
nonspecific  component of the loan loss  allowance is added based on a review of
the  portfolio's  size and  composition.  At December 31, 2002 the allowance for
loan loss equaled 388% of  non-accrual  and past due loans  compared to 996% and
1,771% at  December  31,  2001 and 2000,  respectively.  During  the year  ended
December 31, 2002, the Company  recorded net  charge-offs of $127 thousand (.06%
of average loans) compare d to $8 thousand  (0.01% of average loans) compared to
$83 thousand (0.05% of average loans) in net charge-offs  during the years ended
December 31, 2001 and 2000.

NONINTEREST  INCOME.  Noninterest  income  increased to $1,847,061  for the year
ended December 31, 2002 compared to $1,401,520,  for the prior year, an increase
of 31.79%.  Noninterest  income for the year ended December 31, 2001 represented
an increase of 2.1% from the December 31, 2000 total of  $1,372,988.  Changes in
noninterest  income  over the past  three  years  have  been the  result of wide
fluctuations in certain  noninterest income categories,  (gain on sale of loans,
gain on sale of investments,  loan fees) and an increase in service charges from
1999 to 2000. Gain on sale of investments was $184,704 in 2000. In 2001and 2002,
the Company had no investment sales or income from sales.  Gain on sale of loans
held-for-sale  has been highly  variable  reflecting  the overall  interest rate
environment. As rates decrease, the Bank's volume of fixed rate mortgage lending
increases,  which in turn provides a higher  volume of loan sales and gains.  In
2001,


                                       30
<PAGE>
interest  rates  decreased  from 2000  levels  and  income  from gain on sale of
mortgage loans increased to $187,304.  In 2002, interest rates decreased further
and income from gain on sale of mortgage loans again  increased to $499,304.  In
percentage terms gain on sale of loans held for sale increased by 119% from 2000
to 2001, and 167% from 2001 to 2002.  Loan appraisal,  credit and  miscellaneous
charges are also highly variable;  from 2000 to 2001, these charges increased to
$226,641 an increase of 196.9%.  In 2002, these charges  decreased to $179,006 a
decrease of 21% despite a high volume of loan  transactions.  This  decrease was
caused by the  market  trends  towards  low and no cost loan  products.  Service
charges and fees are  primarily  generated by the Bank's  ability to attract and
retain transaction-based deposit accounts. Service charges and fees increased to
$1,041,662  for the year ended  December  31, 2002 as  compared to $953,496  and
$996,884 in the two prior years.  The  increase for the year ended  December 31,
2002 from the prior year was  $88,166,  or 9.3% while the  decrease for the year
ended  December 31, 2001 from the prior year was $43,388,  or 4.4%.  The Company
hopes  to  increase  its  service  charge  and fee  revenues  in the  future  by
increasing the level of transaction-based  accounts.  Finally, other noninterest
income increased from 2000 to 2001 and increased from 2001 to 2002. For the year
ended December 31, 2002, other noninterest income was $127,089, an increase from
the prior year total of $34,079.

NONINTEREST EXPENSES.  Noninterest expenses for the year ended December 31, 2002
totaled  $9,445,866,  an  increase of  $2,451,366  or 35.1% from the prior year.
Salary and employee benefits increased by 10.5% to $4,222,006 for the year ended
December  31, 2002  compared to  $3,821,330  for the prior  year.  The  increase
reflects growth in the Company's workforce to fully staff branches as well as an
increasing need for highly skilled  employees due to the higher complexity level
of the Bank's  business.  Occupancy  expense  increased to $831,148  compared to
$689,575 and $615,809 in the two prior years.  This  increase was due to certain
needed repairs and maintenance at several of the Company's  locations,  upgrades
to the  facilities  for the new core data system,  and  Charlotte  Hall location
being open for a full year.  Advertising  increased from 2001 levels to $338,216
for the year ended  December  31, 2002  compared to $301,975 and $246,619 in the
two prior years.  Most advertising  costs were incurred  attempting to build our
transaction deposit base. Data processing expense increased to $568,095 from the
prior year total of $291,399,  an increase of 95%. The Bank incurred significant
costs related to its  conversion in this category in 2002.  These costs included
training, consulting, and transition fees related to the conversion process. The
increase  in  data  processing  expense  is  also  reflective  of the  Company's
additional transaction based deposit accounts and an increase in overall deposit
volume.  Loss on disposal of obsolete  equipment  totaled $65,104 in 2002. These
expenses  related to the write-off of certain  equipment  that could not support
the  new  core  system.  Depreciation  of  furniture,  fixtures,  and  equipment
increased  from $241,714 in 2000, to $263,535 in 2001, to $339,184 in 2002.  The
increase from 2000 to 2001 reflects the Bank's opening of certain  locations and
the subsequent  increase in the amount of premises  purchased.  In 2002, certain
asset lives were adjusted to better  reflect  useful lives of  equipment,  which
increased  current  expense.  Telephone  communications  expenses  increased  to
$345,559 in 2002 from  $127,958 in 2001,  and  $109,537 in 2000.  The  increased
expense in 2002 was primarily  attributable to the conversion and change in data
systems  which  required  an  increase  in the  amount and  complexity  of phone
communication  lines. The Bank also uses certain phone lines to transmit data to
its service bureau, which has also increased costs. In 2002, the Bank recorded a
valuation  allowance  of $972,889 on its  foreclosed  real  estate.  For further
explanation of this item see the discussion in the foreclosed asset section. ATM
expenses  increased to $312,200  from  $254,175,  an increase of $58,025 or 22%.
This  increase  was due to an increase in ATM's,  as well as higher  transaction
volume  at  ATM's  caused  by an  increase  in the  Bank's  transaction  account
business.  Office  supplies  increased  to $290,636  from  $253,545 in 2001,  an
increase of $37,091 or 15%.  This  increase  was caused by a the increase in the
Banks deposit and loan activity  particularly  in transaction  accounts.  Office
equipment  expenses  also  increased to $217,171 from  $211,316,  an increase of
$35,855 or 17%. The increase was due to the  expansion of the Branch  network as
well as the increased  volume of business.  Finally other expenses were $913,658
in 2002, increasing from $779,692 in 2001, and $536,474 in 2000. The increase in
other  expenses is  reflective of the increases in the Bank's size and volume of
transactions over this period.

INCOME TAX  EXPENSE.  During the year  ended  December  31,  2002,  the  Company
recorded income tax expense of $1,067,000 compared to expenses of $1,318,350 and
$1,207,000  in the two prior years.  The

                                       31
<PAGE>
Company's  effective tax rates for the years ended December 31, 2002,  2001, and
2000 were 35.2%, 34.7% and 34.1%,  respectively.  The slight increase in the tax
rate  during  2002  was  primarily   attributable  to  an  increase  in  certain
non-deductible  costs.  The  increase in the tax rate during 2001 was  primarily
attributable  to an increase in the state income tax burden.  In 2000 taxes were
substantially reduced because income earned on investment securities held by the
Bank's  passive  investment   corporation   subsidiary,   Tri-County  Investment
Corporation  ("TCIC"),  was not  subject to state  income tax. In 2001 and 2002,
reductions in the assets invested in TCIC as well as the interest rate earned on
these investments  reduced the amount of income sheltered from state income tax,
increasing the effective tax rate.

COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 2002 AND 2001

The Company's total assets increased $20,216,405, or 7.7%, to $282,173,695 as of
December 31, 2002 from $261,957,290 at December 31, 2001. The increase in assets
was primarily in cash and interest  bearing  deposits with banks which increased
by  $11,408,651  or 80.8% to  $25,536,783.  The  increase  was due to the  large
amounts of  securities  and loan  balances  which  prepaid in 2002.  The lack of
attractive long term investments caused the Bank to invest the proceeds of these
prepayments in short term assets.  In addition,  the Bank chose to sell,  rather
than  add to its  portfolio  substantially  all  fixed  rate  residential  first
mortgages  settled in 2002,  which increased cash balances while reducing loans.
Other investments  including  securities available for sale and held to maturity
as well as stock in the Federal Home Loan and Federal Reserve Banks increased by
$6,162,559  in 2002 to  $47,404,670  from  $41,242,111  in 2001.  As noted above
prepayments  on securities  increased due to the low interest rate  environment.
Although the Bank  purchased  securities  throughout  the year,  total  balances
increased  only   marginally  as   $33,115,668  in  securities   purchases  were
substantially offset by prepayments.

Loans held for sale decreased  from  $2,354,315 in the prior year to $1,262,667.
The  balance of this  account is subject to a high  amount of  variability.  Net
loans  receivable  increased  by  $3,999,271  or  2.1% to  $197,449,282  in 2002
compared with  $193,450,011  in 2001.  Large increases in commercial real estate
and commercial  lines of credit offset a decrease in residential  first mortgage
balances. Commercial real estate and commercial lines of credit grew because the
Bank focused on these lines as target  markets and the Bank keeps  substantially
all of  these  loans  in its  portfolio.  Commercial  lines  of  credit  grew to
$29,947,326  in 2002 an increase of  $11,408,117  or 61.5% from  $18,539,209  in
2001.  Commercial  real  estate loan  balances  grew to  $74,291,593  in 2002 an
increase of $8,674,676 or 13.2% from  $65,616,917 in 2001. These large increases
were offset by a large decrease in the balance of residential first mortgages to
$48,975,989 in 2002 from $61,429,647 in 2001 a decrease of $12,453,658 or 20.3%.
As noted above,  residential first mortgages declined due to increasing rates of
prepayment and the Bank's sale of most of the  residential  first mortgages that
it settled in 2002.

Premises and equipment  increased $303,547 primarily due to upgrades of computer
equipment and offices,  the opening of an additional  branch, and the conversion
to a new data core system.  Substantial amounts of equipment to support the core
data conversion were acquired during the year.  Foreclosed real estate decreased
primarily as the result of the establishment of a valuation allowance on certain
foreclosed  properties.  Other assets  increased  $525,528  primarily  due to an
increase in certain prepaid tax accounts.

Deposits increased to $203,025,112 at December 31, 2002 compared to $183,116,534
for the prior  year.  The total  increase of 10.9% was  concentrated  in certain
transaction-based account types.  Noninterest-bearing  demand deposits increased
to $33,045,310 at December 31, 2002 from the prior year's total of  $17,738,065,
an increase of $15,307,245, or 86.3%. Interest-bearing demand deposits increased
to $22,440,453 at year end compared with $20,842,088, an increase of $1,598,365,
or 7.7%.  Savings deposits increased by $10,307,533 or 50.6% to $30,675,167 from
$20,367,634.  Certificates  of deposit grew to $77,082,464  from  $70,360,762 an
increase of $6,721,702,  or 9.6%.  These  increases were offset by a decrease in
money market  deposits to $39,781,718  at December 31, 2002 from  $53,807,885 at
December  31,  2001,  a decrease  of  $14,026,167,  or 26.1%.  The  Company  had
relatively  small changes in short and long term debt and other  liabilities  in
2002.
                                       32
<PAGE>

The Company experienced a $1,286,307,  or 5.0%, increase in stockholders' equity
for the year ended December 31, 2002. The increase in  stockholders'  equity was
attributable  to the retention of earnings from the period less cash dividends ,
option  exercises and ESOP  activity.  These  increases in equity were partially
offset by repurchases of common stock totaling  $443,568 and a decrease in other
comprehensive income.

ASSET/LIABILITY MANAGEMENT

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

Among other tools used to monitor  interest  rate risk is a "gap"  report  which
measures the dollar difference between the amount of interest-earning assets and
interest-bearing  liabilities  subject to repricing  within a given time period.
Generally,  during a period of rising  interest  rates,  a negative gap position
would adversely affect net interest income, while a positive gap would result in
an  increase  in net  interest  income.  While,  conversely,  during a period of
falling  interest  rates,  a negative  gap would  result in an  increase  in net
interest income and a positive gap would adversely  affect net interest  income.
The following sets forth the Bank's gap position at December 31, 2002:

                                       33
<PAGE>
<TABLE>
<CAPTION>
                                                            OVER 3 TO 12        OVER 1
                                             0-3 MONTHS         MONTHS        THROUGH 5 YEARS   OVER 5 YEARS
                                                             (AMOUNTS IN THOUSANDS)
<S>                                           <C>              <C>               <C>               <C>
Assets:
Cash and due from banks                       $ 10,357         $     --          $     --          $     --
Interest-bearing deposits                       15,180               --                --                --
Securities                                       9,493           14,072            17,901             3,202
Loans held for sale                              1,263               --                --                --
Loans                                           29,630           30,845            43,328            97,628
                                              --------         --------          --------          --------
Total Assets                                  $ 65,923         $ 44,917          $ 61,229          $100,830
                                              ========         ========          ========          ========

Liabilities
Noninterest bearing deposits                  $ 33,045         $     --                --          $     --
Interest bearing demand deposits                22,440               --                --                --
Money market deposits                           39,782               --                --                --
Savings                                         30,675               --                --                --
Certificates of deposit                         14,899           34,131          $ 28,052                --
Short-term debt                                    752               --                --                --
Long-term debt                                      88           15,162             7,000            25,920
                                              --------         --------          --------          --------
Total Liabilities                             $141,681         $ 49,293          $ 35,052          $ 25,920
                                              ========         ========          ========          ========

Gap                                           $(75,758)        $ (4,376)         $ 26,177          $ 74,910
Cumulative Gap                                $(75,758)        $(80,134)         $(53,957)         $ 20,953
Cumulative Gap as a percentage of
  total assets                                  -26.85%          -28.40%           -19.12%             7.42%
</TABLE>


The foregoing  analysis assumes that the Bank's assets and liabilities move with
rates at  their  earliest  repricing  opportunities  based  on  final  maturity.
Mortgage-backed securities are assumed to mature during the period in which they
are  estimated to prepay and it is assumed that loans and other  securities  are
not called nor do they prepay prior to maturity. Certificates of deposit and IRA
accounts  are  presumed to reprice at  maturity.  NOW and savings  accounts  are
assumed to reprice within three months  although it is the Company's  experience
that such accounts may be less sensitive to changes in market rates.

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

                                       34
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

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

The Bank's  principal  sources of funds for  investments  and operations are net
income,  deposits from its primary market area,  principal and interest payments
on loans,  interest received on investment securities and proceeds from maturing
investment securities. Its principal funding commitments are for the origination
or  purchase  of loans  and the  payment  of  maturing  deposits.  Deposits  are
considered  the  primary  source of funds  supporting  the  Bank's  lending  and
investment activities. The Bank also uses borrowings from the FHLB of Atlanta to
supplement  deposits.  The  amount  of FHLB  advances  available  to the Bank is
limited to the lower of 35% of Bank assets or the amount supportable by eligible
collateral  including FHLB stock,  current residential first mortgage loans, and
certain securities.

The Bank's most liquid assets are cash, cash equivalents,  and  interest-bearing
deposits  which  are  comprised  of cash on hand,  amounts  due  from  financial
institutions,  and  interest-bearing  deposits.  The  levels of such  assets are
dependent on the Bank's  operating  financing and  investment  activities at any
given time. The variations in levels of cash and cash equivalents are influenced
by deposit flows and anticipated future deposit flows.

Cash, cash equivalents,  and interest-bearing  deposits as of December 31, 2002,
totaled  $25,536,783,  an increase of $11,408,651  (80.8%) from the December 31,
2001 total of  $14,128,132.  This  increase was  primarily  in  interest-bearing
deposits at other financial  institutions which totaled  $15,179,851at  December
31, 2002 compared to $7,678,158  at the end of 2001.  Cash and cash  equivalents
increased to $10,356,932 from $6,449,974 at December 31, 2001,  primarily due to
an increase in balances invested in short term mutual funds.

The  Company's  principal  sources  of cash flows are its  financing  activities
including  deposits  and  borrowings.   During  the  year  2002,  all  financing
activities  provided  $17,747,865  million in cash compared to $9,823,609 during
2001 and  $21,591,397  during 2000.  The  increase in cash flows from  financing
activities  during the most recent period was  principally due to an increase in
deposit growth in 2002. During 2002, net deposit growth was $19,908,378 compared
to $15,310,535 in 2001. In 2002,  short and long term borrowing used  $1,541,019
in cash compared to  $4,487,586 in cash used in 2001.  The Company also receives
cash from its operating  activities  which provided  $4,523,228  million in cash
during 2002, compared to cash flows of $5,012,228 and $4,068,169 during 2001 and
2000,  respectively.  The  decrease  in  operating  cash flows  during  2002 was
primarily  due to a decrease in the net activity in selling loans held for sale.
In  2001,  the  purchase  and sale of loans  held for sale  provided  $2,186,619
compared to $1,590,952 in 2002.

The Company's principal use of cash has been in investing  activities  including
its investments in loans for portfolio,  investment securities and other assets.
During  the year  ended  December  31,  2002,  the  Company  invested a total of
$18,364,135  in its  investing  activities  compared to  $9,750,117  in 2001 and
$28,556,739  in 2000.  The  principal  reason for the  increase  in cash used in
investing  Factivities  was an increase in the purchase of investments  over the
proceeds of sales, redemptions, and principal reductions.

Federal  banking  regulations  require  the  Company  and the  Bank to  maintain
specified levels of capital.  At December 31, 2002 the Company was in compliance
with these  requirements  with a leverage  ratio of 9.53%,  a Tier 1  risk-based
capital  ratio of 12.60%  and  total  risk-based  capital  ratio of  13.75%.  At
December  31,  2002,   the  Bank  met  the   criteria  for   designation   as  a
well-capitalized depository institution under FRB regulations.

                                       35
<PAGE>

IMPACT OF INFLATION AND CHANGING PRICES

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------

Not applicable since the registrant is a small business issuer.

                                       36
<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------

The Company's financial  statements and supplementary data appear in this Annual
Report beginning on the page immediately following Item 15 hereof.

ITEM  9.  CHANGES  IN AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
          FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------

Not applicable.

                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------

The information contained under the section captioned "Proposal I -- Election of
Directors" in the Company's  definitive  proxy  statement for the Company's 2003
Annual Meeting of Stockholders (the "Proxy Statement") is incorporated herein by
reference.

The executive officers of the Company are as follows:

MICHAEL L. MIDDLETON (55 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.  Since January
1996,  Mr.  Middleton  has served on the Board of  Directors of the Federal Home
Loan Bank of Atlanta,  most  recently as Vice  Chairman,  and also serves as its
Board Representative to the Council of Federal Home Loan Banks.

C. MARIE BROWN (60 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, of Zonta
and serves on  various  administrative  committees  of the  Hughesville  Baptist
Church and the board of the Charles County Chapter of the American Red Cross.

H.  BEAMAN  SMITH (57 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. Prior to that time, Mr. Smith
was a  majority  owner of the  Smith's  Family  Honey  Company  in Bryans  Road,
Maryland.  Mr. Smith is a Vice President of Fry Plumbing  Company of Washington,
D.C., a Trustee of the Ferguson  Foundation,  a member of the Bryans Road Sports
Council and the Treasurer of the Mayaone Association.

GREGORY C.  COCKERHAM  (48 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 22 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 (44 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.

                                       37
<PAGE>

ITEM 11.  EXECUTIVE COMPENSATION
--------------------------------

The information contained under the section captioned "Proposal I -- Election of
Directors  -- Executive  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" of 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" of 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.

     (d)  EQUITY COMPENSATION PLANS

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.
<TABLE>
<CAPTION>
                                                                                                 NUMBER OF SECURITIES REMAINING
                                                                                                  AVAILABLE FOR FUTURE ISSUANCE
                              NUMBER OF SECURITIES TO BE ISSUED      WEIGHTED-AVERAGE EXERCISE      UNDER EQUITY COMPENSATION
                                UPON EXERCISE OF OUTSTANDING           PRICE OF OUTSTANDING        PLANS (EXCLUDING SECURITIES
PLAN CATEGORY                   OPTIONS, WARRANTS AND RIGHTS       OPTIONS, WARRANTS AND RIGHTS      REFLECTED IN COLUMN (A))
-------------                 ---------------------------------    ----------------------------   -----------------------------
<S>                                    <C>                                <C>                                <C>
Equity compensation plans
  approved by security holders         82,701                             $20.71                             46,839

Equity compensation plans not
  approved by security holders (1)     14,900                              25.65                              6,642

      Total (2)                        97,601                              21.46                             55,281
<FN>
__________

(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.

</FN>
</TABLE>

                                       38
<PAGE>

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

The information required by this item is incorporated herein by reference to the
section captioned  "Proposal I -- Election of Directors" and "Transactions  with
the Company and the Bank" of the Proxy Statement.

ITEM 14.  CONTROLS AND PROCEDURES
---------------------------------

The Company's Chief Executive Officer and Chief Financial Officer have evaluated
the Company's  disclosure  controls and  procedures  (as such term is defined in
Rule  13a-14(c)  under the Exchange Act) as of a date within 90 days of the date
of filing of this Form 10-K. Based upon such determination,  the Company's Chief
Executive  Officer and Chief Financial Officer have concluded that such controls
and  procedures  are  effective  to ensure that the  information  required to be
disclosed  by the  Company in the  reports it files  under the  Exchange  Act is
gathered, analyzed and disclosed with adequate timeliness.

There have been no significant  changes in the Company's internal controls or in
other factors that could  significantly  affect internal controls  subsequent to
the date of the evaluation described above.


                                     PART IV

ITEM 15.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------

     (a)  LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
          ----------------------------------------------

          (1) Financial Statements.  The following is a list of the consolidated
financial statements which are being filed as part of this Annual Report on Form
10-K.
<TABLE>
<CAPTION>
                                                                                        Page
                                                                                        ----
         <S>                                                                             <C>
         Independent Auditors' Report                                                    41
         Consolidated Balance Sheets as of December 31, 2002 and 2001                    42
         Consolidated Statements of Income for the Years Ended December 31, 2002,
              2001 and 2000                                                              43
         Consolidated Statements of Changes in Stockholders' Equity for the Years
              Ended December 31, 2002, 2001 and 2000                                     44
         Consolidated Statements of Cash Flows for the Years Ended December 31, 2002,
              2001 and 2000                                                              45
         Notes to Consolidated Financial Statements                                      47
</TABLE>

          (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.

          3.1     Articles of Incorporation of Tri-County Financial Corporation*
          3.2     Bylaws of Tri-County Financial Corporation  *****
         10.1 +   Tri-County Financial Corporation 1995 Stock Option and
                  Incentive Plan, as amended **
         10.2 +   Tri-County Financial Corporation 1995 Stock Option Plan for
                  Non-Employee Directors, as amended ***

                                       39
<PAGE>

         10.3 +   Employment  Agreements with Michael L.  Middleton, as amended,
                  C. Marie Brown, as amended,  and Gregory C. Cockerham ****
         10.4 +   Guaranty Agreements with Michael L. Middleton, C. Marie Brown
                  and Gregory C. Cockerham **
         10.5 +   Executive Incentive Compensation Plan **
         10.6 +   Employment Agreement with William J. Pasenelli **
         10.7 +   Retirement Plan for Directors **
         10.8 +   Split Dollar Agreements with Michael L. Middleton and C. Marie
                  Brown **
         10.9+    Guaranty Agreement with William J. Pasenelli *****
         10.10+   Split Dollar Agreement with William J. Pasenelli *****
         21       Subsidiaries of the Registrant
         23       Consent of Stegman & Company
         99       Certification of Chief Executive Officer and Chief Financial
                  Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
_______________
    +     Management  contract or  compensatory  plan required to be filed as an
          exhibit pursuant to Item 14(c).
    *     Incorporated by reference to the Registrant's  Registration  Statement
          on Form S-4 (No. 33-31287).
    **    Incorporated by reference to the Registrant's Form 10-K for the fiscal
          year ended December 31, 2000.
    ***   Incorporated by reference to the Registrant's  Registration  Statement
          on Form S-8 (File No. 333-70800).
    ****  Incorporated by reference to  Registrant's  Annual Report on Form 10-K
          for the fiscal year ended December 31, 1998
    ***** Incorporated by reference to  Registrant's  Annual Report on Form 10-K
          for the fiscal year ended December 31, 2001


     (b)  REPORTS ON FORM 8-K. No reports on Form 8-K have been filed during the
          -------------------
          last quarter of the fiscal year covered by this report.

     (c)  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.

     (d)  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.

                                       40
<PAGE>

Audit Committee of the
Board of Directors and Stockholders
Tri-County Financial Corporation


     We have audited the accompanying  consolidated balance sheets of Tri-County
Financial  Corporation  as of  December  31,  2002  and  2001,  and the  related
consolidated  statements  of income,  changes in  stockholders'  equity and cash
flows for each of the three years in the period ended  December 31, 2002.  These
financial  statements are the  responsibility of the Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material respects, the consolidated financial position of
Tri-County  Financial  Corporation  as of December  31,  2002 and 2001,  and the
results  of its  operations  and cash  flows for each of the three  years in the
period  ended  December 31,  2002,  in  conformity  with  accounting  principles
generally accepted in the United States of America.



/s/ Stegman & Company


Baltimore, Maryland
February 28, 2003


                                       41
<PAGE>

                        TRI-COUNTY FINANCIAL CORPORATION

                           CONSOLIDATED BALANCE SHEETS
                           DECEMBER 31, 2002 AND 2001
<TABLE>
<CAPTION>
                        ASSETS

                                                                         2002             2001
<S>                                                                 <C>               <C>
Cash and due from banks                                             $ 10,356,932      $ 6,449,974
Interest-bearing deposits with banks                                  15,179,851        7,678,158
Investment securities available for sale - at fair value              41,826,113       35,917,207
Investment securities held to maturity - at amortized cost             2,841,807        2,289,354
Stock in Federal Home Loan Bank and Federal Reserve Bank - at cost     2,736,750        3,035,550
Loans held for sale                                                    1,262,667        2,354,315
Loans receivable - net of allowance for loan losses
of $2,314,074 and $2,281,581, respectively                           197,449,282      193,450,011
Premises and equipment, net                                            5,736,395        5,432,848
Foreclosed real estate                                                   716,014        1,800,569
Accrued interest receivable                                            1,042,453        1,049,401
Other assets                                                           3,025,431        2,499,903
                                                                   -------------    -------------
        TOTAL ASSETS                                               $ 282,173,695    $ 261,957,290
                                                                   =============    =============
             LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES:
  Noninterest-bearing deposits                                      $ 33,045,310     $ 17,738,165
  Interest-bearing deposits                                          169,979,802      165,378,369
                                                                   -------------    -------------
    Total deposits                                                   203,025,112      183,116,534
  Short-term borrowings                                                  752,298        1,813,317
  Long-term debt                                                      48,170,000       48,650,000
  Accrued expenses and other liabilities                               3,353,520        2,790,981
                                                                   -------------    -------------

    Total liabilities                                                255,300,930      236,370,832
                                                                   -------------    -------------
STOCKHOLDERS' EQUITY:
Common stock - par value $.01; authorized - 15,000,000 shares;
  issued 759,778 and 756,805 shares, respectively                          7,598            7,568
Additional paid in capital                                             7,716,906        7,545,590
Retained earnings                                                     18,817,615       17,678,367
Accumulated other comprehensive income                                   493,691          555,513
Unearned ESOP shares                                                    (163,045)        (200,580)
                                                                   -------------    -------------

Total stockholders' equity                                            26,872,765       25,586,458
                                                                   -------------    -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                         $ 282,173,695    $ 261,957,290
                                                                   =============    =============
</TABLE>

See notes to consolidated financial statements

                                       42
<PAGE>
                        TRI-COUNTY FINANCIAL CORPORATION
                        CONSOLIDATED STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
<TABLE>
<CAPTION>
                                                                      2002           2001           2000
                                                                      ----           ----           ----
<S>                                                                <C>            <C>            <C>
INTEREST INCOME:
   Interest and fees on loans                                      $ 14,221,247   $ 15,223,463   $ 13,950,200
   Taxable interest and dividends on investment securites             2,436,361      3,215,164      4,237,326
   Interest on deposits with banks                                      104,646         76,049        102,036
                                                                   ------------   ------------   ------------
        Total interest income                                        16,762,254     18,514,676     18,289,562
                                                                   ------------   ------------   ------------
INTEREST EXPENSE:
   Interest on deposits                                               3,453,443      5,935,478      6,314,871
   Interest on short term borrowings                                      7,634        259,558      1,418,146
   Interest on long term debt                                         2,507,551      2,562,775      1,694,473
                                                                   ------------   ------------   ------------
        Total interest expenses                                       5,968,628      8,757,811      9,427,490
                                                                   ------------   ------------   ------------

NET INTEREST INCOME                                                  10,793,626      9,756,865      8,862,072

PROVISION FOR LOAN LOSSES                                               160,000        360,000        360,000

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES                  10,633,626      9,396,865      8,502,072
                                                                   ------------   ------------   ------------
NONINTEREST INCOME:
   Loan appraisal, credit, and miscellaneous charges                    179,006        226,641         76,326
   Net gain on sale of loans held for sale                              499,304        187,304         85,716
   Net gain on sales of investment securities                                --             --        184,704
   Service charges                                                    1,041,662        953,496        996,884
   Other                                                                127,089         34,079         29,358
                                                                   ------------   ------------   ------------
        Total noninterest income                                      1,847,061      1,401,520      1,372,988
                                                                   ------------   ------------   ------------
NONINTEREST EXPENSE:
   Salary and employee benefits                                       4,222,006      3,821,330      3,643,865
   Occupancy expense                                                    831,148        689,575        615,809
   Advertising                                                          338,216        301,975        246,619
   Data processing expense                                              568,095        291,399        255,792
   Loss on disposal of obsolete equipment                                65,104             --             --
   Depreciation of furniture, fixtures, and equipment                   339,184        263,535        241,714
   Telephone communications                                             345,559        127,958        109,537
   Valuation allowance on foreclosed real estate                        972,889             --             --
   ATM expenses                                                         312,200        254,175        340,532
   Office supplies                                                      290,636        253,545        156,260
   Office equipment expenses                                            247,171        211,316        185,262
   Other                                                                913,658        779,692        536,474
                                                                   ------------   ------------   ------------
        Total noninterest expenses                                    9,445,866      6,994,500      6,331,864
                                                                   ------------   ------------   ------------
INCOME BEFORE INCOME TAXES                                            3,034,821      3,803,885      3,543,196
Income tax expense                                                    1,067,000      1,318,350      1,207,000
                                                                   ------------   ------------   ------------
NET INCOME                                                         $  1,967,821   $  2,485,535   $  2,336,196
                                                                   ============   ============   ============
INCOME PER COMMON SHARE
   Basic                                                                  $2.58          $3.24          $2.98
   Diluted                                                                 2.45           3.11           2.85
</TABLE>

See notes to consolidated financial statements

                                       43
<PAGE>
                        TRI-COUNTY FINANCIAL CORPORATION

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001, AND 2000
<TABLE>
<CAPTION>
                                                                                  Accumulated
                                                                                     Other        Unearned
                                         Common      Paid-in       Retained      Comprehensive      ESOP
                                          Stock      Capital       Earnings      Income (Loss)     Shares          Total
                                         ------      -------       --------      -------------    ---------        -----
<S>                                       <C>       <C>            <C>               <C>           <C>          <C>
BALANCES, JANUARY 1, 2000                 $ 7,882   $ 7,447,240    $ 14,555,324      $ (718,498)   $(176,565)   $ 21,115,383
  Comprehensive income:
    Net Income                                 --            --       2,336,196              --           --       2,336,196
    Unrealized gains on investment
      securities net of tax of $310,083                                                 603,569                      603,569
                                                                                                                ------------
      Total comprehensive income                                                                                   2,939,765
Cash dividend  $0.30 per share                 --            --        (236,595)             --           --        (236,595)
Excess of fair market value over cost
  of leveraged ESOP shares released            --        12,964              --              --           --          12,964
Exercise of stock options                      50        40,661              --              --           --          40,711
Repurchase of common stock                   (173)           --        (479,217)             --           --        (479,390)
Net change in unearned ESOP shares             18            --              --              --       36,966          36,984
                                          -------   -----------    ------------       ---------    ---------    ------------
BALANCES, DECEMBER 31, 2000                 7,777     7,500,865      16,175,708        (114,929)    (139,599)     23,429,822
  Comprehensive income:
    Net Income                                 --            --       2,485,535              --           --       2,485,535
    Unrealized gains on investment
      securities net of tax of $343,599        --            --              --         670,442           --         670,442
                                                                                                                ------------
      Total comprehensive income                                                                                   3,155,977
Cash dividend  $0.40 per share                 --            --        (309,204)             --           --        (309,204)
Excess of fair market value over cost
  of leveraged ESOP shares released            --        12,964              --              --           --          12,964
Exercise of stock options                      56        31,761              --              --           --          31,817
Repurchase of common stock                   (248)           --        (673,672)             --           --        (673,920)
Net change in unearned ESOP shares            (17)           --              --              --      (60,981)        (60,998)
                                          -------   -----------    ------------       ---------    ---------    ------------
BALANCES, DECEMBER 31, 2001                 7,568     7,545,590      17,678,367         555,513     (200,580)     25,586,458
  Comprehensive income:
    Net Income                                 --            --       1,967,821              --           --       1,967,821
    Unrealized gains on investment
      securities net of tax of $24,455         --            --              --         (61,822)          --         (61,822)
                                                                                                                ------------
      Total comprehensive income                                                                                   1,905,999
Cash dividend  $0.50 per share                 --            --        (385,129)             --           --        (385,129)
Excess of fair market value over cost
  of leveraged ESOP shares released            --        10,445              --              --           --          10,445
Exercise of stock options                     133       160,871              --              --           --         161,004
Repurchase of common stock                   (123)           --        (443,444)                                    (443,567)
Net change in unearned ESOP shares             20            --              --              --       37,535          37,555
                                          -------   -----------    ------------       ---------    ---------    ------------
BALANCES, DECEMBER 31, 2002               $ 7,598   $ 7,716,906    $ 18,817,615       $ 493,691    $(163,045)   $ 26,872,765
                                          =======   ===========    ============       =========    =========    ============
</TABLE>

See notes to consolidated financial statements

                                       44
<PAGE>
                        TRI-COUNTY FINANCIAL CORPORATION

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              FOR THE YEARS ENDED DECMBER 31, 2002, 2001, AND 2000
<TABLE>
<CAPTION>
                                                                                2002           2001           2000
                                                                                ----           ----           ----
<S>                                                                         <C>            <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                                $ 1,967,821    $ 2,485,535    $ 2,336,196
   Adjustments to reconcile net income to net
    cash provided by operating activities:
      Valuation allowance on foreclosed real estate                             972,889             --             --
      Provision for loan losses                                                 160,000        360,000        360,000
      Depreciation and amortization                                             445,558        396,400        348,110
      Net amortization of premium/discount on
      mortgage backed securities and investments                                 48,426         66,146        (86,909)
      Deferred income tax benefit                                              (399,000)      (205,000)      (118,000)
      Decrease (increase) in accrued interest receivable                          6,948        304,257       (207,138)
      Decrease in deferred loan fees                                            (90,291)       (18,131)       (31,732)
      Increase in accrued expenses and other liabilities                        562,539        638,249        911,013
      Decrease (increase) in other assets                                      (319,625)    (1,006,157)       323,234
      Loss (gain) on disposal of premises and equipment                          76,315         (8,386)            --
      Gain on sale of investment securities                                          --             --       (184,704)
      Origination of loans held for sale                                    (23,376,262)    (9,752,097)    (1,966,774)
      Proceeds from sale of loans held for sale                              24,967,214     11,938,716      2,470,589
      Gain on sales of loans held for sale                                     (499,304)      (187,304)       (85,716)
                                                                           ------------   ------------   ------------
      Net cash provided by operating activities                               4,523,228      5,012,228      4,068,169
                                                                           ------------   ------------   ------------

CASH FLOWS FROM INVESTING ACTIVITIES:
  Net increase in interest-bearing deposits with banks                       (7,501,693)    (1,702,844)    (2,912,035)
  Purchase of investment securities available for sale                      (30,740,615)    (2,246,225)    (6,023,907)
  Proceeds from sale, redemption or principal payments
    of investment securities available for sale                              24,692,742     23,423,736      6,927,513
  Purchase of investment securities held to maturity                         (2,375,053)    (1,345,703)      (893,649)
  Proceeds from maturities or principal payments
    of investment securities held to maturity                                 1,822,600        770,717      1,128,333
  Net redemption (purchase) of FHLB and Federal Reserve stock                   298,800             --       (747,850)
  Loans originated or acquired                                              (86,078,892)   (96,149,353)   (70,415,720)
  Principal collected on loans                                               82,009,912     70,448,931     44,707,731
  Purchase of premises and equipment                                         (1,106,504)    (1,334,396)      (327,155)
  Proceeds from disposal of premises and equipment                              281,084          8,963             --
  Sale (acquisition) of foreclosed real estate                                  333,484     (1,623,943)            --
                                                                           ------------   ------------   ------------
      Net cash used in investing activities                                 (18,364,135)    (9,750,117)   (28,556,739)
                                                                           ------------   ------------   ------------
</TABLE>

                                       45
<PAGE>
                        TRI-COUNTY FINANCIAL CORPORATION

                CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
              FOR THE YEARS ENDED DECMBER 31, 2002, 2001, AND 2000
<TABLE>
<CAPTION>

                                                                            2002          2001           2000
                                                                            ----          ----           ----
<S>                                                                     <C>           <C>            <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net increase in deposits                                              $ 19,908,578  $ 15,310,535   $ 12,064,199
  Net (decrease) increase in short-term borrowings                        (1,061,019)  (11,737,586)       152,525
  Dividends paid                                                            (385,129)     (309,204)      (236,595)
  Exercise of stock options                                                  161,004        31,817         40,711
  Net change in unearned ESOP shares                                          47,999       (48,033)        49,948
  Repurchase of common stock                                                (443,568)     (673,920)      (479,391)
  Proceeds from long-term borrowings                                         920,000    12,250,000     30,000,000
  Payments of long-term borrowings                                        (1,400,000)   (5,000,000)   (20,000,000)
                                                                        ------------  ------------   ------------

  Net cash provided by financing activities                               17,747,865     9,823,609     21,591,397

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                           3,906,958     5,085,720     (2,897,173)

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                             6,449,974     1,364,254      4,261,427
                                                                        ------------  ------------   ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                $ 10,356,932  $  6,449,974   $  1,364,254
                                                                        ============  ============   ============

Supplementary cash flow information:
  Cash paid during the year for:
    Interest                                                            $  6,225,058  $  9,015,483   $  8,737,746
    Income taxes                                                           2,110,500     1,431,000        925,000

Noncash transfer from loans to foreclosed real estate                             --     1,276,070             --
</TABLE>

See notes to consolidated financial statements.

                                       46
<PAGE>
                        TRI-COUNTY FINANCIAL CORPORATION

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
              FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000



1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

          Basis of Presentation and Consolidation
          ---------------------------------------

               The  consolidated  financial  statements  include the accounts of
Tri-County Financial Corporation and its wholly owned subsidiary, Community Bank
of Tri-County (the "Bank") and the Bank's wholly owned subsidiaries,  Tri-County
Investment   Corporation  and  Community  Mortgage   Corporation  of  Tri-County
(collectively,   the  "Company").  All  significant  intercompany  balances  and
transactions have been eliminated in consolidation. The accounting and reporting
policies of the Company conform with accounting principles generally accepted in
the  United  States of  America  and to general  practices  within  the  banking
industry.  Certain  reclassifications  have  been  made  to  amounts  previously
reported to conform with classifications made in 2002.

          Use of Estimates
          ----------------

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

          Nature of Operations
          --------------------

               The Company,  through its bank subsidiary,  conducts full service
commercial banking operations throughout the Southern Maryland area. Its primary
financial  deposit  products  are  savings,  transaction,  and term  certificate
accounts.  Its primary  lending  products  are  mortgage  loans on  residential,
construction  and  commercial  real  estate and various  types of  consumer  and
commercial lending.

          Significant Group Concentrations of Credit
          ------------------------------------------

               Most of the  Company's  activities  take  place  in the  Southern
Maryland area  comprising  St. Mary's,  Charles,  and Calvert  counties.  Note 2
discusses the types of securities  the Company  invests in. Note 3 discusses the
type of lending  that the  Company  engages  in. The  Company  does not have any
significant concentration to any one customer or industry.

                                       47
<PAGE>

          Cash and Cash Equivalents
          -------------------------

               For purposes of the  consolidated  statements of cash flows,  the
Company  considers all highly liquid debt instruments  with original  maturities
when purchased of three months or less to be cash equivalents. These instruments
are presented as cash and due from banks.

          Investment Securities
          ---------------------

               Investment securities that are held principally for resale in the
near term are  classified as trading  assets and are recorded at fair value with
changes in fair value  recorded in earnings.  The Company had no trading  assets
during the periods  presented.  Debt securities that management has the positive
intent and ability to hold to maturity are classified as "held-to-maturity"  and
recorded at amortized  cost.  Securities  not  classified as held to maturity or
trading,  including equity securities with readily  determinable fair values are
classified as  "available-for-sale"  and recorded at fair value, with unrealized
gains and losses  excluded from  earnings and reported net of deferred  taxes in
other comprehensive income, a separate component of stockholders' equity.

               Purchase premiums and discounts are recognized in interest income
using the interest method over the terms of the securities. Declines in the fair
value of  held-to-maturity  and  available-for-sale  securities below their cost
that are deemed to be other than temporary are reflected in earnings as realized
losses.  Gains and losses on the sales of  securities  are recorded on the trade
date and are determined using the specific identification method.

               The Company invests in Federal Home Loan Bank and Federal Reserve
Bank stock which are considered restricted as to marketability.

          Loans Held for Sale
          -------------------

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

          Loans Receivable
          ----------------

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

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

                                       48
<PAGE>

               The  accrual of  interest on  mortgage  and  commercial  loans is
discontinued  at the time the loan is 90 days  delinquent  unless  the credit is
well secured and in the process of collection. Consumer loans are charged-off no
later than 120 days past due. In all cases,  loans are placed on  nonaccrual  or
charged-off  at an earlier  date if  collection  of  principal  or  interest  is
considered doubtful.

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

          Allowance for Loan Losses
          -------------------------

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

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

               The allowance for loan loss consists of a specific  component and
a nonspecific  component.  The components of allowance for loan losses represent
an estimation done pursuant to either SFAS No. 5 "Accounting for Contingencies",
or SFAS No. 114 "Accounting by Creditors for Impairment of a Loan". The specific
component of the allowance for loan losses reflects  expected  losses  resulting
from analysis developed through specific credit allocations for individual loans
and  historical  loss  experience for each loan  category.  The specific  credit
allocations  are based on a regular  analysis  of all loans over a  fixed-dollar
amount  where  the  internal  credit  rating  is at  or  below  a  predetermined
classification.  The  historical  loan loss element is determined  statistically
using a loss  migration  analysis that examines loss  experience and the related
internal gradings of loans charged-off. The loss migration analysis is performed
quarterly and loss factors are updated regularly based on actual experience. The
specific  component of the allowance for loan losses also includes  management's
determination  of the  amounts  necessary  for  concentrations  and  changes  in
portfolio mix and volume.

               The nonspecific  portion of the allowance is determined  based on
management's  assessment  of general  economic  conditions,  as well as specific
economic factors in the individual  markets in which the Company operates.  This
determination  inherently  involves a higher risk of  uncertainty  and considers
current  risk  factors  that  may not  have  yet  manifested  themselves  in the
Company's  historical  loss factors used to determine the specific  component of
the allowance and it recognizes knowledge of the portfolio may be incomplete.

                                       49
<PAGE>

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

          Mortgage Servicing Assets
          -------------------------

               Mortgage  servicing assets are recognized as separate assets when
rights are  acquired  through  purchase or through sale of mortgages or mortgage
servicing rights.  Capitalized servicing rights are reported in other assets and
are amortized into noninterest  income in proportion to, and over the period of,
the estimated  future net servicing income of the underlying  financial  assets.
Servicing  assets are evaluated for impairment  based upon the fair value of the
rights as compared to amortized  cost.  Impairment is determined by  stratifying
rights by predominant  characteristics,  when available,  such as interest rates
and terms. Fair value is determined using prices for similar assets with similar
characteristics,  when  available,  or based upon  discounted  cash flows  using
market based assumptions. Impairment is recognized through a valuation allowance
for an  individual  stratum,  to the  extent  that  fair  value is less than the
capitalized amount for the stratum.

          Premises and Equipment
          ----------------------

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

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


          Foreclosed Real Estate
          ----------------------

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

                                       50
<PAGE>

          Income Taxes
          ------------

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

          Earnings Per Share
          ------------------

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

          Stock-Based Compensation
          ------------------------

               Stock based  compensation is recognized using the intrinsic value
method.  For  disclosure  purposes,  pro forma net income and earnings per share
effects are provided as if the fair value method had been applied.

          New Accounting Standards
          ------------------------

               Accounting for  Stock-Based  Compensation:  In December 2002, the
Financial  Accounting  Standards  Board  issued  SFAS No. 148,  "Accounting  for
Stock-Based  Compensation - Transition and Disclosure",  which provides guidance
on how  to  transition  from  the  intrinsic  value  method  of  accounting  for
stock-based  employee  compensation  under  Accounting  Principles Board Opinion
("APB") 25 to SFAS No.  123's fair value method of  accounting,  if a company so
elects. The Company has not elected to change its method of accounting for stock
based compensation so the provisions of SFAS 148 had no effect on the results of
operations.

               Accounting for Long-lived Assets:  SFAS No. 144,  "Accounting for
the Impairment or Disposal of Long-Lived Assets", was issued in October 2001 and
addresses how and when to measure  impairment  on  long-lived  assets and how to
account for long-lived  assets that an entity plans to dispose of either through
sale,  abandonment,   exchange,  or  distribution  to  owners.  The  statement's
provisions  supersede SFAS No. 121,  Accounting for the Impairment of Long-Lived
Assets and for  Long-Lived  Assets to Be  Disposed  of,  which  addressed  asset
impairment,  and certain  provisions  of APB Opinion 30 related to reporting the
effects of the  disposal of a business  segment  and  requires  expected  future
operating  losses from  discontinued  operations to be recorded in the period in
which the losses are incurred rather than the measurement  date.  Under SFAS No.
144, more dispositions may qualify for discontinued  operations treatment in the
income  statement.  The  provisions  of SFAS No.  144 became  effective  for the
Company on January  1,  2002,  and did not have a material  impact on results of
operations, financial position, or liquidity.

                                       51
<PAGE>

2.   INVESTMENT SECURITIES

     The  amortized  cost and  estimated  fair values of  securities  with gross
unrealized losses and gains are:
<TABLE>
<CAPTION>
                                                                          December 31, 2002
                                                         -----------------------------------------------------------
                                                                            Gross        Gross
                                                           Amortized      Unrealized   Unrealized    Estimated Fair
                                                             Cost            Gains       Losses         Values
                                                             ----            -----       ------         ------
<S>                                                      <C>              <C>          <C>           <C>
Asset-backed securities issued by:
     GSE's                                               $ 28,597,630     $ 601,972    $     --      $ 29,199,602
     Other                                                  7,826,724       104,014         919         7,929,819
                                                         ------------     ---------    --------      ------------
Total debt securities available for sale                   36,424,354       705,986         919        37,129,421
Corporate equity securities                                   509,010       244,971      20,000           733,981
Mutual Funds                                                3,962,711            --          --         3,962,711
                                                         ------------     ---------    --------      ------------
Total securities available for sale                      $ 40,896,075     $ 950,957    $ 20,919      $ 41,826,113
                                                         ============     =========    ========      ============

Securities held-to-maturity
U.S. Government obligations                              $    300,000     $      --    $  1,760      $    298,240
Other investments                                           2,541,807        16,269          --         2,558,076
                                                         ------------     ---------    --------      ------------
Total securities held-to-maturity                        $  2,841,807     $  16,269    $  1,760      $  2,856,316
                                                         ============     =========    ========      ============
<CAPTION>
                                                                          December 31, 2001
                                                         -----------------------------------------------------------
                                                                            Gross        Gross
                                                           Amortized      Unrealized   Unrealized    Estimated Fair
                                                             Cost            Gains       Losses         Values
                                                             ----            -----       ------         ------
<S>                                                      <C>              <C>          <C>           <C>
Asset-backed securities issued by:
     GSE's                                               $ 25,603,305     $ 564,133    $ 82,495      $ 26,084,943
     Other                                                  8,846,200       147,777         516         8,993,461
                                                         ------------     ---------    --------      ------------
Total debt securities available for sale                   34,449,505       711,910      83,011        35,078,404
Corporate equity securities                                   509,010       218,212          --           727,222
Mutual Funds                                                  111,581            --          --           111,581
                                                         ------------     ---------    --------      ------------
Total securities available for sale                      $ 35,070,096     $ 930,122    $ 83,011      $ 35,917,207
                                                         ============     =========    ========      ============
Securities held-to-maturity
U.S. Government obligations                              $    300,000     $      --    $    500      $    299,500
Other investments                                           1,989,354            --          --         1,989,354
                                                         ------------     ---------    --------      ------------
Total securities held-to-maturity                        $  2,289,354     $      --    $    500      $  2,288,854
                                                         ============     =========    ========      ============
</TABLE>


Mutual Funds  investments  detailed above consist of short duration mutual funds
whose market value  approximated  amortized cost. Other  investments  consist of
certain CD strip  instruments  whose market  value is estimated  based on market
returns on similar risk and maturity instruments because no active market exists
for  these  instruments.   At  December  31,  2002  and  2001,  U.S.  Government
obligations with a carrying value of $300,000 were pledged to secure public unit
deposits and for other  purposes  required or permitted by law. In addition,  at
December 31, 2002 and 2001,  certain other  securities  with a carrying value of
$5,047,000 and $3,413,300, respectively were pledged to secure certain deposits.
At December

                                       52
<PAGE>

31,  2002,  securities  with a carrying  value of  $38,200,000  were  pledged as
collateral for advances from the Federal Home Loan Bank of Atlanta.

     The scheduled maturities of securities at December 31, 2002 are as follows:
<TABLE>
<CAPTION>
                                                            Available for Sale                       Held to Maturity
                                                    --------------------------------          -----------------------------
                                                     Amortized               Fair                Amortized           Fair
                                                        Cost                Value                  Cost              Value
                                                    --------------------------------          -----------------------------
<S>                                                 <C>                  <C>                   <C>               <C>
Within one year                                     $ 3,962,711          $ 3,962,711           $  300,000        $  298,240
Over one year through five years                             --                   --            2,541,807         2,558,076
Over five years through ten years                            --                   --                   --                --
                                                    --------------------------------          -----------------------------
                                                      3,962,711            3,962,711           $2,841,807        $2,856,316
Mortgage-backed securities                           36,424,354           37,129,421                   --                --
                                                    --------------------------------          -----------------------------
                                                    $40,387,065          $41,092,132           $2,841,807        $2,856,316
                                                    ================================          =============================
</TABLE>

     Proceeds from the sales of investment  securities available for sale during
2002, 2001, and 2000 were $0, $0, and $186,900, respectively. Gross gains in the
years  ending  December  31,  2002,  2001,  and 2000 were $0, $0,  and  $184,704
respectively.  Gross losses for the years ending  December 31, 2002,  2001,  and
2000 were $-0-, $0, and $0, respectively.  Asset-backed securities are comprised
of mortgage-backed  securities as well as mortgage derivative securities such as
collateralized   mortgage   obligations  and  real  estate  mortgage  investment
conduits.  In  certain  cases,  the Bank will  purchase  securities  of a single
private  issuer,  defined as an issuer which is not a government  or  government
sponsored entity, in total amounts in excess of 10% of stockholders' equity. The
Bank only does so when satisfied that such  concentrations pose no threat to the
Bank's  safety or  soundness.  The Bank had no  holdings  of private  issuers in
excess of 10% of capital at December 31, 2002.

                                       53
<PAGE>
3.   LOANS RECEIVABLE

     Loans receivable at December 31, 2002 and 2001 consist of the following:
<TABLE>
<CAPTION>
                                               2002                  2001
                                               ----                  ----
<S>                                       <C>                   <C>
Commercial real estate                    $  74,291,593         $  65,616,917
Residential first mortgages                  48,975,989            61,429,647
Residential construction                     14,578,702            18,136,008
Second mortgage loans                        19,007,265            18,580,099
Commercial lines of credit                   29,947,326            18,539,209
Consumer loans                               13,630,086            14,187,608
                                          -------------         -------------
                                            200,430,961           196,489,488
                                          -------------         -------------

Less:
  Deferred loan fees                            667,605               757,896
  Allowance for loan loss                     2,314,074             2,281,581
                                          -------------         -------------
                                              2,981,679             3,039,477
                                          -------------         -------------
                                          $ 197,449,282         $ 193,450,011
                                          =============         =============
</TABLE>

     The  following  table sets forth the  activity  in the  allowance  for loan
losses:
<TABLE>
<CAPTION>
                                             2002          2001          2000
                                             ----          ----          ----
<S>                                       <C>           <C>           <C>
Balance January 1,                        $2,281,581    $1,929,531    $1,653,290

Add:
  Provision charged to operations            160,000       360,000       360,000
  Recoveries                                   2,795        31,417        12,034
Less:
  Charge-offs                                130,302        39,367        95,793
                                          ----------    ----------    ----------
Balance, December 31                      $2,314,074    $2,281,581    $1,929,531
                                          ==========    ==========    ==========
</TABLE>

     No loans included within the scope of SFAS No. 114 were identified as being
impaired at December 31, 2002 or 2001 and for the years then ended.

                                       54
<PAGE>

     Loans on which the  recognition  of interest has been  discontinued,  which
were not included  within the scope of SFAS No. 114,  amounted to  approximately
$597,000,   $207,000,   and  $7,000  at  December  31,  2002,  2001,  and  2000,
respectively.  If interest  income had been  recognized on  nonaccrual  loans at
their stated rates during 2002, 2001, and 2000,  interest income would have been
increased by approximately $33,033,  $10,480, and $913,  respectively.  Interest
income of $33,320,  $12,914 and $8,912 was  recognized  for these loans in 2002,
2001 and 2000.

     Included in loans  receivable  at December 31, 2002 and 2001, is $1,022,846
and $1,223,840 due from officers and directors of the Bank. These loans are made
in the  ordinary  course  of  business  at  substantially  the  same  terms  and
conditions as those  prevailing  at the time for  comparable  transactions  with
outsiders  and are not  considered  to  involve  more  than the  normal  risk of
collectibility.  Activity in loans  outstanding  to officers  and  directors  is
summarized as follows:
<TABLE>
<CAPTION>
                                                     2002               2001
                                                     ----               ----
<S>                                              <C>                <C>
Balance, beginning of year                       $ 1,223,840        $   536,005
New loans made during year                            60,001          1,150,460
Repayments made during year                         (260,995)          (462,625)
                                                 -----------        -----------
Balance, end of year                             $ 1,022,846        $ 1,223,840
                                                 ===========        ===========
</TABLE>


4.   LOAN SERVICING

     Loans  serviced  for others and not  reflected  in the  balance  sheets are
$73,205,838  and  $68,287,344  at  December  31,  2002 and  2001,  respectively.
Servicing loans for others generally  consists of collecting  mortgage payments,
maintaining  escrow accounts,  disbursing  payments to investors and foreclosure
processing.  Loan servicing income is recorded on the accrual basis and includes
servicing fees from investors and certain charges collected from borrowers, such
as late payment fees.  Mortgage  servicing rights capitalized during 2002, 2001,
and 2000 totaled $298,096, $182,119, and $45,365, respectively.

     Amortization of mortgage  servicing rights totaled $48,000,  $144,000,  and
$144,000,  respectively. Net servicing rights assets totaled $780,408, $525,075,
and $486,956 at December 31, 2002, 2001, and 2000, respectively.

                                       55
<PAGE>

5.   FORECLOSED ASSETS

Foreclosed  assets are presented net of an allowance for losses.  An analysis of
the allowance for losses on foreclosed assets is as follows:
<TABLE>
<CAPTION>
                                                        Years ended December 31,
                                                  -----------------------------------
                                                    2002          2001         2000
                                                    ----          ----         ----
<S>                                               <C>            <C>          <C>
Balance at beginning of year                      $     --       $   --       $    --
Provision for losses                               972,899           --            --
Charge-offs
Recoveries                                              --           --            --
                                                  --------       ------       -------
Balance at end of year                            $972,899       $   --       $    --
                                                  ========       ======       =======
</TABLE>

Expenses applicable to foreclosed assets include the following:
<TABLE>
<CAPTION>
                                                    Years ended December 31,
                                             ------------------------------------
                                                  2002         2001        2000
                                                  ----         ----        ----
<S>                                             <C>           <C>         <C>
Net gain on sale of foreclosed real estate      (64,755)        --          --
Provision for losses                            972,889         --          --
Operating expenses                               12,176        6,253       5,728
                                              ---------      -------     -------
                                              $ 920,310      $ 6,253     $ 5,728
                                              =========      =======     =======
</TABLE>
                                       56
<PAGE>

6.   PREMISES AND EQUIPMENT

     A summary of premises  and  equipment  at December  31, 2002 and 2001 is as
follows:
<TABLE>
<CAPTION>
                                                              2002                2001
                                                              ----                ----
<S>                                                       <C>                  <C>
Land                                                      $ 1,399,311          $ 1,731,941
Building and improvements                                   4,322,963            3,642,101
Furniture and equipment                                     2,367,380            2,824,015
Automobiles                                                   111,881              103,144
                                                          -----------          -----------
Total cost                                                  8,201,535            8,301,201
Less accumulated depreciation                               2,465,141            2,868,353
                                                          -----------          -----------
Premises and equipment, net                               $ 5,736,394          $ 5,432,848
                                                          ===========          ===========
</TABLE>


     Certain bank  facilities are leased under various  operating  leases.  Rent
expense  was  $211,200,   $242,387,   and  $168,921  in  2002,  2001  and  2000,
respectively.  Future minimum rental commitments under noncancellable  operating
leases are as follows:

       2003                                                 $181,812
       2004                                                  181,362
       2005                                                  180,912
       2006                                                  180,462
       2007                                                  179,562
       Thereafter                                            322,224
                                                          ----------
           Total                                          $1,226,334
                                                          ==========

                                       57
<PAGE>

7.   DEPOSITS

     Deposits outstanding at December 31 consist of:
<TABLE>
<CAPTION>
                                                     2002                2001
                                                     ----                ----
<S>                                             <C>                 <C>
Noninterest-bearing demand                      $ 33,045,310        $ 17,738,165
Interest-bearing:
  Demand                                          22,440,453          20,842,088
  Money market deposits                           39,781,718          53,807,885
  Savings                                         30,675,167          20,367,634
  Certificates of deposit                         77,082,464          70,360,762
                                                ------------        ------------
Total interest-bearing                           169,979,802         165,378,369
                                                ------------        ------------
Total deposits                                  $203,025,112        $183,116,534
                                                ============        ============
</TABLE>

     The aggregate  amount of time deposits in denominations of $100,000 or more
at December 31, 2002 and 2001 were $18,790,000 and $17,018,000, respectively.

At December 31, 2002,  the scheduled  maturities of time deposits are as follows
(in 000's):

                        2003                            $49,031
                        2004                             12,688
                        2005                              4,867
                        2006                             10,496
                                                        -------
                                                        $77,082
                                                        =======

8.   SHORT TERM BORROWINGS AND LONG-TERM DEBT

     The Bank's  long-term  debt consists of advances from the Federal Home Loan
Bank of Atlanta. The Bank classifies debt based upon original maturity, and does
not  reclassify  debt to short term status during its life.  These include fixed
rate, adjustable rate, and convertible  advances.  Rates and maturities on these
advances are as follows:
<TABLE>
<CAPTION>
                                       Fixed              Adjustable           Fixed Rate
                                       Rate                  Rate             Convertible
                                       -----                 ----             -----------
<S>                                    <C>                  <C>                  <C>
    2002
Highest Rate                           5.43%                2.49%                6.25%
Lowest Rate                            1.00%                2.49%                4.62%
Weighted Average Rate                  4.69%                2.49%                5.42%
Matures through                         2022                 2005                 2011

    2002
Highest Rate                           5.43%                5.79%                6.25%
Lowest Rate                            1.13%                5.31%                4.62%
Weighted Average Rate                  4.69%                5.69%                5.42%
Matures through                         2022                 2002                 2011
</TABLE>

                                       58
<PAGE>

     The Bank's  fixed rate debt  generally  consists of advances  with  monthly
interest  payments and principal  due at maturity.  The Bank's  adjustable  rate
long-term debt adjusts quarterly based upon a margin over the three month London
Interbank Offered Rate ("LIBOR"). The margin is set at 80 basis points. The debt
has a minimum  interest of .80% and a maximum  rate of 5.30%.  The Bank's  fixed
rate,  convertible,  long-term debt is callable by the issuer,  after an initial
period ranging from six months to five years.  These advances become callable on
dates  ranging  from 2002 to 2005.  Depending on the  specific  instrument,  the
instrument is callable  either  continuously  after the initial period  (Bermuda
option)  or  only  at  the  date  ending  the  initial  period  (European).  The
contractual maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
                                                   December 31,
                                                         2002                                           2001
                            ---------------------------------------------------------------          -----------
                               Fixed         Adjustable       Fixed Rate
                                Rate            Rate          Covertible           Total                Total
                                ----            ----          ----------           -----                -----
<S>                         <C>              <C>              <C>               <C>                  <C>
Due in 2002                 $       --       $       --       $        --       $        --          $ 6,400,000
Due in 2003                     88,000               --                --            88,000           10,088,000
Due in 2004                     88,000               --                --            88,000               88,000
Due in 2005                     74,000        5,000,000        10,000,000        15,074,000               74,000
Due in 2006                  7,000,000               --                --         7,000,000            7,000,000
Due in 2007                         --               --                --                --                   --
Thereafter                     920,000               --        25,000,000        25,920,000           25,000,000
                            ----------       ----------       -----------       -----------          -----------
                            $8,170,000       $5,000,000       $35,000,000       $48,170,000          $48,650,000
                            ==========       ==========       ===========       ===========          ===========
</TABLE>

     From time to time, the Bank also has daily advances outstanding,  which are
classified as short-term debt. These advances are repayable at the Bank's option
at any time and reprice  daily.  These  advances  totaled $0 and  $1,000,000  at
December  31,  2002 and 2001,  respectively.  The rate on the short term debt at
December 31, 2001 was 1.83%.

     Under the terms of an Agreement  for Advances and Security  Agreement  with
Blanket  Floating  Lien  (the  "Agreement"),   the  Company  maintains  eligible
collateral consisting of 1 - 4 unit residential first mortgage loans, discounted
at 75% of the unpaid principal  balance,  equal to 100% at December 31, 2001, of
its total  outstanding  long and short  term  Federal  Home Loan Bank  advances.
During 2001,  the Bank entered into an addendum to the  Agreement  that expanded
the  types of  eligible  collateral  under  the  Agreement  to  include  certain
commercial  real estate and second  mortgage  loans.  These loans are subject to
eligibility  rules,  and  collateral  values are discounted at 50% of the unpaid
loan principal  balance.  In addition,  only 50% of total collateral for Federal
Home Loan Bank advances may consist of commercial real estate loans. In addition
the Bank has  pledged  its  Federal  Home  Loan  Bank  stock of  $2,662,500  and
securities with a carrying value of $38,500,000 as additional collateral for its
advances. Based upon our understanding of current borrowing rules at the Federal
Home Loan Bank of Atlanta, the Bank is limited to total advances of up to 40% of
assets or $113  million.  The Bank had  sufficient  collateral  to  borrow  this
amount.

     Other short-term debt consists of notes payable to the U.S. Treasury, which
are Federal treasury


                                       59
<PAGE>

tax and loan deposits accepted by the Bank and remitted on demand to the Federal
Reserve Bank. At December 31, 2002 and 2001,  such  borrowings were $752,298 and
$813,317,  respectively.  The Bank pays  interest on these  balances at a slight
discount  to the  federal  funds  rate.  The notes  are  secured  by  investment
securities  with an  amortized  cost of  approximately  $786,700 and $786,700 at
December 31, 2002 and 2001, respectively.

9.   INCOME TAXES

     Income tax was as follows:
<TABLE>
<CAPTION>
                                               2002            2001             2000
                                               ----            ----             ----
<S>                                        <C>              <C>              <C>
Current
  Federal                                  $1,312,000       $1,409,350       $1,307,000
  State                                       154,000          114,000           18,000
                                           ----------       ----------       ----------
                                            1,466,000        1,523,350        1,325,000
                                           ----------       ----------       ----------
Deferred
  Federal                                    (327,000)        (168,000)         (97,000)
  State                                       (72,000)         (37,000)         (21,000)
                                           ----------       ----------       ----------
                                             (399,000)        (205,000)        (118,000)
                                           ----------       ----------       ----------
Total Income Tax Expense                   $1,067,000       $1,318,350       $1,207,000
                                           ==========       ==========       ==========
</TABLE>

     Total income tax expense differed from the amounts computed by applying the
federal  income tax rate of 34% to income before income taxes as a result of the
following:
<TABLE>
<CAPTION>
                                              2002                          2001                          2000
                                   --------------------------   ----------------------------    ---------------------------
                                                   Percent of                     Percent of                     Percent of
                                                   Pre Tax                         Pre Tax                        Pre Tax
                                      Amount        Income          Amount         Income         Amount          Income
                                   --------------------------   ----------------------------    ---------------------------
<S>                                <C>               <C>         <C>                <C>         <C>                <C>
Expected income tax expense at
  federal tax rate                 $ 1,031,839       34.0%       $ 1,293,321        34.0%       $ 1,205,000        34.0%
State taxes net of federal benefit      61,666        2.0%            77,000         2.0%                 -         0.0%
Nondeductible expenses                  20,908        0.7%             5,233         0.1%            14,000         0.4%
Other                                  (47,413)      -1.6%           (57,204)       -1.4%           (12,000)       -0.3%
                                   -----------       ----        -----------        ----        -----------        ----
                                   $ 1,067,000       35.1%       $ 1,318,350        34.7%       $ 1,207,000        34.1%
                                   ===========       ====        ===========        ====        ===========        ====
</TABLE>

                                       60
<PAGE>

     The net deferred tax assets in the accompanying  balance sheets include the
following components:
<TABLE>
<CAPTION>
                                                                   2002             2001
                                                                   ----             ----
<S>                                                          <C>                <C>
Deferred tax assets:
  Deferred fees                                                $   22,147          $ 44,566
  Allowance for loan losses                                       795,953           768,525
  Deferred compensation                                           118,709           102,568
  Valuation allowance on foreclosed real estate                   375,730                --
                                                               ----------         ---------
                                                                1,312,539           915,659
                                                               ----------         ---------
Deferred tax liabilities:
  FHLB stock dividends                                            152,896           153,866
  Depreciation                                                     97,505            98,328
  Unrealized gain on investment
    securities available for sale                                 267,144           291,599
                                                               ----------         ---------
                                                                  517,545           543,793
                                                               ----------         ---------
                                                               $  794,994         $ 371,866
                                                               ==========         =========
</TABLE>

     Retained earnings at December 31, 2002, include  approximately $1.2 million
of bad debt  deductions  allowed for federal income tax purposes (the "base year
tax reserve") for which no deferred income tax has been  recognized.  If, in the
future,  this portion of retained earnings is used for any purpose other than to
absorb bad debt losses,  it would create income for tax purposes only and income
taxes would be imposed at the then prevailing  rates. The unrecorded  income tax
liability on the above amount was approximately $458,000 at December 31, 2002.

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

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

                                       61
<PAGE>

10.  COMMITMENTS AND CONTINGENCIES

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

     As of December 31, 2002 and 2001, in addition to the undisbursed portion of
loans receivable of approximately $3,996,000 and $6,031,000,  respectively,  the
Bank had outstanding loan commitments  approximating  $3,783,900 and $1,926,500,
respectively.

     Standby letters of credit written are conditional commitments issued by the
Bank  to  guarantee  the  performance  of a  customer  to a third  party.  These
guarantees are issued primarily to support construction borrowing  arrangements.
The credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.  The Bank holds cash or
a secured interest in real estate as collateral to support those commitments for
which  collateral is deemed  necessary.  Standby  letters of credit  outstanding
amounted  to  $9,322,655   and   $5,698,000  at  December  31,  2002  and  2001,
respectively.  In  addition  to  the  commitments  noted  above,  customers  had
approximately  $23,090,000  and  $10,123,000  available under lines of credit at
December 31, 2002 and 2001, respectively.

                                       62
<PAGE>

11.  STOCK OPTION AND INCENTIVE PLAN

     The Company  has a stock  option and  incentive  plan to attract and retain
personnel  and  provide  incentive  to  employees  to promote the success of the
business. In addition, the Company has a stock option plan for its directors. At
December 31, 2001, 61,081 shares of stock have been authorized and are available
for grants of options under the plans. The exercise price for options granted is
set at the discretion of the Board, but is not less than the market value of the
shares as of the date of grant.  An option's  maximum  term is ten years and the
options generally vest immediately upon issuance.

     The  Company  applies  APB  Opinion  25  and  related   Interpretations  in
accounting for the stock option plan. Accordingly, no compensation cost has been
recognized.  Had  compensation  cost for the  Company's  stock  option plan been
determined  based upon fair values at the grant dates for awards  under the plan
consistent  with the method  prescribed  by SFAS Nos. 123 and 148, the Company's
net income and  earnings  per share  would have been  adjusted  to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
                                                                       2002          2001          2000
                                                                       ----          ----          ----
<S>                                                                <C>           <C>           <C>
Net income, as reported                                            $ 1,967,821   $ 2,485,535   $ 2,336,119
Less pro forma stock-based compensation expense determined
  under the fair value method, net of related tax effects             (217,187)     (226,251)      (66,040)
                                                                   -----------   -----------   -----------
Pro forma net income                                               $ 1,750,634   $ 2,259,284   $ 2,270,079
                                                                   ===========   ===========   ===========
Earnings per share as reported
  Basic                                                                 $ 2.58        $ 3.24        $ 2.98
  Diluted                                                                 2.45          3.11          2.85

Pro forma earnings per share
  Basic                                                                   2.30          2.95          2.89
  Diluted                                                                 2.18          2.83          2.76
</TABLE>

     For the purpose of computing the pro forma  amounts  indicated  above,  the
fair  value  of each  option  on the  date  of  grant  is  estimated  using  the
Black-Scholes   option   pricing  model  with  the  following   weighted-average
assumptions used for the grants:
<TABLE>
<CAPTION>
                                                                         2001          2001          2000
                                                                         ----          ----          ----

<S>                                                                      <C>           <C>           <C>
Dividend Yield                                                           1.41%         1.30%         0.75%
Expected volatility                                                     35.00%        15.00%        15.00%
Risk - free interest rate                                                4.82%         4.91%         5.85%
Expected lives (in years)                                                   10            10            10
Weighted average fair value                                            $ 17.24       $ 11.06       $ 12.28
</TABLE>


                                       63
<PAGE>

The following tables summarize activity in the plan:
<TABLE>
<CAPTION>
                                              2002                     2001                      2000
                                      ---------------------     --------------------      -------------------
                                                  Weighted                 Weighted                  Weighted
                                                  Average                  Average                   Average
                                                  Exercise                 Exercise                  Exercise
                                       Shares      Price        Shares      Price         Shares      Price
                                      ---------------------     --------------------      -------------------

<S>                                    <C>          <C>         <C>         <C>           <C>         <C>
Outstanding at beginning of year       99,679       $18.99      91,036      $16.89        91,184      $12.61
Granted                                12,595        31.67      20,448       26.57         9,179       26.66
Exercised                             (14,078)       12.92      (7,105)      10.28        (7,790)      14.61
Forfeitures                              (595)       26.26      (4,700)      24.41        (1,537)      25.25
                                      -------                  -------                   -------
Outstanding at end of year             97,601       $21.46      99,679      $18.99        91,036      $16.89
                                      =======       ======     =======      ======       =======      ======
</TABLE>

Options outstanding are all currently exercisable and are summarized as follows:

                             Weighted
                              Average             Weighted
                Number       Remaining            Average
             Outstanding    Contractual           Exercise
              12/31/2002       Life                 Price
             -----------    -----------           --------

                31,645      3 years                $10.28
                20,647      6 years                 24.24
                 7,665      7 years                 26.60
                17,732      8 years                 26.64
                14,950      9 years                 26.71
                 4,962     10 years                 39.00
                ------
                97,601                             $21.46
                ======


12.  EMPLOYEE BENEFIT PLANS

     The  Bank  has  an  Employee  Stock  Ownership  Plan  (ESOP)  which  covers
substantially all of the Bank's employees. The ESOP acquires stock of the Bank's
parent corporation,  Tri-County Financial Corporation.  The Company accounts for
its ESOP in  accordance  with AICPA  Statement  of Position  93-6.  Accordingly,
unencumbered  shares held by the ESOP are treated as  outstanding  in  computing
earnings  per share.  Shares  issued to the ESOP but pledged as  collateral  for
loans  obtained  to  provide  funds to acquire  the  shares  are not  treated as
outstanding  in  computing  earnings  per share.  Dividends  on ESOP  shares are
recorded as a reduction of retained  earnings.  The ESOP may acquire in the open
market up to 195,700 shares. At December 31, 2002, the Plan owns 55,195 shares.

                                       64
<PAGE>

     The  Company  also has a 401(k)  plan.  The Bank  matches a portion  of the
employee  contributions.  This  ratio is  determined  annually  by the  Board of
Directors.  Currently one-half of an employee's first 6% deferral is matched. As
of  January 1, 2003,  the  Company  will match  one-half  of the  employee's  8%
deferral.  All employees who have completed one year of service and have reached
the age of 21 are covered under this defined  contribution  plan.  Contributions
are determined at the  discretion of management and the Board of Directors.  For
the years ended December 31, 2002, 2001, and 2000, the Company charged $108,000,
$93,000, and $90,000, against earnings to fund the Plans.

     In  addition,  the Bank has a  separate  nonqualified  retirement  plan for
non-employee directors. Directors are eligible for a maximum benefit of $3,500 a
year for ten years following  retirement from the Board of Community Bank of Tri
County.  The maximum  benefit is earned at 15 years of service as a non-employee
director.  Full vesting  occurs after 2 years of service.  Expense  recorded for
this plan was $11,034,  $7,071,  and $19,042 for the years  ending  December 31,
2002, 2001, and 2000 respectively.

13.  REGULATORY MATTERS

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

     Quantitative  measures established by regulation to ensure capital adequacy
require the Company  and the Bank to  maintain  minimum  amounts and ratios (set
forth in the table  below) of  tangible  and core  capital  (as  defined  in the
regulations)  to total adjusted assets (as defined),  and of risk-based  capital
(as defined) to risk-weighted assets (as defined).  Management  believes,  as of
December  31,  2002,  that the Company  and the Bank meet all  capital  adequacy
requirements to which they are subject.

     As of December  31,  2002,  the most recent  notification  from the Federal
Reserve categorized the Bank as well-capitalized  under the regulatory framework
for prompt corrective  action. To be categorized as  well-capitalized,  the Bank
must maintain minimum total risk-based,  Tier 1 risk-based,  and Tier 1 leverage
ratios as set forth in the table.  There are no  conditions or events since that
notification  that management  believes have changed the Company's or the Bank's
category.

     The Company's and the Bank's actual capital amounts and ratios for 2002 and
2001 are presented in the tables below:

                                       65
<PAGE>
<TABLE>
<CAPTION>
                                                                                                    To be considered well
                                                                          Required for capital     capitalized under prompt
                                                      Actual               adequacy purposes          corrective action
                                                      ------              ---------------------    ------------------------
<S>                                            <C>           <C>           <C>            <C>         <C>           <C>
At December 31, 2002
  Total capital (to risk weighted assets)
    The Company                                $ 28,769      13.77%        $ 16,715       8.00%
    The Bank                                   $ 26,966      12.96%        $ 16,647       8.00%       $ 20,809      10.00%

  Tier 1capital (to risk weighted assets)
    The Company                                $ 26,379      12.63%        $  8,357       4.00%
    The Bank                                   $ 24,576      11.81%        $  5,324       4.00%       $ 12,485       6.00%

  Tier 1capital (to average assets)
    The Company                                $ 26,379       9.53%        $ 11,069       4.00%
    The Bank                                   $ 24,576       8.96%        $ 10,966       4.00%       $ 13,708       5.00%

At December 31, 2001
  Total capital (to risk weighted assets)
    The Company                                $ 27,314      14.08%        $ 15,511       8.00%
    The Bank                                   $ 25,799      13.26%        $ 15,570       8.00%       $ 19,462      10.00%

  Tier 1capital (to risk weighted assets)
    The Company                                $ 24,841      12.81%        $  7,756       4.00%
    The Bank                                   $ 23,517      12.08%        $  7,785       4.00%       $ 11,677       6.00%

  Tier 1capital (to average assets)
    The Company                                $ 24,841       9.64%        $ 10,311       4.00%
    The Bank                                   $ 23,517       9.46%        $  9,944       4.00%       $ 12,430       5.00%
</TABLE>

14.  EARNINGS PER SHARE

     The calculations of basic and diluted earnings per share are as follows:
<TABLE>
<CAPTION>
                                                      2002            2001           2000
                                                   ----------      ----------     ----------
<S>                                                <C>             <C>            <C>
Basic earnings per share
  Net income                                       $1,967,821      $2,485,535     $2,336,196
  Average common shares outstanding                   761,417         766,927        784,605
  Net income per common share - basic              $     2.58      $     3.24     $     2.98

Diluted earnings per share
  Net income                                       $1,967,821      $2,485,535     $2,336,196
  Average common shares outstanding                   761,417         766,927        784,605
  Stock option adjustment                              42,705          31,860         36,534
  Average common shares outstanding - diluted         804,122         798,787        821,139
  Net income per common share - diluted            $     2.45      $     3.11     $     2.85
</TABLE>

For the year ended  December  31, 2002  options for 4,962 shares of common stock
were excluded from  computing  diluted  earnings per share because their effects
were antidilutive. No antidilutive options were outstanding at December 31, 2001
or 2000.

15.  FAIR VALUE OF FINANCIAL INSTRUMENTS

     The estimated fair value amounts have been  determined by the Company using
available market information and appropriate valuation  methodologies.  However,
considerable  judgment  is  necessarily  required  to  interpret  market data to
develop the estimates of fair value. Accordingly, the


                                       66
<PAGE>

estimates  presented  herein are not  necessarily  indicative of the amounts the
Company could realize in a current market exchange.  The use of different market
assumptions  and/or  estimation  methodologies may have a material effect on the
estimated  fair value  amounts.  Therefore,  any aggregate  unrealized  gains or
losses should not be interpreted as a forecast of future earnings or cash flows.
Furthermore,  the  fair  values  disclosed  should  not  be  interpreted  as the
aggregate current value of the Company.
<TABLE>
<CAPTION>
                                                 December 31, 2002                December 31, 2001
                                               ------------------------         --------------------------
                                                              Estimated                        Estimated
                                                Carrying        Fair             Carrying        Fair
                                                 Amount         Value             Amount         Value
                                                 ------         -----             -------        -----
<S>                                            <C>           <C>                <C>            <C>
Assets:
  Cash and cash equivalents                    $10,356,932   $10,356,932        $ 6,449,974    $ 6,449,974
  Interest bearing deposits with banks          15,179,851    15,179,851          7,678,158      7,678,158
  Investment securities and stock in FHLB
    and FRB                                     47,404,670    47,419,179         41,242,111     41,242,111
  Loans receivable, net                        197,449,282   200,839,805        193,450,011    199,325,377
  Loans held for sale                            1,262,667     1,287,920          2,354,315      2,354,315

Liabilities:
  Savings, NOW, and money market accounts      125,942,648   125,942,648        112,755,772    112,755,862
  Time certificates                             77,082,464    78,811,495         70,360,762     71,827,020
  Long-term debt and other borrowed funds       48,922,298    53,801,600         50,463,317     52,340,500
</TABLE>


     At December 31, 2002 and 2001, the Company had outstanding loan commitments
and standby  letters of credit of $13.1 million and $7.6 million,  respectively.
Based on the short-term lives of these instruments, the Company does not believe
that  the fair  value of these  instruments  differs  significantly  from  their
carrying values.

          Valuation Methodology
          ---------------------

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

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

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

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

               Deposits - The fair value of checking accounts,  saving accounts,
and money  market

                                       67
<PAGE>

accounts was the amount payable on demand at the reporting date.

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

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

               The fair value estimates  presented herein are based on pertinent
information  available to management as of December 31, 2002 and 2001.  Although
management  is not aware of any  factors  that  would  significantly  affect the
estimated  fair  value  amounts,  such  amounts  have not  been  comprehensively
revalued  for  purposes  of these  financial  statements  since  that  date and,
therefore,  current  estimates of fair value may differ  significantly  from the
amount presented herein.

                                       68
<PAGE>

16.  CONDENSED FINANCIAL STATEMENTS - PARENT COMPANY ONLY

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

Balance Sheets
<TABLE>
<CAPTION>
                        ASSETS
                                                                                 2002                2001
                                                                                 ----                ----
<S>                                                                         <C>                 <C>
Cash -noninterest bearing                                                   $    301,927        $     25,000
Cash -interest bearing                                                           838,142             925,521
Other assets                                                                     884,984             691,208
Investment securities available for sale                                          32,436             111,582
Investment in wholly owned subsidiary                                         25,069,624          24,073,273
                                                                            ------------        ------------
                            TOTAL ASSETS                                    $ 27,127,113        $ 25,826,584
                                                                            ============        ============

Current liabilities                                                         $    254,348        $    240,126

Stockholders' equity
  Common stock                                                                     7,598               7,568
  Surplus                                                                      7,716,906           7,545,590
  Retained earnings                                                           18,817,615          17,678,367
  Unearned ESOP shares                                                          (163,045)           (200,580)
  Accumulated other comprehensive income                                         493,691             555,513
                                                                            ------------        ------------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY                                   $ 27,127,113        $ 25,826,584
                                                                            ============        ============
</TABLE>

Condensed Statements of Income:
<TABLE>
<CAPTION>

                                                                   Year Ended December 31,
                                                            -------------------------------------------
                                                                2002            2001            2000
                                                                ----            ----            ----
<S>                                                         <C>             <C>               <C>
Dividends from subsidiary                                   $ 1,000,000     $ 2,250,000       $ 500,000
Interest income                                                  18,644          26,929          27,510
Miscellaneous expenses                                         (154,995)       (167,787)        (90,391)

Income before income taxes and equity in                        863,649       2,109,142         437,119
  undistributed net income of subsidiary
Federal and state income tax benefit                             46,000          40,650              --

Equity in undistributed net income of subsidiary              1,058,172         335,743       1,899,077
                                                            -----------     -----------     -----------
NET INCOME                                                  $ 1,967,821     $ 2,485,535     $ 2,336,196
                                                            ===========     ===========     ===========
</TABLE>

                                       69
<PAGE>
Condensed Statements Cash Flows:
<TABLE>
<CAPTION>
                                                                              2002             2001             2000
                                                                              ----             ----             ----
<S>                                                                       <C>              <C>              <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                                              $ 1,967,821      $ 2,485,535      $ 2,336,196
  Adjustments to reconcile net income to net cash
    provided by operating activities:
    Equity in undistributed earnings of subsidiary                         (1,058,172)        (335,743)      (1,899,077)
    Increase in current assets                                               (193,776)        (611,564)         (39,398)
    Increase in current liabilities                                            14,222            3,600               --

      Net cash provided by operating activities                               730,095        1,541,828          397,721
                                                                          -----------      -----------      -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Net (increase) decrease in interest-bearing deposits                         87,379         (645,521)         439,068
  Purchase of investment securities available for sale                             --          (76,903)          (6,677)
  Maturity or redemption of investment securities
    available for sale                                                         79,146               --               --
                                                                          -----------      -----------      -----------
      Net cash provided (used) by investing activities                        166,525         (722,424)         432,391
                                                                          -----------      -----------      -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Dividends paid                                                             (385,129)        (309,204)        (236,595)
  Exercise of stock options                                                   161,004           31,817           53,676
  Net change in ESOP loan                                                      48,000          (48,034)          36,984
  Redemption of common stock                                                 (443,568)        (673,920)        (479,391)
                                                                          -----------      -----------      -----------
      Net cash used in financing activities                                  (619,693)        (999,341)        (625,326)
                                                                          -----------      -----------      -----------
INCREASE (DECREASE) IN CASH                                                   276,927         (179,937)         204,786

CASH AT BEGINNING OF YEAR                                                      25,000          204,937              151
                                                                          -----------      -----------      -----------
CASH AT END OF YEAR                                                       $   301,927      $    25,000      $   204,937
                                                                          ===========      ===========      ===========
</TABLE>

                                       70
<PAGE>

17.   QUARTERLY FINANCIAL RESULTS (UNAUDITED)

     A summary of selected  consolidated  quarterly  financial  data for the two
years ended December 31, 2002 is reported as follows:
<TABLE>
<CAPTION>
                                                             2002
                                        ---------------------------------------------------
                                          Fourth       Third        Second        First
                                         Quarter      Quarter       Quarter      Quarter
                                         -------      -------       -------      -------
<S>                                     <C>          <C>           <C>          <C>
Interest and dividend income            $ 4,105,575  $ 4,281,934   $ 4,207,146  $ 4,167,599
Interest expense                          1,438,465    1,484,376     1,495,799    1,549,988
                                        -----------  -----------   -----------  -----------
Net interest income                       2,667,110    2,797,558     2,711,347    2,617,611
Provision for loan loss                      30,000       30,000        30,000       70,000
                                        -----------  -----------   -----------  -----------
Net interest income after provision       2,637,110    2,767,558     2,681,347    2,547,611

Noninterest income                          664,740      386,913       398,059      397,349
Noninterest expense                       2,025,764    2,033,746     3,457,062    1,929,294

Income before income taxes                1,276,086    1,120,725      (377,656)   1,015,666
Provision for income taxes                  446,000      391,000      (134,600)     364,600
Net income                              $   830,086  $   729,725   $  (243,056) $   651,066
                                        ===========  ===========   ===========  ===========
Earnings per common share

Basic                                   $      1.09  $      0.96   $     (0.32) $      0.86
                                        ===========  ===========   ===========  ===========
Diluted                                 $      1.03  $      0.91   $     (0.32) $      0.82
                                        ===========  ===========   ===========  ===========
<CAPTION>
                                                             2001
                                         --------------------------------------------------
                                          Fourth        Third        Second       First
                                          Quarter      Quarter      Quarter      Quarter
                                          -------      -------      -------      -------
<S>                                      <C>          <C>          <C>          <C>
Interest and dividend income             $ 4,326,809  $ 4,630,360  $ 4,649,286  $ 4,908,221
Interest expense                           1,821,087    2,132,804    2,316,701    2,487,219
                                         -----------  -----------  -----------  -----------
Net interest income                        2,505,722    2,497,556    2,332,585    2,421,002
Provision for loan loss                       90,000       90,000       90,000       90,000
                                         -----------  -----------  -----------  -----------
Net interest income after provision        2,415,722    2,407,556    2,242,585    2,331,002

Noninterest income                           355,728      344,406      353,858      347,528
Noninterest expense                        1,840,743    1,862,904    1,609,104    1,681,749

Income before income taxes                   930,707      889,058      987,339      996,781
Provision for income taxes                   312,650      322,000      335,700      348,000
Net income                               $   618,057  $   567,058  $   651,639  $   648,781
                                         ===========  ===========  ===========  ===========
Earnings per common share

Basic                                    $      0.83  $      0.74  $      0.84  $      0.83
                                         ===========  ===========  ===========  ===========
Diluted                                  $      0.79  $      0.71  $      0.81  $      0.80
                                         ===========  ===========  ===========  ===========
</TABLE>
                                       71
<PAGE>

                                   SIGNATURES

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

                                        TRI-COUNTY FINANCIAL CORPORATION


Date: March 28, 2003                    By:/s/ Michael L. Middleton
                                           -------------------------------------
                                           Michael L. Middleton
                                           President and Chief Executive Officer
                                           (Duly Authorized Representative)


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


By: /s/ Michael L. Middleton                 By:/s/ William J. Pasenelli
    -----------------------------------         --------------------------------
    Michael L. Middleton                        William J. Pasenelli
    (Director, President and Chief              (Chief Financial and Accounting
    Executive Officer)                          Officer)

Date: March 28, 2003                         Date: March 28, 2003


By: /s/ C. Marie Brown                       By:/s/ Herbert N. Redmond
    -----------------------------------         --------------------------------
    C. Marie Brown                              Herbert N. Redmond, Jr.
    (Director and Chief Operating Officer)      (Director)

Date: March 28, 2003                         Date: March 28, 2003



By: /s/ H. Beaman Smith                      By:/s/ W. Edelen Gough, Jr.
    -----------------------------------         --------------------------------
    H. Beaman Smith                             W. Edelen Gough, Jr.
    (Director and Secretary/Treasurer)          (Director)

Date: March 28, 2003                         Date: March 28, 2003



By: /s/ Louis P. Jenkins, Jr.                By:/s/ A. Joseph Slater, Jr.
    -----------------------------------         --------------------------------
    Louis P. Jenkins, Jr.                       A. Joseph  Slater, Jr.
    (Director)                                  (Director)

Date: March 28, 2003                         Date: March 28, 2003


<PAGE>

                                  CERTIFICATION

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

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

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

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

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

     (b)  Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     (c)  Presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;


5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
the  registrant's  board or  directors  (or persons  fulfilling  the  equivalent
functions):

     (a)  all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     (b)  any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and


6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly report whether there were significant  changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date: March 28, 2003

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

<PAGE>

                                  CERTIFICATION


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

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

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

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

4.  The  registrant's  other  certifying  officers  and  I are  responsible  for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

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

     (e)  Evaluated the  effectiveness of the registrant's  disclosure  controls
          and procedures as of a date within 90 days prior to the filing date of
          this quarterly report (the "Evaluation Date"); and

     (f)  Presented  in  this  quarterly   report  our  conclusions   about  the
          effectiveness  of the disclosure  controls and procedures based on our
          evaluation as of the Evaluation Date;

5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation,  to the registrant's auditors and the audit committee of
the  registrant's  board or  directors  (or persons  fulfilling  the  equivalent
functions):

     (c)  all  significant  deficiencies  in the design or operation of internal
          controls  which could  adversely  affect the  registrant's  ability to
          record,  process,   summarize  and  report  financial  data  and  have
          identified for the  registrant's  auditors any material  weaknesses in
          internal controls; and

     (d)  any fraud, whether or not material,  that involves management or other
          employees who have a  significant  role in the  registrant's  internal
          controls; and


6. The  registrant's  other  certifying  officers  and I have  indicated in this
quarterly report whether there were significant  changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent  evaluation,  including any corrective  actions with
regard to significant deficiencies and material weaknesses.

Date: March 28, 2003

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