<PAGE>
 
                                                                      Exhibit 13
COMMUNITY FINANCIAL CORP.





         [LOGO]






                              1998 ANNUAL REPORT
<PAGE>
 
TABLE OF CONTENTS


Community Financial Corp....................................            (i)

Market Information..........................................            (i)

Letter to Stockholders......................................             1

Selected Consolidated Financial and Other Data..............             2

Management's Discussion and Analysis of Financial Condition 
      and Results of Operations.............................             4

Consolidated Financial Statements...........................            16

Corporate Information............... .......................  Inside Back Cover
<PAGE>
 
COMMUNITY FINANCIAL CORP.

      Community Financial Corp. (the "Company") is a bank holding company with
five wholly owned bank subsidiaries headquartered in Illinois: Community Bank &
Trust, N.A. in Olney; American Bank of Illinois in Highland; The Egyptian State
Bank in Carrier Mills; Saline County State Bank in Stonefort; and MidAmerica
Bank of St. Clair County in O'Fallon. The Company's principal business is
overseeing the business of its wholly owned bank subsidiaries and investing its
assets.

      Community Bank & Trust, N.A. ("CB&T") is a national bank operating through
five offices serving Richland, Coles, Jasper, Lawrence and Wayne Counties and
contiguous counties in Southeastern Illinois. At December 31, 1998, CB&T had
total assets of $214.2 million and total deposits of $148.1 million.

      American Bank of Illinois in Highland ("ABI") is an Illinois commercial
bank operating through two offices located in Highland and Pocahontas, Illinois
and serving Bond and Madison Counties in Western Illinois. At December 31, 1998,
ABI had total assets of $23.9 million and total deposits of $19.9 million.

      The Egyptian State Bank ("Egyptian") is an Illinois commercial bank
operating through a single office located in Carrier Mills, Illinois and serving
Saline County in Southern Illinois. At December 31, 1998, Egyptian had total
assets of $24.5 million and total deposits of $21.2 million.

      Saline County State Bank ("Saline") is an Illinois commercial bank
operating through two offices located in Stonefort and Creal Springs, Illinois
and serving Saline and Williamson Counties in Southern Illinois. At December 31,
1998, Saline had total assets of $16.8 million and total deposits of $14.8
million.

      MidAmerica Bank of St. Clair County ("MidAmerica") is an Illinois
commercial bank operating through a single office located in O'Fallon, Illinois
and serving St. Clair County in Western Illinois. At December 31, 1998,
MidAmerica had total assets of $25.8 million and total deposits of $20.3
million.

MARKET INFORMATION

      The Company's common stock began trading under the symbol "CFIC" on the
Nasdaq National Market System on June 30, 1995. There are currently 2,242,612
shares of the common stock outstanding and approximately 609 holders of record
of the common stock. Since issuance of the common stock, on January 15, 1999,
the Company paid a cash dividend of $.25 per share to stockholders of record as
of December 25, 1998, on January 15, 1998, the Company paid a cash dividend of
$.25 per share to stockholders of record as of December 26, 1997, and on January
15, 1997, the Company paid a cash dividend of $.25 per share to stockholders of
record as of December 30, 1996. No other dividends have been paid on the common
stock. Following are the high and low closing sale prices, by fiscal quarter, as
reported by Nasdaq during the periods indicated.
<TABLE>
<CAPTION>

                                   High        Low          
                                   ----        --- 
<S>                            <C>          <C>
1997                                                        
----                                                        
First Quarter................  $  16.625    $  12.750       
Second Quarter...............     15.688       14.000       

Third Quarter................     20.250       14.500       
Fourth Quarter...............     19.750       16.250       

                                   High         Low   
                                   ----         ---
<S>                             <C>         <C>
1998                                                 
----                                                 
First Quarter................  $  21.000    $  18.750
Second Quarter...............     23.500       16.250
                                                             
Third Quarter................     17.250       11.750
Fourth Quarter...............     13.125       11.000
</TABLE>

                                      (i)
<PAGE>
 
Dear Stockholder:

      It is a pleasure to present to you the annual report of Community
Financial Corp. for 1998. Community Financial Corp. is a multi-bank holding
company incorporated under the laws of the State of Illinois whose principal
office is located in Olney, Illinois. Our vision continues to focus on providing
top quality service to our clientele while taking great care to ensure our
endeavors contribute to the enhancement of shareholder value. The Company's
overriding strategy for the attainment of this vision has been to employ the
best people, armed with the latest proven technology, to service markets and/or
lines of business with which we have a unique familiarity. As a Company with
strong community ties, in the markets we serve, we are better positioned to
serve our customers than our larger competitors.

      A number of actions are in motion that will position the Company for the
future. New computer equipment has been installed enabling us to achieve
compliance with the Year 2000 as mandated by our regulatory agencies. This
equipment, while helping us achieve compliance for the Year 2000, will also
allow us to better meet our customers' needs while retaining our competitive
edge.

      Having announced my plan to retire at the end of 1999, I would like to
reassure you that the Board of Directors and Management have addressed the issue
of my retirement and completed a succession plan allowing for a seamless
transition in management.

      You will find the detail of our financial results elsewhere in this annual
report showing that, during the year ended December 1998, our total assets
increased from $304.3 million to $309.8 million, or 1.81 percent with net income
of $1.2 million.

      We welcome your comments as we move forward with the growth of our
company. I would like to thank the directors, officers, and staff for working
with me making my career with the Company both pleasant and fulfilling.







                                                     /s/ Shirley B. Kessler
                                                     Shirley B. Kessler
                                                     President
<PAGE>
 
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

Selected Financial Condition Data

<TABLE>
<CAPTION>
                                                                           At December 31,       
                                               --------------------------------------------------------------------

                                                     1998          1997         1996         1995        1994   
                                                   --------      --------     --------     --------    ---------
                                                                          (In thousands)
<S>                                            <C>              <C>        <C>            <C>        <C>
Assets......................................   $  309,840       $ 304,265  $   185,799    $ 186,513  $  164,633
Loans receivable, net.......................      157,207         162,318      122,307      114,494     111,369
Investment securities:
   Available for sale.......................       52,102          57,283       13,990       19,347       7,716
   Held to maturity.........................       16,921          18,318        3,362        3,113       2,255
Cash and cash equivalents and time deposits.       22,902          26,724       12,618        9,877       5,638
Mortgage-backed and related securities 
  available for sale (1)....................       42,797          23,895       28,319       35,520      32,310
Mortgage-backed and related securities
  held-to-maturity..........................          442             891         --           --           -- 
Deposits....................................      223,933         218,915      139,100      144,277     151,078
FHLB advances...............................       44,100          37,000        7,500        3,000       1,050
Other borrowings............................        4,296          10,923        3,121         --          --
Stockholders' equity........................       35,266          35,727       34,082       38,106      11,254
</TABLE>
-------------------------------------------------------------------------------

Selected Operations Data
<TABLE>
<CAPTION>


                                                                          At December 31,       
                                               ---------------------------------------------------------------------
                                                    1998        1997         1996          1995         1994   
                                               ------------- -----------  -----------  ------------  ------------
                                                                  (In thousands, except per share data)
<S>                                            <C>           <C>          <C>          <C>           <C>
Interest income.............................   $     22,231  $   17,008   $   13,875   $   13,267    $  11,776
Interest expense............................        (12,815)     (8,670)      (6,728)      (6,747)      (5,576)
                                                -----------  ----------   ----------   ----------    ---------
Net interest income.........................          9,416       8,338        7,147        6,520        6,200
Provision for loan losses...................           (441)       (236)         (10)        (113)        (212) 
                                               ------------  ----------   ----------   ----------    ---------
Net interest income after                                             
  provision for loan losses.................          8,975       8,102        7,137        6,407        5,988
Noninterest income..........................          1,681       1,129          777        1,033          953
Noninterest expense.........................         (8,880)     (7,152)      (6,798)      (4,437)      (4,691)
Gain (loss) on sale of assets...............            (18)         (2)          --          137          (26) 
                                               ------------  ----------   ----------   ----------    ---------
Income before provision for income tax......          1,758       2,077        1,116        3,140        2,224
Provision for income tax....................           (521)       (675)        (343)      (1,107)        (813)
                                               ------------  ----------   ----------   ----------    ---------
Income before extraordinary item and
  cumulative effect of change in
  accounting principle......................          1,237       1,402          773        2,033        1,411
Extraordinary items.........................             --          --           --           --         (701) (1)
                                               ------------  ----------   ----------   ----------    ---------
Net income..................................   $      1,237  $    1,402   $      773   $    2,033    $     710
                                               ============  ==========   ==========   ==========    =========
Basic earnings per share....................   $        .57  $      .62   $      .33   $      .42       N/A    
                                               ============  ==========   ==========   ==========    =========
Diluted earnings per share.................    $        .55  $      .60   $      .33   $      .42
                                               ============  ==========   ==========   ==========    =========
Cash dividends declared per share...........   $        .25  $      .25   $      .25   $       --       N/A    
                                               ============  ==========   ==========   ==========    =========
</TABLE>
------------
(1)   Consists of a $701,000 expense representing the recapture of the Bank's
      tax bad debt reserve taken in the quarter ended December 31, 1994 in
      connection with the Board of Directors' determination to effectuate the
      conversion to a national bank.

                                       2
<PAGE>
 
Key Operating Ratios:
<TABLE>
<CAPTION>
                                                                             At or for the
                                                                        Year Ended December 31,             
                                                           -----------------------------------------------     
                                                                1998              1997           1996  
                                                           -------------    -------------   --------------
<S>                                                        <C>              <C>             <C>
Performance Ratios:
  Return on average assets (net income
    divided by average total assets)......................        .40%               .62%            .42% (1)
  Return on average equity (net income
    divided by average stockholders' equity (2)...........       3.43               4.02            2.15  (1)
  Interest rate spread (combined weighted average 
    interest rate earned less combined weighted 
    average interest rate cost)...........................       2.79               3.05            3.17
  Net yield on interest-earning assets....................       3.18               3.80            4.03
  Ratio of average interest-earning assets
    to average interest-bearing liabilities...............     109.02             119.04          122.58
  Ratio of noninterest expense to average
    total assets..........................................       2.84               3.15            3.66

Asset Quality Ratios:
  Nonperforming assets to total assets
    at end of period......................................        .53                .81 (3)         .27
  Nonperforming loans to total loans......................        .75               1.29 (4)         .36
  Allowance for loan losses to total
    loans at end of period................................       1.24               1.18            1.23
  Allowance for loan losses to nonperforming
     loans at end of period...............................     164.78                .91 (5)      339.29
  Provision for loan losses to total loans
     at end of period.....................................        .28                .15             .01
  Net charge-offs to average loans........................        .25                .19             --

Capital Ratios:
  Stockholders' equity to total assets at end of period...      11.38              11.74           18.34
  Average stockholders' equity to average assets..........      11.54              15.33           19.19
</TABLE>
----------
(1)   Ratios are based on net income, which includes a one-time special
      assessment of $703,000, net of taxes, paid to recapitalize the Savings
      Association Insurance Fund ("SAIF") of the Federal Deposit Insurance
      Corporation ("FDIC"). After restating to eliminate this expense, return on
      average assets and return on average equity would have been .80% and
      4.11%, respectively.

(2)   Average stockholders' equity reflects average unrealized losses on
      securities available for sale for the year ended December 31, 1996 and
      average unrealized gains on securities available for sale for the years
      ended December 31, 1997 and 1998 respectively.

(3)   Nonperforming assets included a $1.1 million nonperforming loan on which
      minimal losses are expected. The ratio for nonperforming assets to total
      assets would be .46% restated to exclude this loan.

(4)   Nonperforming loans consist of nonaccrual loans and accruing loans which
      are contractually past due 90 days or more. Nonperforming loans at
      December 31, 1997 included a $1.1 million nonperforming loan on which
      minimal losses are expected. The ratio of nonperforming loans to total
      loans would be .64% restated to exclude this loan.

(5)   Nonperforming assets included a $1.1 million nonperforming loan on which
      minimal losses are expected. The ratio of the allowance for loan losses to
      nonperforming loans at December 31, 1997 would be 184.18% restated to
      exclude this loan.

                                       3
<PAGE>
 
               MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS

General

         The Company's net income is dependent primarily on its net interest
income, which is the difference between interest income earned on its loan and
mortgage-backed and related securities portfolio and interest paid on
interest-bearing liabilities. Net interest income is determined by (i) the
difference between yields earned on interest-earning assets and rates paid on
interest-bearing liabilities ("interest rate spread") and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The
Company's interest rate spread is affected by regulatory, economic and
competitive factors that influence interest rates, loan demand and deposit
flows. To a lesser extent, the Company's net income also is affected by the
level of general and administrative expenses and the level of other income,
which primarily consists of service charges and other fees.

         The operations of the Company are significantly affected by prevailing
economic conditions, competition and the monetary, fiscal and regulatory
policies of governmental agencies. Lending activities are influenced by the
demand for and supply of housing, competition among lenders, the level of
interest rates and the availability of funds. Deposit flows and costs of funds
are influenced by prevailing market rates of interest, primarily on competing
investments, account maturities and the levels of personal income and savings in
the Company's market area.

Forward-Looking Statements

         When used in this Annual Report, the words or phrases "will likely
result," "are expected to," "will continue," "is anticipated," "estimate,"
"project" or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area, and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as of
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.

         The Company does not undertake, and specifically disclaims any
obligation, to publicly release the result of any revisions which may be made to
any forward-looking statements to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.

Year 2000 Readiness Disclosure

      The following information constitutes "Year 2000 Readiness Disclosure"
under the Year 2000 Information and Readiness Disclosure Act.

          A great deal of information has been disseminated about the global
computer crash that may occur in the year 2000. Many computer programs that can
only distinguish the final two digits of the year entered (a common programming
practice in earlier years) are expected to read entries for the year 2000 as the
year 1900 and compute payment, interest or delinquency based on the wrong date
or are expected to be unable to compute payment, interest or delinquency. Rapid
and accurate data processing is essential to the operations of the Company. Data
processing is also essential to most other financial institutions and many other
companies.

         The Company has conducted a comprehensive review of its computer system
to identify applications that could be affected by the "Year 2000" issue, and
has developed an implementation plan to address the issue. All of the material
data processing of the Company that could be affected by this problem is
provided by third party suppliers. Management closely monitors the progress of
the suppliers in resolving this potential problem and reports the status 

                                       4
<PAGE>
 
of their progress to the Board of Directors on a monthly basis. During the
fourth quarter of 1998, the Company conducted testing of its mission critical
banking applications through the third party data processing suppliers. The
results of the testing were favorable. The Company has a contingency plan,
scheduled for testing in the first quarter of 1999, that addresses how it will
operate should a natural disaster affect any of the Company's operating segments
or mission critical data processing suppliers. The Company is developing a
business resumption plan, scheduled for completion in the first quarter of 1999,
which addresses how it will resume operations should an uncontrollable
situation, such as power failure or loss of telecommunication, occur due to a
"Year 2000" issue. The Company is developing a customer awareness plan,
scheduled for completion in the first quarter of 1999, that is designed to
promote and educate its customers and the general public on the issues of how
the Company and the entire banking industry is preparing for the "Year 2000". In
the fourth quarter of 1998 the Company completed a risk assessment of its
commercial and agricultural borrowers, with indebtedness to the company of
$250,000 for Community Bank & Trust, NA and $100,000 or more for all other
affiliates, concerning their compliance with the "Year 2000" issue. The Company
has projected that the expenses of these plans should not exceed $163,000. The
regulatory bodies, which regulate the Company, have established detailed
timeframes for compliance with the Federal Financial Institutions Examination
Council (FFIEC) specified time tables for "Year 2000" preparedness plans and the
Company has achieved those timeframes.

Comparison of Financial Condition at December 31, 1998, 1997 and 1996

         The Company's financial condition began to change in 1997 as assets
increased by $118.5 million, or 63.8%, from $185.8 million at December 31, 1996
to $304.3 million at December 31, 1997. The increase was primarily due to the
acquisitions of American Bank of Highland in May adding $20.6 million at
December 31, 1997, The Egyptian State Bank in October adding $26.2 million at
December 31, 1997, Saline County State Bank in October adding $17.6 million at
December 31, 1997 and MidAmerica Bank of St. Clair County in November adding
$22.7 million at December 31, 1997. The Company's total assets remained fairly
unchanged for the 1998 period as reflected by a modest increase in total assets
of $5.5 million or 1.8% from $304.3 million at December 31, 1997 to $309.8
million at December 31, 1998.

         The Company's net loans receivable increased by $40.0 million, or 32.7%
from $122.3 million at December 31, 1996 to $162.3 million at December 31, 1997.
The increase was primarily due to the acquisitions of American Bank of Highland
adding $11.2 million, Egyptian State Bank adding $8.8 million, Saline County
State Bank adding $8.0 million and MidAmerica Bank of St. Clair County adding
$13.1 million. Net loans receivable had a modest decrease of $5.1 million, or
3.1% from $162.3 million at December 31, 1997 to $157.2 million at December 31,
1998. The decrease is primarily due to a decrease in automobile loans of $2.9
million, or 10.7% from $27.1 million at December 31, 1997 to $24.2 million at
December 31, 1998, as competition against the rates offered by the major
automakers credit divisions was too low for the Company to compete against. The
market for used automobiles is strong and the Company works with numerous
automobile dealers to obtain this business. The credit risk associated with this
type of credit requires the Company's credit policy to be followed, resulting in
a reduced number of the dealer contracts being accepted.

         The Company's investment securities increased by $58.2 million, or
334.5%, from $17.4 million at December 31, 1996 to $75.6 million at December 31,
1997. Investment securities decreased by $6.6 million or 8.7%, to $69.0 million
at December 31, 1998. The increase during 1997 was partly due to the
acquisitions of American Bank of Highland adding $5.9 million, Egyptian State
Bank adding $8.8 million, Saline County State Bank adding $5.8 million and
MidAmerica Bank of St. Clair County adding $2.9 million. The primary reason for
the increase was due to Community Bank & Trust investment securities increasing
$35.3 million through leveraging Federal Home Loan Bank Advances. The primary
reason for the decrease during 1998 was due to a change in the investing
strategy from shorter term callable notes to longer-term mortgage-backed and
related securities.

         The Company's mortgage-backed and related securities decreased by $3.5
million, or 12.4%, from $28.3 million at December 31, 1996 to $24.8 million at
December 31, 1997. The decrease is the result of principal payback, sales and
maturities. The proceeds were reinvested in other interest-earning assets.
Mortgage-backed and related securities increased by $18.4 million, or 74.2%, to
$43.2 million at December 31, 1998. The increase in 1998 is the result of a
change in the investment strategy from shorter term callable securities to
longer-term mortgage-backed and 

                                       5
<PAGE>
 
related securities. The increase was funded primarily through decreases in cash
and cash equivalents of $3.8 million, investment securities of $6.6 million and
an increase in deposits of $5.0 million.

         Deposits were $139.1 million, $218.9 million and $223.9 million at
December 31, 1996, 1997 and 1998, respectively. The increase of $79.8 million,
or 57.4% from $139.1 million at December 31, 1996 to $218.9 million at December
31, 1997 was due primarily to acquisitions. American Bank of Highland added
$19.0 million, The Egyptian State Bank added $21.3 million, Saline County State
Bank added $14.9 million and MidAmerica Bank of St. Clair County added $17.1
million. The increase of $5.0 million, or 2.3% from $218.9 million at December
31, 1997 to $223.9 million at December 31, 1998 was primarily due to an increase
of $4.7 million, or 3.6% in certificate of deposits from $130.2 million at
December 31, 1997 to $134.9 million at December 31, 1998.

         The Company's repurchase agreements increased by $2.2 million, or
71.0%, from $3.1 million at December 31, 1996 to $5.3 million at December 31,
1997. The Company's repurchase agreements decreased by $1.0 million, or 18.9%,
from $5.3 million at December 31, 1997 to $4.3 million at December 31, 1998. The
repurchase program was introduced in 1996 to attract large depositors. The FDIC
does not insure these liabilities.

         The Company's Federal Home Loan Bank advances increased $29.5 million,
or 393.3%, from $7.5 million at December 31, 1996 to $37.0 million at December
31, 1997. The increase was used as leverage to acquire investment securities.
The investments purchased had a weighted average yield of 6.8% with the advances
having a weighted average cost of 5.4%. Federal Home Loan Bank advances
increased $7.1 million, or 19.2%, from $37.0 million at December 31, 1997 to
$44.1 million at December 31, 1998. The increase was used as leverage to acquire
investment securities. The investments purchased have a weighted average yield
of 6.2% with the advances having weighted average cost of 5.1%.

         The Company entered into a line of credit agreement during 1997 which
provides the availability of a $10.0 million line of credit at the prime rate.
The Company used $5.6 million of this to acquire MidAmerica Bank of St. Clair
County in November 1997. During 1998, the Company retired the $5.6 million debt.

Comparison of Operating Results for the Years Ended December 31, 1998 and 1997

         Net Income. Net income was $1.2 million for the year ended December 31,
1998, as compared to $1.4 million for the year ended December 31, 1997. This
represents a decrease of $165,000, or 11.8%. The decrease in net income reflects
(on a pre-tax basis) a $1.1 million, or 13.3%, increase in net interest income,
a $536,000, or 47.6%, increase in non-interest income and a $1.7 million, or
23.6%, increase in non-interest expense. The results of operations for the year
ended December 31, 1997 does not reflect a full year of operations for all the
acquisitions made in 1997, while the results for the year ended December 31,
1998 includes all acquisitions. The decrease, is partly due to an increase in
provisions for loan losses of $205,000, or 86.9% from $236,000 for the year
ended December 31, 1997 to $441,000 for the year ended December 31, 1998. The
increase in the provision for loan losses is the result of the acquisition made
in 1997 as the loan review process determined that the reserves for the acquired
banks was not in compliance with the Company's policies. In the first quarter of
1998 was the final non-recurring pre-tax charge of $147,000 to terminate the
defined benefit plan. The following represents acquisition cost that are
reported for the year ended December 31, 1998: interest cost of $302,000 on
funds borrowed to make acquisitions in 1997 and $366,000 on goodwill and core
deposit intangibles.

         Net Interest Income. Net interest income increased by $1.1 million, or
13.3%, from $8.3 million for the year ended December 31, 1997 to $9.4 million
for the year ended December 31, 1998. The increase in net interest income
reflects an increase in interest income of $5.2 million, or 30.6%, from $17.0
million for the year ended December 31, 1997 to $22.2 million for the year ended
December 31, 1998. The increase was due to an increase in volume, as the average
interest earning assets increased $77.2 million, or 35.2% from $219.3 million
for the year ended December 31, 1997 to $296.5 million for the year ended
December 31, 1998, while the average yield declined from 7.8% to 7.5% for the
years ended December 31, 1997 and 1998, respectively. The interest rate spread
declined .26%, from 3.05% at December 31, 1997 to 2.79% at December 31, 1998.
The decrease was primarily the result of the average yields on assets decreasing
by .26%. This decrease was primarily the result of declining average yields on
investment securities due to having $50.2 million of investment securities
available for sale invested in callable securities that were called 

                                       6
<PAGE>
 
during the year and invested in lower yielding securities. In the fourth quarter
of 1998, the investment committee changed the investment strategy to reduce the
volatile nature of callable securities and to invest in mortgage-backed
securities as funds became available. The cost of interest-bearing liabilities
increased by $4.1 million, or 47.1%, from $8.7 million for the year ended
December 31, 1997 to $12.8 million for the year ended December 31, 1998. The
increase was due to an increase in volume of $87.8 million, or 47.7%, in the
average balance of interest-bearing liabilities from $184.2 million for the year
ended December 31, 1997 to $272.0 million for the year ended December 31, 1998.


         Interest Income. Interest income was $22.2 million for the year ended
December 31, 1998, as compared to $17.0 million for the year ended December 31,
1997, representing an increase of $5.2 million, or 30.6%. The increase was
primarily due to a volume increase in the average earning assets of $77.2
million, or 35.2% from $219.3 million at December 31, 1997 to $296.5 million for
the year ended December 31, 1998 as the yield decrease from 7.8% to 7.5% for the
years ended December 31, 1997 and 1998 respectively. Interest on loans increased
by $1.9 million, or 15.7%, from $12.1 million for the year ended December 31,
1997 to $14.0 million for the year ended December 31, 1998. This is due to a
volume increase of $18.4 million, or 13.1%, in the average loans receivable
(net), which reflects a full-year of operations in 1998 for the acquisitions of
The Egyptian State Bank in October 1997, Saline County State Bank in October
1997, and MidAmerica Bank of St. Clair County in November 1997. The increase is
also due to interest on investments and interest-bearing deposits increasing by
$3.1 million, or 97.0%, from $3.2 million for the year ended December 31, 1997
to $6.3 million for the year ended December 31, 1998. The increase was primarily
the result of a volume increase in the average balance of investment securities
increasing $45.0 million, or 114.8%, from $39.2 million for the year ended
December 31, 1997 to $84.2 million for the year ended December 31, 1998. In
addition, the average balance of cash and cash equivalents experienced a volume
increase of $10.9 million, or 79.6%, from $13.7 million for the year ended
December 31, 1997 to $24.6 million for the year ended December 31, 1998.

         Interest Expense. Interest expense, which consists primarily of
interest on deposits, increased by $4.1 million, or 47.1%, from $8.7 million for
the year ended December 31, 1997 to $12.8 million for the year ended December
31, 1998. Interest on deposits increased by $2.7 million or 37.5%, from $7.2
million for the year ended December 31, 1997 to $9.9 million for the year ended
December 31, 1998. The increase is due to a volume increase on average deposits
of $64.4 million, or 40.6%, from $158.7 million for the year ended December 31,
1997 to $223.1 million for the year ended December 31, 1998, which reflects a
full year of reporting for the acquisitions made in 1997. In addition, interest
on other borrowed funds increased $1.5 million, or 100.0%, from $1.5 million for
the year ended December 31, 1997 to $3.0 million for the year ended December 31,
1998. Of this increase $1.1 million was due to the increase of $23.1 million, or
112.1%, in the average balance in Federal Home Loan Bank advances from $20.6
million at December 31, 1997 to $43.7 million at December 31, 1998. The Company
leveraged these funds with higher yielding assets.

         Provision for Loan Losses. The Company established provisions for loan
losses of $441,000 and $236,000 for the years ended December 31, 1998 and 1997,
respectively. The Company's provisions for loan losses has been increased to
reflect the net charge offs for the period. Net charge offs to average loans was
 .25% and .19% for the periods ending December 31, 1998 and 1997 respectively.
Provisions for loan losses to total loans was .28% and .15% for the periods
ending December 31, 1998 and 1997 respectively.

         Non-Interest Income. Non-interest income increased by $536,000, or
47.6%, from $1.1 million for the year ended December 31, 1997 to $1.7 million
for the year ended December 31, 1998. The increase is primarily due to the
report reflecting a full year of operations for the acquisitions of The Egyptian
State Bank in October 1997, Saline County State Bank in October 1997, and
MidAmerica Bank of St. Clair County in November 1997. Of the increase, $254,000
was contributed by the acquisitions made in 1997 reflecting on the 1998
balances. The remainder was primarily the increase of $191,000 in the collection
of late fees as the result of increased collection efforts.

         Non-Interest Expense. Non-interest expense increased by $1.7 million,
or 23.6%, from $7.2 million for the year ended December 31, 1997 to $8.9 million
for the year ended December 31, 1998. The increase is primarily due to the
report reflecting a full year of operations for the acquisitions made in 1997
reflecting on the 1998 balances. A non-recurring pre-tax expense of $147,000 was
recognized in the first quarter of 1998 to close the defined benefit plan.

                                       7
<PAGE>
 
         Income Taxes. The Company's income tax was $521,000 and $675,000 for
the years ended December 31, 1998 and 1997, respectively, which resulted in
effective income tax rates of 29.6% and 32.5%, respectively.


Comparison of Operating Results for the Years Ended December 31, 1997 and 1996

         Net Income. Net income was $1.4 million for the year ended December 31,
1997, as compared to $773,000 for the year ended December 31, 1996. This
represents an increase of $627,000, or 81.1%. The increase in net income
reflects (on a pre-tax basis) a $1.2 million, or 16.9%, increase in net interest
income, a $349,000, or 44.9%, increase in non-interest income and a $354,000, or
5.2%, increase in non-interest expense.

         Net Interest Income. Net interest income increased by $1.2 million, or
16.9%, from $7.1 million for the year ended December 31, 1996 to $8.3 million
for the year ended December 31, 1997. The increase in net interest income
reflects an increase in interest income of $3.1 million, or 22.3%, from $13.9
million for the year ended December 31, 1996 to $17.0 million for the year ended
December 31, 1997 due to an increase of 23.5% in average interest-earning assets
from $177.5 million for the year ended December 31, 1996 to $219.3 million for
the year ended December 31, 1997. The cost of interest-bearing liabilities
increased by $2.0 million, or 29.9%, from $6.7 million for the year ended
December 31, 1996 to $8.7 million for the year ended December 31, 1997 due to an
increase of $39.4 million, or 27.2%, in the average balance of interest-bearing
liabilities from $144.8 million for the year ended December 31, 1996 to $184.2
million for the year ended December 31, 1997.

         Interest Income. Interest income was $17.0 million for the year ended
December 31, 1997, as compared to $13.9 million for the year ended December 31,
1996, representing an increase of $3.1 million, or 22.3%. The increase is partly
due to interest on loans increasing by $1.6 million, or 15.2%, from $10.5
million for the year ended December 31, 1996 to $12.1 million for the year ended
December 31, 1997. This is due to an increase of $20.5 million, or 17.1%, in the
average loans receivable (net), which reflects the acquisitions of American Bank
of Illinois in Highland in May 1997, The Egyptian State Bank in October 1997,
Saline County State Bank in October 1997, and MidAmerica Bank of St. Clair
County in November 1997. The increase is also due to interest on investments and
interest-bearing deposits increasing by $1.8 million, or 128.6%, from $1.4
million for the year ended December 31, 1996 to $3.2 million for the year ended
December 31, 1997. This is due to the average balance of securities available
for sale increasing $19.9 million, or 124.4%, from $16.0 million for the year
ended December 31, 1996 to $35.9 million for the year ended December 31, 1997.
In addition, the average balance of cash and cash equivalents increased by $6.7
million, or 95.7%, from $7.0 million for the year ended December 31, 1996 to
$13.7 million for the year ended December 31, 1997 as a result of the arbitrage.

         Interest Expense. Interest expense, which consists primarily of
interest on deposits, increased by $2.0 million, or 29.9%, from $6.7 million for
the year ended December 31, 1996 to $8.7 million for the year ended December 31,
1997. Interest on deposits increased by $900,000 or 14.3%, from $6.3 million for
the year ended December 31, 1996 to $7.2 million for the year ended December 31,
1997. The increase was partly due to the increase of $21.9 million, or 16.0%, in
the average balance of deposits, which reflects the acquisitions made in 1997.
In addition, interest and other borrowed funds increased $1.1 million, or
266.5%, from $406,000 for the year ended December 31, 1996 to $1.5 million for
the year ended December 31, 1997. This increase is due to the increase of $17.4
million, or 214.8%, in the average balance of borrowings which is primarily due
to borrowings used to arbitrage.

         Provision for Loan Losses. The Company established provisions for loan
losses of $236,000 and $10,000 for the years ended December 31, 1997 and 1996,
respectively. A significant portion of the increase was related to a $1.1
million loan that became nonaccruing during the year ended December 31, 1997.

         Non-Interest Income. Non-interest income increased by $349,000, or
44.9%, from $777,000 for the year ended December 31, 1996 to $1.1 million for
the year ended December 31, 1997. The increase is primarily due to the
acquisitions of American Bank of Illinois in Highland in May 1997, The Egyptian
State Bank in October 1997, Saline County State Bank in October 1997, and
MidAmerica Bank of St. Clair County in November 1997.

                                       8
<PAGE>
 
         Non-Interest Expense. Non-interest expense increased by $400,000, or
5.9%, from $6.8 million for the year ended December 31, 1996 to $7.2 million for
the year ended December 31, 1997. For the year ended December 31, 1996, two
non-recurring events totaling $1.6 million (pre-tax) were included. Restating
non-interest expense by removing the one time SAIF assessment of $1.0 million
and the approximated cost to close a defined benefit plan of $622,000, would
have been $5.1 million. For the year ended December 31, 1997, non-interest
expense reflects a non-recurring charge of $506,000 for an early retirement
program offered to twelve employees of which seven accepted. Restating
non-interest expense by removing the early retirement expense of $506,000 would
have been $6.6 million. Restated non-interest expense increased by $1.5 million,
or 29.4%, from $5.1 million for the year ended December 31, 1996 to $6.6 million
for the year ended December 31, 1997. Restated compensation and benefits
increased $855,000, or 26.9%, from $3.0 million (restated $3.6 million less
$622,000) at the year ended December 31, 1996 to $3.8 million (restated $4.3
million less $506,000) at the year end December 31, 1997. This increase is
partly due to benefit expenses, that were approved by the stockholders, in total
amounting to $584,000 for the annual funding of the Management Recognition Plan
(MRP) for $372,000 and the Employee Stock Ownership Plan (ESOP) for $212,000.
The remaining portion of the increase in non-interest expense was primarily due
to the acquisitions made in 1997.

         Income Taxes. The Company's income tax was $675,000 and $343,000 for
the years ended December 31, 1997 and 1996, respectively, which resulted in
effective income tax rates of 32.5% and 30.7%, respectively.

Average Balance, Interest and Average Yields and Rates

         The following table sets forth certain information relating to the
Company's average interest-earning assets and interest-bearing liabilities and
reflects the average yield on assets and average cost of liabilities for the
periods and at the date indicated. Such yields and costs are derived by dividing
income or expense by the average monthly balance of assets or liabilities,
respectively, for the periods presented. Average balances are derived from
month-end balances. Management does not believe that the use of month-end
balances instead of daily balances has caused any material difference in the
information presented.

         The table also presents information for the periods and at the date
indicated with respect to the difference between the average yield earned on
interest-earning assets and average rate paid on interest-bearing liabilities,
or "interest rate spread," which institutions have traditionally used as an
indicator of profitability. Another indicator of an institution's net interest
income is its "net yield on interest-earning assets," which is its net interest
income divided by the average balance of interest-earning assets. Net interest
income is affected by the interest rate spread and by the relative amounts of
interest-earning assets and interest-bearing liabilities. When interest-earning
assets approximate or exceed interest-bearing liabilities, any positive interest
rate spread will generate net interest income.

                                       9
<PAGE>
 
<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                               -----------------------------------------------------------------------------
                                                         1998                      1997                     1996          
                                               ------------------------ ------------------------- --------------------------
                                                                 Average                  Average                    Average
                                                Average          Yield/   Average          Yield/   Average          Yield/ 
                                                Balance Interest  Cost    Balance Interest  Cost    Balance Interest  Cost  
                                               -------- -------- ------  -------- -------- ------  -------- -------- -------
                                                                          (Dollars in thousands)
<S>                                            <C>      <C>       <C>    <C>       <C>       <C>   <C>       <C>       <C>
Interest-earning assets:
  Loans receivable, net (1).................   $158,716 $ 13,993  8.82%  $140,306  $ 12,143  8.65% $119,828  $ 10,462  8.73%
  Investment securities:
     Securities available for sale..........     64,934    4,006  6.17     35,853     2,250  6.28    16,007       852  5.32
     Securities held to maturity............     19,288    1,020  5.29      3,349       166  4.95     3,217       142  4.41
  Mortgage-backed and related securities:
     Securities available for sale..........     28,388    1,862  6.56     25,939     1,696  6.54    31,453     2,038  6.48
     Securities held-to-maturity............        616       33  5.36        148         8  5.35      --         --    --
  Cash and cash equivalents.................     24,578    1,317  5.36     13,681       745  5.45     7,029       381  5.42 
                                                -------  -------         -------- ---------        --------  --------
     Total interest-earning assets..........    296,520   22,231  7.50    219,276    17,008  7.76   177,534    13,875  7.82
Noninterest-earning assets..................     16,198                     8,079                     7,982
                                               --------                 ---------                 ---------
     Total assets...........................   $312,718                 $ 227,355                  $185,516
                                               ========                 =========                  ========
                                                         
Interest-bearing liabilities:                            
  Deposits..................................   $223,086    9.865  4.42   $158,654     7,182  4.53  $136,764     6,322  4.62
  Borrowings................................     48,891    2,950  6.03     25,547     1,488  5.82     8,066       406  5.03
                                               --------   ------         -------- ---------        --------    ------ 
     Total interest-bearing liabilities.....    271,977   12,815  4.71    184,201     8,670  4.71   144,830     6,728  4.65
                                                          ------                  ---------                    ------ 
Noninterest-bearing liabilities.............      4,647                     8,303                     5,080 
                                               --------                  --------                  --------           
     Total liabilities......................    276,624                   192,504                   149,910
Stockholders' equity........................     36,068                    35,033                    35,937
Unrealized losses on securities.............         26                      (182)                     (331)
                                               --------                  --------                  --------           
Total liabilities and retained earnings.....   $312,718                 $ 227,355                  $185,516
                                               ========                 =========                  ========
                                                                                                  
Net interest income.........................             $ 9,416                  $  8,338                     $7,147
                                                         =======                  ========                     ======

Interest rate spread........................                      2.79%                      3.05%                     3.17%
                                                                 =====                      =====                     =====
                      
Net yield on interest-earning assets........                      3.18%                      3.80%                     4.03% 
                                                                 =====                      =====                     =====  
Ratio of average interest-earning assets
  to average interest-bearing liabilities...                    109.02%                    119.04%                   122.58%
                                                                ======                     ======                    ======
</TABLE>
-----------
(1)   Includes nonaccrual loans.

                                       10
<PAGE>
 
Rate/Volume Analysis

      The following table below sets forth certain information regarding changes
in interest income and interest expense of the Company for the periods
indicated. For each category of interest-earning asset and interest-bearing
liability, information is provided on changes attributable to: (i) changes in
volume (changes in volume multiplied by old rate); (ii) changes in rate (changes
in rate multiplied by old volume); and (iii) changes in rate/volume (changes in
rate multiplied by changes in volume).

<TABLE>
<CAPTION>
                                                                        Year Ended December 31,
                                        -------------------------------------------------------------------------------------------
                                                           1998 vs.1997                            1997 vs. 1996    
                                        -------------------------------------------------   --------------------------------------- 

                                                    Increase (Decrease)                              Increase (Decrease)
                                                          Due to                                           Due to 
                                        -------------------------------------------------   -------------------------------------- 
                                                                                                                            
                                                                      Rate/                                         Rate/   
                                        Volume           Rate        Volume     Total       Volume      Rate        Volume  Total 
                                        ------           ----        ------     -----       ------      ----        ------  -----
                                                                                (In thousands)                              
<S>                                     <C>           <C>        <C>         <C>         <C>         <C>          <C>       <C>
Interest Income:                                                                                                            
  Loans receivable, net................  $  1,593     $   227    $      30   $  1,850     $1,788     $   (91)     $  (16)  $ 1,681
  Investment securities:                                                                                                          
    Securities available for sale......     1,826         (38)         (32)     1,756      1,056         153         189     1,398
    Securities held to maturity........       790          11           53        854          6          17           1        24
  Mortgage-backed and related                                                                                                     
    securities:                                                                                                                   
    Securities available for sale......       160           5            1        166       (357)         19          (4)     (342)
                                                                                                                                  
    Securities held-to-maturity........        25           0            0         25        --          --            8         8
  Cash and cash equivalents............       594         (12)           0        572        361           1           2       364
                                         --------     --------      ------     ------     ------     -------      ------   -------
   Total interest-earning assets.......     4,988         193           42      5,223      2,854          99         180     3,133
                                         --------     ---------     ------     ------     ------     -------      ------   -------  
Interest expense:                                                                                                                 
  Deposits.............................     2,917        (166)         (68)     2,683      1,012        (131)        (21)      860
  Borrowings...........................     1,360          53           49      1,462        880          64         138     1,082
                                         --------     -------     --------   --------     ------     -------      ------   -------
   Total interest-bearing liabilities..     4,277        (113)         (19)     4,145      1,892         (67)        117     1,942
                                         --------     -------     --------   --------     ------     -------      ------   -------
Change in net interest income..........  $    711     $   306     $     61   $  1,078     $  962     $   166      $   63   $ 1,191
                                         ========     ========    ========    =======       ======    =======     =======  =======  
</TABLE>



Asset/Liability Management

      Net interest income, the primary component of the Company's net income, is
derived from the difference or "spread" between the yield on interest-earning
assets and the cost of interest-bearing liabilities. The Company has sought to
reduce its exposure to changes in interest rates by matching more closely the
effective maturities or repricing characteristics of its interest-earning assets
and interest-bearing liabilities. The matching of the Company's assets and
liabilities may be analyzed by examining the extent to which its assets and
liabilities are interest rate sensitive and by monitoring the expected effects
of interest rate changes on the Company's net portfolio value.

      An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If the Company's
assets mature or reprice more quickly or to a greater extent than its
liabilities, the Company's net portfolio value and net interest income would
tend to increase during periods of rising interest rates but decrease during
periods of falling interest rates. If the Company's assets mature or reprice
more slowly or to a lesser extent than its liabilities, the Company's net
portfolio value and net interest income would tend to decrease during periods of
rising interest rates but increase during periods of falling interest rates. The
Company's policy is to mitigate interest rate risk by avoidance of the
origination of long-term loans funded by short-term deposits and by pursuing
certain strategies designed to decrease the vulnerability of its earnings to
material and prolonged changes in interest rates.

                                       11
<PAGE>
 
      The Company has established an Asset and Liability Management Committee
which currently is comprised of five non-employee directors and senior
management of the Company. This Committee meets on a quarterly basis and reviews
the maturities of the Company's assets and liabilities and establishes policies
and strategies designed to regulate the Company's flow of funds and to
coordinate the sources, uses and pricing of such funds. The first priority in
structuring and pricing the Company's assets and liabilities is to maintain an
acceptable interest rate spread while reducing the net effects of changes in
interest rates.

      Management's principal strategy in managing interest rate risk has been to
maintain short- and intermediate-term assets in portfolio, including locally
originated one- to five-year balloon mortgage loans, as well as increased levels
of agricultural, commercial business and consumer loans, which typically are for
short or intermediate terms and carry higher interest rates than residential
mortgage loans. In addition, in managing the Company's portfolio of investment
securities and mortgage-backed and related securities, management seeks to
purchase securities that mature on a basis that approximates as closely as
possible the estimated maturities of the Company's liabilities. The Company does
not engage in hedging activities. On January 1, 1994, the Bank adopted SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities," at
which time it transferred investment and mortgage-backed and related securities
to a portfolio of investment and mortgage-backed and related securities
available for sale. The Company is holding these investment and mortgage-backed
and related securities as available for sale because it may sell these
securities prior to maturity should it need to do so for liquidity or asset and
liability management purposes.

      In addition to shortening the average repricing period of its assets, the
Company has sought to lengthen the average maturity of its liabilities by
adopting a tiered pricing program for its certificates of deposit, which
provides higher rates of interest on its longer term certificates in order to
encourage depositors to invest in certificates with longer maturities.

      The Company's Board of Directors is responsible for reviewing the
Company's asset and liability policies. The Board meets monthly to review
interest rate risk and trends, as well as liquidity and capital ratios and
requirements. Management is responsible for administering the policies and
determinations of the Board of Directors with respect to asset and liability
goals and strategies.

Interest Rate Sensitivity Analysis

      The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific period if it
will mature or reprice within that period. The interest rate sensitivity gap is
defined as the difference between the amount of interest-earning assets maturing
or repricing within a specific time period and the amount of interest-bearing
liabilities maturing or repricing within that time period. A gap is considered
positive when the amount of interest rate sensitive assets exceeds the amount of
interest rate sensitive liabilities, and is considered negative when the amount
of interest rate sensitive liabilities exceeds the amount of interest rate
sensitive assets. At December 31, 1998, the Company had a negative one-year
interest rate sensitivity gap of 11.2%, as a result of which its net interest
income could be adversely affected by rising interest rates and positively
affected by falling interest rates. Generally, during a period of rising
interest rates, a negative gap 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.

                                       12
<PAGE>
 
         The following table sets forth the amounts of interest-earning assets
and interest-bearing liabilities outstanding at December 31, 1998 which are
expected to mature or reprice in each of the time periods shown.

<TABLE>
<CAPTION>
                                                            Over One       Over Five      Over Ten         Over
                                               One Year      Through        Through        Through        Twenty
                                               or Less     Five Years      Ten Years    Twenty Years       Years      Total
                                              --------     ---------      ---------    ------------  -------------  ---------
                                                                           (In thousands)
<S>                                           <C>          <C>             <C>          <C>           <C>            <C>
Interest-earning assets:
  Investment securities (1).................. $ 57,400      $ 11,121       $    568     $         0   $          0   $ 69,089
  Interest-earning deposits..................   14,768             0              0               0              0     14,768  
  Fixed-rate single-family mortgage loans....   22,955        26,677         15,278               0              0     64,910
  Mortgage-backed and related securities (1).    4,845           903         37,421               0              0     43,169
  Other loans................................   37,228        51,464          5,584               0              0     94,276
                                              --------     ---------      ---------    ------------  -------------  ---------
     Total...................................  137,196        90,165         58,851               0              0    286,212
                                              --------     ---------      ---------    ------------  -------------   --------

Interest-bearing liabilities:
  Deposits..................................   167,747        43,638              0               0              0    211,385
  Borrowings................................     4,296        37,000          7,100               0              0     48,396  
                                            ----------     ---------      ---------    ------------   ------------  ---------  
     Total..................................   172,043        80,638          7,100               0              0    259,781
                                              --------     ---------      ---------    ------------   ------------   --------
Interest sensitivity gap....................  $(34,847)    $   9,527       $ 51,751     $         0   $          0   $ 26,431
                                              ========     =========       ========     ===========   ============   ========
Cumulative interest sensitivity gap.........  $(34,847)     $(25,320)      $ 26,431     $    26,431   $     26,431   $ 26,431
                                              ========      ========       ========     ===========   ============   ========
Ratio of interest-earning assets
   to interest-bearing liabilities..........      79.7 %       111.8 %        828.9 %           N/A %          N/A %    110.2 %
                                              ========      ========       ========     ===========   ============   ========
Ratio of cumulative gap to total assets.....     (11.2)%        (8.2)%          8.5 %           8.5 %          8.5 %      8.5 %
                                              ========      ========       ========     ===========   ============   ========
</TABLE>
-------------
(1)   Investment securities and mortgage-backed and related securities are
      included at amortized cost. These securities have not been adjusted for
      any available for sale valuation reserves.

      The preceding table was prepared utilizing certain assumptions regarding
repricing. While management believes that these assumptions are reasonable, the
actual interest rate sensitivity of the Company's assets and liabilities could
vary significantly from the information set forth in the table due to market and
other factors. The following assumptions were used: (i) adjustable-rate mortgage
loans are presented as of their earliest repricing schedule, (ii) commercial and
other loans are cash flowed based on their amortization schedule with no
prepayments, (iii) fixed- and adjustable-rate mortgage-backed and related
securities are analyzed at the cusip level for repricing date and average
remaining life. In addition, it is assumed that fixed maturity deposits are not
withdrawn prior to maturity and that other deposits are withdrawn or repriced at
an annual rate.

      The interest rate-sensitivity of the Company's assets and liabilities
illustrated in the table above could vary substantially if different assumptions
were used or actual experience differs from the assumptions used.

      Certain shortcomings are inherent in the method of analysis presented in
the above table. Although certain assets and liabilities may have similar
maturities or periods of repricing, they may react in different degrees to
changes in market interest rates. The interest rates on certain types of assets
and liabilities may fluctuate in advance of changes in market interest rates,
while interest rates on other types of assets and liabilities may lag behind
changes in market interest rates. Certain assets, such as adjustable-rate
mortgages, have features which restrict changes in interest rates on a
short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table. The ability of many
borrowers to service their adjustable-rate debt may decrease in the event of an
interest rate increase.

                                       13
<PAGE>
 
Liquidity and Capital Resources

      The Company has no business other than that of its subsidiary banks and
investing its assets. Management believes that the Company's current assets,
earnings on such assets and principal and interest payments on the ESOP loan,
together with dividends that may be paid from the subsidiary banks to the
Company, will provide sufficient funds for its initial operations and liquidity
needs; however, no assurance can be given that the Company will not have a need
for additional funds in the future.

      The Company's primary sources of funds are deposits and borrowings, as
well as proceeds from maturing mortgage-backed and related securities and
principal and interest payments on loans and mortgage-backed and related
securities. While maturities and scheduled amortization of mortgage-backed and
related securities and loans are a predictable source of funds, deposit flows
and mortgage prepayments are greatly influenced by general interest rates,
economic conditions, competition and other factors.

      The primary investing activity of the Company is the origination of loans.
Other investing activities include the purchase of investment securities and
purchases of mortgage-backed and related securities. The primary financing
activity of the Company is accepting savings deposits and obtaining short-term
borrowings through FHLB advances.

      The Company has other sources of liquidity if there is a need for funds.
The Company has a portfolio of unpledged investment securities and
mortgage-backed and related securities with an aggregate market value of $36.1
million at December 31, 1998 classified as available for sale. Another source of
liquidity is the ability to obtain advances from the FHLB of Chicago. In
addition, the Company maintains a portion of its investments in interest-bearing
deposits that will be available when needed.

      The Company's most liquid assets are cash and cash equivalents, which are
short-term, highly liquid investments with original maturities of less than
three months that are readily convertible to known amounts of cash, and include
interest-bearing deposits. The levels of these assets are dependent on the
Company's operating, financing and investing activities during any given period.

      The Company anticipates that it will have sufficient funds available to
meet its current commitments. At December 31, 1998, the Company had commitments
to originate loans of $16.8 million. Certificates of deposit which are scheduled
to mature in less than one year at December 31, 1998 totaled $91.2 million.
Management believes that a significant portion of such deposits will remain with
the Company.

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 change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Company
are monetary in nature. As a result, interest rates have a greater impact on the
Company's performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.

                                       14
<PAGE>
 
Impact of New Accounting Standards


      Comprehensive Income. In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. This statement requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements.

      This statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal years beginning after
December 15, 1997. The Company has adopted the provisions of the statement in
1998 and has presented comprehensive income information in the consolidated
statements of financial condition and statements of stockholders' equity.

      Disclosures about Segments of an Enterprise and Related Information. In
June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. This
statement is effective for financial statements for periods beginning after
December 15, 1997. The management of the Company has adopted the appropriate
provisions of the statement for 1998.

      Employers' Disclosure about Pension and Other Postretirement Benefits. In
February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits. This
statement is effective for financial statements for periods beginning after
December 15, 1997. The management of the Company has adopted the appropriate
provisions of the statements at January 1, 1998.

      Accounting for Derivative Instruments and Hedging Activities. In June
1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." SFAS No. 133 establishes a new model for accounting for
derivatives and hedging activities and supersedes and amends a number of
existing standards. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999, but earlier application is permitted as of the beginning of any
fiscal quarters subsequent to June 15, 1998. Upon the statement's initial
application, all derivatives are required to be recognized in the statement of
financial position as either assets or liabilities and measured at fair value.
In addition, all hedging relationships must be designated, reassessed and
documented pursuant to the provisions of SFAS No. 133. Adoption of SFAS No. 133
is not expected to have a material effect on the Company's financial position or
operating results.

      Accounting for Mortgage-Backed Securities. In October 1998, the FASB
issued SFAS No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS No. 134 amends the earlier SFAS No. 65, "Accounting for
Certain Mortgage Banking Activities." The new statement requires that, after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities should classify the resulting mortgage-backed securities or
other retained interests based on its ability and intent to sell or hold those
investments. The statement is effective for the first fiscal quarter beginning
after December 15, 1998. The management of the Company does not currently
believe that its activities meet the definition of "mortgage banking
activities," and therefore does not anticipate that this statement will have a
material effect on the Company's financial position or operating results.

                                       15
<PAGE>
 
                [LETTERHEAD OF LARSSON WOODYARD & HENSON, LLP]
 
                          Independent Auditors' Report



To the Board of Directors
Community Financial Corp.
 and Subsidiaries
Olney, Illinois

We have audited the accompanying consolidated balance sheets of Community
Financial Corp. and Subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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 financial position of Community Financial
Corp. and Subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.



/s/ Larsson Wodyard & Henson, LLP

February 5, 1999
Paris, Illinois

                                       16
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS

                                     ASSETS

<TABLE>
<CAPTION>
                                                                                                      December 31,
                                                                                             ----------------------------
                                                                                                 1998           1997 
                                                                                             ------------   -------------
                                                                                                      (1,000's)
                                                                                             ----------------------------
<S>                                                                                          <C>            <C> 
Cash                                                                                         $      8,134   $      8,607
Interest bearing deposits                                                                          14,768         18,117
                                                                                             ------------   -------------
      Total Cash and Cash Equivalents                                                              22,902         26,724

Securities available for sale (amortized cost of $52,168
   and $57,282 in 1998 and 1997, respectively)                                                     52,102         57,283
Securities held to maturity (estimated market value of
   $17,133 and $18,403 in 1998 and 1997, respectively)                                             16,921         18,318
Mortgage-backed and related securities available for sale (amortized
   cost of $42,727 and $23,878 at 1998 and 1997, respectively)                                     42,797         23,895
Mortgage-backed and related securities held to maturity
(estimated market value of $463 and $927 at 1998 and 1997, respectively)                              442            891
Loans receivable, net                                                                             157,207        162,318
Foreclosed real estate, net                                                                           436            126
Accrued interest receivable                                                                         3,094          2,675
Premises and equipment, net                                                                         7,635          5,853
Prepaid income taxes                                                                                    0              0
Deferred income taxes                                                                                 275            289
Goodwill and other intangibles                                                                      4,456          5,109
Core deposit intangibles                                                                              517            527
Other assets                                                                                        1,056            257
                                                                                             ------------   -------------
Total Assets                                                                                 $    309,840   $    304,265
                                                                                             ============   =============
                                       LIABILITIES AND STOCKHOLDERS' EQUITY

Deposits                                                                                     $    223,933   $    218,915
Federal Home Loan Bank advances                                                                    44,100         37,000
Repurchase agreements                                                                               4,296          5,323
Other borrowings                                                                                        0          5,600
Advances from borrowers for taxes and insurance                                                        32             41
Accrued interest payable                                                                              493            457
Accrued income taxes                                                                                   58             46
Other liabilities                                                                                   1,662          1,156
                                                                                             ------------   -------------
    Total Liabilities                                                                             274,574        268,538
                                                                                             ------------   -------------
Commitments and contingencies

Stockholders' Equity:
   Preferred stock $0.01 par value; 1,000,000 shares authorized;
     0 shares issued at December 31,1998 and 1997
   Common stock $.01 par value; 7,000,000 shares authorized;
     2,242,612 and 2,360,612 shares issued at December 31, 1998 and 1997, respectively                 26             26
   Additional paid-in capital                                                                      25,649         25,754
   Treasury stock                                                                                  (5,273)        (3,803)
   Shares held for management recognition plan                                                       (569)          (750)
   Unallocated employee stock ownership plan (ESOP) shares                                         (1,164)        (1,428)
   Accumulated other comprehensive income                                                               4             11
   Retained earnings                                                                               16,593         15,917
                                                                                             ------------   -------------
Total Stockholders' Equity                                                                         35,266         35,727
                                                                                             ------------   -------------
Total Liabilities and Stockholders' Equity                                                   $    309,840   $    304,265
                                                                                             ============   =============
</TABLE>

          See accompanying notes to consolidated financial statements.



                                                        

                                       17
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                                                              December 31,           
                                                                            ---------------------------------------------
                                                                                 1998              1997          1996  
                                                                            -------------      ------------    ----------
                                                                                                 (1,000's)            
                                                                            --------------------------------------------- 
<S>                                                                         <C>               <C>             <C>
Interest income:
   Interest on loans                                                        $     13,993     $     12,143   $    10,462
   Interest on mortgage-backed and related securities                              1,895            1,651         2,038
   Interest on securities and interest-bearing deposits                            6,343            3,214         1,375
                                                                            ------------     ------------   -----------
     Total interest income                                                        22,231           17,008        13,875
                                                                            ------------     ------------   -----------    

Interest expense:
   Interest on deposits                                                            9,865            7,182         6,322
   Interest on other borrowed funds                                                2,950            1,488           406
                                                                            ------------     ------------   -----------
     Total interest expense                                                       12,815            8,670         6,728
                                                                            ------------     ------------   -----------
     Net interest income                                                           9,416            8,338         7,147

Provision for loan losses                                                           (441)            (236)          (10)
                                                                            ------------     ------------   -----------

     Net interest income after provision for loan losses                           8,975            8,102         7,137

Non-interest income                                                                1,663            1,127           777

Non-interest expense                                                               8,880            7,152         6,798
                                                                            ------------     ------------   -----------
     Income before income taxes                                                    1,758            2,077         1,116

Provision for income taxes                                                           521              675           343
                                                                            ------------     ------------   -----------
     Net income                                                             $      1,237     $      1,402   $       773
                                                                            ============     ============   ===========
Basic earnings per share                                                    $        .57     $        .62   $       .33
Diluted earnings per share                                                  $        .55     $        .60   $       .33
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       18
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
                                                                                            Accumulated
                                                             Unallocated                    Other Compre-
                                Common   Paid-in    Treasury    ESOP         MRP   Retained    hensive                 Comprehensive
                                 Stock     Capital   Stock     Shares       Stock  Earnings     Income        Total       Income
                                -------  ---------- --------- ---------   -------- --------  -------------   -------  --------------
                                                                           1,000's                                                
                                ----------------------------------------------------------------------------------------------------

<S>                             <C>      <C>        <C>       <C>          <C>     <C>       <C>             <C>         <C>
Balance, December 31, 1995       $  26     $ 25,280  $     0  $  (2,116)  $     0  $ 14,972    $   (56)    $  38,106
Comprehensive Income
   Net income                                                                           773                      773     $      773
                                                                                                                         ----------
   Other comprehensive income
     Unrealized gain (loss)
       on securities                                                                                                           (345)

     Related tax effects                                                                                                        138
                                                                                                                         ----------
     Total other
       comprehensive income                                                                       (207)         (207)          (207)

                                                                                                                         ----------
     Total comprehensive income                                                                                                 566
                                                                                                                         ==========
ESOP shares allocated                           117                 423                                          540
Common stock acquired for
  Management Recognition Plan                                              (1,123)                            (1,123)
Treasury stock                                        (3,411)                                                 (3,411)
Dividends ($.25 per share)                                                             (596)                    (596)
                                 -----     -------- --------  ---------   -------- --------    -------       -------
Balance, December 31, 1996          26       25,397   (3,411)    (1,693)   (1,123)   15,149       (263)       34,082
Comprehensive Income
   Net income                                                                         1,402                    1,402     $    1,402
                                                                                                                         ----------
   Other comprehensive income
     Unrealized gain (loss)
       on securities                                                                                                            480
     Related tax effects                                                                                                       (192)

     Less reclassification
      adjustment for gains
      included in net income                                                                                                    (23)

     Related tax effects                                                                                                          9
                                                                                                                         ----------
   Total other
     comprehensive income                                                                          274           274            274
                                                                                                                         ----------
   Total comprehensive income                                                                                            $    1,676
                                                                                                                         ==========
ESOP shares allocated                           213                265                                           478
Amortization of
  Management Recognition Plan                   144                           373                                517
Treasury stock                                         (392)                                                    (392)
Other                                                                                   (44)                     (44)
Dividends ($.25 per share)                                                             (590)                    (590)
                                 -----     -------- --------  ---------   -------- --------    -------      --------
Balance, December 31, 1997          26       25,754  (3,803)    (1,428)      (750)   15,917         11        35,727
Comprehensive Income
   Net income                                                                         1,237                    1,237     $    1,237
                                                                                                                         ----------
   Other comprehensive income
     Unrealized gain
       (loss) on securities                                                                                                     (11)

     Related tax effects                                                                                                          4
                                                                                                                         ----------
   Total other
     comprehensive income                                                                           (7)           (7)            (7)

                                                                                                                         ----------
   Total comprehensive income                                                                                            $    1,230
                                                                                                                         ==========
ESOP shares allocated                            66                 264                                          330
Amortization of
  Management Recognition Plan                  (111)                          181                                 70
Treasury stock                                       (1,470)                                                  (1,470)
Stock options exercised                         (60)                                                             (60)
Dividends ($.25 per share)                                                             (561)                    (561)
                                 -----     --------  -------  ---------   --------  -------    -------     ---------
Balance, December 31, 1998       $  26     $ 25,649  $(5,273) $  (1,164)  $  (569)  $16,593    $     4     $  35,266
                                 =====     ========  =======  =========   ========  =======    =======     =========
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       19
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                                             December 31,               
                                                                             ----------------------------------------------
                                                                                 1998            1997              1996 
                                                                             ------------  ---------------  ---------------
                                                                                               (1,000's)                       
                                                                             ----------------------------------------------
<S>                                                                          <C>           <C>               <C>
Operating activities:
   Net income                                                                      1,237    $       1,402    $         773
   Adjustments to reconcile net income to net cash
    provided by operating activities:
     Provision for depreciation                                                      552              342              240
     Provision for loan losses                                                       441              236               10
     Accretion of discounts on securities                                           (160)             (65)             (56)
     Amortization of premiums on securities                                          125               45               38
     Amortization of intangibles                                                     366               73                0
     Increase in accrued interest receivable                                        (419)            (629)             (21)
     Decrease (increase) in deferred income taxes                                     14              120             (129)
     Decrease (increase) in other assets                                            (502)             567             (564)
     Increase (decrease) in accrued income taxes                                      12              226             (701)
     Increase (decrease) in accrued interest payable                                  36             (105)              46
     (Decrease) increase in other liabilities                                        506             (871)           1,349
     Gain on sale of securities and mortgage-backed
        and related securities                                                         0              (34)               0
     Loss on sale of premises and equipment                                           18                2                0
                                                                             ------------  ---------------  ---------------
        Net cash provided by operating activities                                  2,226            1,309              985
                                                                             ------------  ---------------  ---------------

Investing activities:
   Proceeds from sales of securities available for sale                                0            1,000                0
   Proceeds from maturities of securities held to maturity                         9,442            4,513              321
   Proceeds from maturities of securities available for sale                      50,226           24,647            6,500
   Proceeds from maturities of mortgage-backed securities
     available for sale                                                                0            1,420                0
   Proceeds from sales of mortgage-backed and related
     securities available for sale                                                     0              632                0
   Purchase of securities available for sale                                     (44,886)         (58,043)          (1,003)
   Purchase of securities held to maturity                                        (8,050)          (4,480)            (650)
   Purchase of mortgage-backed securities available for sale                     (28,363)          (1,812)               0
   Acquisitions net of cash and cash equivalents
     acquired of 14,573                                                                0             (942)               0
   Decrease (increase) in loans receivable                                         4,670              134           (7,823)
   Principal collected on mortgage-backed and related securities                   9,909            4,493            7,201
   Increase in foreclosed real estate                                               (310)            (203)             (48)
   Decrease in real estate held for sale                                               0                0              132
   Purchase of premises and equipment                                             (2,352)            (963)            (485)
   Proceeds from sale of premises and equipment                                        0              114                0
   Purchase of Federal Reserve Bank stock                                              0                0              (49)
   Purchase of Federal Home Loan Bank stock                                         (125)          (1,080)            (200)
                                                                             ------------  ---------------  ---------------
      Net cash (used in) provided by investing activities                         (9,839)         (30,570)           3,896
                                                                             ------------  ---------------  ---------------
</TABLE>

                                       20
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>

                                                                                             December 31,               
                                                                          -------------------------------------------------
                                                                                1998            1997              1996     
                                                                          ---------------   --------------  ---------------
                                                                                              (1,000's)                
                                                                          -------------------------------------------------
<S>                                                                        <C>              <C>             <C>         
Financing activities:
   Net increase (decrease) in deposits                                     $       5,018    $       6,055    $      (5,177)
   Increase (decrease) in advances from borrowers
     for taxes and insurance                                                          (9)              (3)               6
   Proceeds from borrowings                                                        7,100           42,600            4,500
   Repayments of borrowings                                                       (5,600)          (7,500)               0
   Decrease in repurchase agreements                                              (1,027)           2,202            3,121
   Purchase of treasury stock                                                     (1,470)            (392)          (3,411)
   Retirement (purchase) of MRP stock                                                181              373           (1,123)
   Amortization of MRP                                                              (111)               0                0
   Stock options                                                                     (60)               0                0
   Earned ESOP stock                                                                 264              265              423
   ESOP adjustment                                                                    66              357              117
   Dividends paid (accrued)                                                         (561)            (590)            (596)
                                                                          ---------------   --------------  ---------------
      Net cash provided by (used in) financing activities                          3,791           43,367           (2,140)
                                                                          ---------------   --------------  ---------------
(Decrease) increase in cash and cash equivalents                                  (3,822)          14,106            2,741

Cash and cash equivalents at beginning of year                                    26,724           12,618            9,877
                                                                          ---------------   --------------  ---------------
Cash and cash equivalents at end of year                                   $      22,902    $      26,724    $      12,618
                                                                          ===============   ==============  ===============
Supplemental Disclosures:
   Additional Cash Flows Information:
      Cash paid for:
         Interest on deposits, advances and other borrowings               $      12,779    $       8,373    $       6,682
   Income taxes:
      Federal                                                              $         626    $         264    $         857
      State                                                                $          40    $           0    $         177

Schedule of Noncash Investing Activities:
   Change in unrealized gain (loss)
     on securities available for sale                                      $          14    $         457    $        (348)
   Change in deferred income taxes
     attributed to unrealized gain (loss)
     on securities available for sale                                      $          (7)   $        (183)   $         141
</TABLE>

          See accompanying notes to consolidated financial statements.

                                       21
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.   Summary of Significant Accounting Policies

   Description of the Business

      Community Financial Corp. (the Company) was incorporated in December 1994
      at the direction of the Board of Directors of Community Bank & Trust, sb,
      the predecessor of Community Bank & Trust, N.A., to become the holding
      company for the Bank upon its conversion from mutual to stock form (the
      Conversion). In June 1995, the Company used the proceeds from its initial
      public offering to acquire all the outstanding capital stock of Community
      Bank & Trust, N.A. The Company's principal business is overseeing and
      directing the business of the banks and investing the Company's assets.
      The Company is registered with the Board of Governors of the Federal
      Reserve System as a bank holding company.

      Community Bank & Trust, N.A. is a national bank operating through five
      offices serving Richland, Coles, Jasper, Lawrence, and Wayne Counties,
      Illinois. During 1997 the Company acquired American Bancshares, Inc., a
      single bank holding company for American Bank of Illinois, Egyptian
      Bancshares, Inc., the holding company for The Egyptian State Bank and
      Saline County State Bank, and MidAmerica Bank of St. Clair County.
      Egyptian Bancshares, Inc. was dissolved in 1997. American Bank of Illinois
      has two offices serving Bond and Madison Counties, Illinois. The Egyptian
      State Bank and Saline County State Bank has offices serving Saline and
      Williamson Counties, Illinois. MidAmerica Bank of St. Clair County has an
      office serving St. Clair County, Illinois.

      The Company's net income is dependent primarily on its net interest
      income, which is the difference between interest income earned on its loan
      and mortgage-backed and related securities portfolio and interest paid on
      interest-bearing liabilities. Net interest income is determined by the
      difference between yields earned on interest-earning assets and rates paid
      on interest-bearing liabilities ("interest rate spread") and the relative
      amounts of interest-earning assets and interest-bearing liabilities. The
      Company's interest rate spread is affected by regulatory, economic and
      competitive factors that influence interest rates, loan demand and deposit
      flows. To a lesser extent, the Company's net income also is affected by
      the level of general and administrative expenses and the level of other
      income, which primarily consists of service charges and other fees. The
      operations of the Company are significantly affected by prevailing
      economic conditions, competition and the monetary, fiscal and regulatory
      policies of governmental agencies. Lending activities are influenced by
      the demand for and supply of housing, competition among lenders, the level
      of interest rates and the availability of funds. Deposit flows and costs
      of funds are influenced by prevailing market rates of interest, primarily
      on competing investments, account maturities and the levels of personal
      income and savings in the Company's market area.

   Basis of Financial Statement Presentation

      The consolidated financial statements include the accounts of the Company
      and its wholly owned subsidiaries Community Bank & Trust, N.A., American
      Bancshares, Inc. and its wholly owned subsidiary American Bank of
      Illinois, The Egyptian State Bank, Saline County State Bank and MidAmerica
      Bank of St. Clair County.

      The consolidated financial statements have been prepared in conformity
      with generally accepted accounting principles. All significant
      intercompany balances and transactions have been eliminated in
      consolidation. In preparing the consolidated financial statements,
      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 revenues and expenses for the period. Actual results could
      differ significantly from those estimates.

                                            

                                       22
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies

   Basis of Financial Statement Presentation

      Material estimates that are particularly susceptible to significant change
      in the near-term relate to the determination of the allowance for loan
      losses. In connection with the determination of the allowance for loan
      losses, management generally obtains independent appraisals for
      significant properties. A substantial portion of the Bank's loans are
      secured by collateral in the State of Illinois. Accordingly, as with most
      financial institutions in the market area, the collectibility of a
      substantial portion of the carrying value of the Bank's loan portfolio is
      susceptible to changes in market conditions.

      Management believes the allowance for loan losses and real estate owned is
      adequate. Management uses available information to recognize losses on
      loans and foreclosed real estate. Future additions to the allowances may
      be necessary based on changes in local economic conditions. In addition,
      regulatory agencies, as an integral part of their examination process,
      periodically review the Bank's allowances for losses on loans and
      foreclosed real estate. Such agencies may require the Bank to recognize
      additions to the allowances based on their judgments about information
      available to them at the time of their examination.


   Cash Equivalents

      For purposes of the consolidated statements of cash flows, cash
      equivalents consist of daily interest bearing demand deposits, federal
      funds sold, and interest bearing deposits and securities having original
      maturities of three months or less.

    Securities and Mortgage-Backed Securities

      Investment and mortgage-backed securities available for sale include
      securities that management intends to use as part of its overall
      asset/liability management strategy and that may be sold in response to
      changes in interest rates and resultant prepayment risk and other related
      factors. Securities available for sale are carried at fair value, and
      unrealized gains and losses (net of related tax effects) are excluded from
      earnings but are included in stockholders' equity. Upon realization, such
      gains and losses will be included in earnings using the specific
      identification method. Investment securities and mortgage-backed
      securities, other than those designated as available for sale or trading,
      are comprised of debt securities for which the Bank has positive intent
      and ability to hold to maturity and are carried at cost, adjusted for
      amortization of premiums and accretion of discounts using the level-yield
      method over the estimated lives of the securities.

      Trading account securities are adjusted to market value through earnings.
      There were no trading account securities during the years ended December
      31, 1998, 1997, and 1996.

      Management determines the appropriate classification of investment and
      mortgage-backed securities as either available for sale, held to maturity,
      or held for trading at the purchase date.

   Loans

      Loans are considered a held-to-maturity asset and, accordingly, are
      carried at historical cost. Loans are stated at unpaid principal balances,
      less the allowance for loan losses and net deferred loan fees and unearned
      discounts. Unearned discounts on installment loans are recognized as
      income over the term of the loans using the interest method. Loan
      origination and commitment fees, as well as certain direct origination
      costs, are deferred and amortized as a yield adjustment over the lives of
      the related loans using the interest method when in excess of loan
      origination cost. Amortization of deferred loan fees is discontinued when
      a loan is placed on nonaccrual status.

                                       

                                       23
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies

   Loans

      Loans are placed on nonaccrual when collection of principal or interest is
      considered doubtful (generally loans past due 90 days or more). Any unpaid
      interest previously accrued on those loans is reversed from income.
      Interest income generally is not recognized on nonaccrual loans unless the
      likelihood of further loss is remote. Income is subsequently recognized
      only to the extent that cash payments are received until, in management's
      judgment, the borrower's ability to make periodic interest and principal
      payments is back to normal, in which case the loan is returned to accrual
      status.

      The allowance for loan losses is maintained at a level which, in
      management's judgment, is adequate to absorb probable losses in the loan
      portfolio. The amount of the allowance is based on management's evaluation
      of the collectibility of the loan portfolio, including the nature of the
      portfolio, credit concentrations, trends in historical loss experience,
      specific impaired loans, and economic conditions. The allowance is
      increased by a provision for loan losses, which is charged to expense, and
      reduced by charge-offs, net of recoveries. Loans are charged off when
      management believes there has been permanent impairment of their carrying
      values.

      The Bank also provides a reserve for losses on specific loans, which are
      deemed to be impaired. Groups of small balance homogeneous basis loans
      (generally residential real estate and consumer loans) are evaluated for
      impairment collectively. A loan is considered impaired when, based upon
      current information and events, it is probable that the bank will be
      unable to collect, on a timely basis, all principal and interest according
      to the contractual terms of the loan's original agreement. When a specific
      loan is determined to be impaired, the reserve for possible loan losses is
      increased through a charge to expense for the amount of the impairment.
      For all non-consumer loans, impairment is measured based on value of the
      underlying collateral. The value of the underlying collateral is
      determined by reducing the collateral's estimated current value by
      anticipated selling costs. The Bank's impaired loans are the same as those
      non-consumer loans currently reported as nonaccrual. The Bank recognizes
      interest income on impaired loans only to the extent that cash payments
      are received.

   Foreclosed Real Estate

      Foreclosed real estate held for sale is carried at the lower of cost or
      estimated fair market value, net of estimated selling costs. Costs of
      holding foreclosed property are charged to expense in the current period,
      except for significant property improvements, which are capitalized to the
      extent that carrying value does not exceed estimated fair market value,
      net of estimated selling cost.

   Premises and Equipment

      Land is carried at cost. Buildings and furniture, fixtures, and equipment
      are carried at cost, less accumulated depreciation and amortization.
      Buildings and furniture, fixtures, and equipment are depreciated using the
      straight-line method over the estimated useful lives of the assets. The
      estimated useful lives are ten to fifty years for buildings and
      improvements and five to fifteen years for equipment.

                                       24
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies

   Goodwill

      Goodwill reflects the excess of cost over fair value of net assets which
      were acquired during 1997. Note 22 more fully describes the purchase
      transaction. Goodwill is amortized over 15 years which approximates the
      periods estimated to be benefited from the assets acquired and liabilities
      assumed. Accumulated amortization at December 31, 1998 and 1997 was
      $327,000 and 50,000, respectively.

   Core Deposit Intangible

      Core deposit intangible represents the intangible value of deposit
      relationships resulting from deposit liabilities assumed in the 1997
      acquisitions and is amortized using an accelerated method based on an
      estimated runoff of the related deposits, not exceeding 7 years.
      Accumulated amortization at December 31, 1998 and 1997 was $112,000 and
      $23,000, respectively.

   Income Taxes

      Deferred income tax assets and liabilities are computed annually for
      differences between the consolidated financial statements and tax basis of
      assets and liabilities that will result in taxable or deductible amounts
      in the future based on enacted tax laws and rates applicable to the
      periods in which the differences are expected to affect taxable income.
      Deferred tax assets are reduced by a valuation allowance when, in the
      opinion of management, it is more likely than not that some portion or all
      of the deferred tax assets will not be realized. Deferred tax assets and
      liabilities are adjusted for the effects of changes in tax laws and rates
      on the date of enactment. Income tax expense is the tax payable or
      refundable for the period plus or minus the change during the period in
      deferred tax assets and liabilities.

   Per Share Data

      The Company adopted Statement of Financial Accounting Standards (SFAS) No.
      128, "Earnings Per Share." SFAS No. 128 revises the manner in which
      earnings per share (EPS) is calculated by replacing the presentation of
      primary and fully diluted EPS with a presentation of basic and diluted
      EPS. Basic earnings per common share is calculated by dividing net income
      by the weighted average number of common shares outstanding during the
      period less unvested MRP and unallocated ESOP shares. Diluted earnings per
      common share is calculated by dividing net income by the weighted average
      number of common shares used to compute basic EPS plus the incremental
      amount of potential common stock determined by the treasury stock method.

   Off-Balance-Sheet Financial Instruments

      In the ordinary course of business, the Company's subsidiaries have
      entered into off-balance-sheet financial instruments consisting of
      commitments to extend credit, commitments under credit card arrangements,
      commercial letters of credit and standby letters of credit. Such
      instruments are recorded in the consolidated financial statements when
      they become payable.

                                       25
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies

   Trust Assets

      Assets held by the Company's subsidiaries in fiduciary or agency capacity
      for customers are not included in the consolidated financial statements as
      such items are not assets of the Company or its subsidiaries.

New Accounting Standards

    Comprehensive Income

      In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
      Income." SFAS No. 130 establishes standards for reporting and display of
      comprehensive income and its components (revenues, expenses, gains, and
      losses) in a full set of general-purpose financial statements. This
      statement requires that all items that are required to be recognized under
      accounting standards as components of comprehensive income be reported in
      a financial statement that is displayed with the same prominence as other
      financial statements.

      This statement requires that an enterprise (a) classify items of other
      comprehensive income by their nature in a financial statement and (b)
      display the accumulated balance of other comprehensive income separately
      from retained earnings and additional paid-in capital in the equity
      section of a statement of financial position. This statement is effective
      for fiscal years beginning after December 15, 1997. The Company has
      adopted the provisions of the statement in 1998 and has presented
      comprehensive income information in the consolidated statements of
      financial condition and statements of stockholders' equity.

    Disclosures about Segments of an Enterprise and Related Information

      In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
      an Enterprise and Related Information." SFAS No. 131 establishes standards
      for the way that public business enterprises report information about
      operating segments in annual financial statements and requires that those
      enterprises report selected information about operating segments in
      interim financial reports issued to shareholders. It also establishes
      standards for related disclosures about products and services, geographic
      areas, and major customers. This statement is effective for financial
      statements for periods beginning after December 15, 1997. The Company has
      adopted the appropriate provisions of the statement for 1998.

   Employers' Disclosure about Pension and Other Postretirement Benefits

      In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
      about Pensions and Other Postretirement Benefits." SFAS No. 132
      standardizes the disclosure requirements for pensions and other
      postretirement benefits. This statement is effective for financial
      statements for periods beginning after December 15, 1997. The Company has
      adopted the appropriate provisions of the statements at January 1, 1998.

                                       26
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1.  Summary of Significant Accounting Policies

   Accounting for Derivative Instruments and Hedging Activities

      In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
      Instruments and Hedging Activities." SFAS No. 133 establishes a new model
      for accounting for derivatives and hedging activities and supersedes and
      amends a number of existing standards. SFAS No. 133 is effective for
      fiscal years beginning after June 15, 1999, but earlier application is
      permitted as of the beginning of any fiscal quarters subsequent to June
      15, 1998. Upon the statement's initial application, all derivatives are
      required to be recognized in the statement of financial position as either
      assets or liabilities and measured at fair value. In addition, all hedging
      relationships must be designated, reassessed and documented pursuant to
      the provisions of SFAS No. 133. Adoption of SFAS No. 133 is not expected
      to have a material effect on the Company's financial position or operating
      results.

   Accounting for Mortgage-Backed Securities

      In October 1998, the FASB issued SFAS No. 134, "Accounting for
      Mortgage-Backed Securities Retained after the Securitization of Mortgage
      Loans Held for Sale by a Mortgage Banking Enterprise." SFAS No. 134 amends
      the earlier SFAS No. 65, "Accounting for Certain Mortgage Banking
      Activities." The new statement requires that, after the securitization of
      mortgage loans held for sale, an entity engaged in mortgage banking
      activities should classify the resulting mortgage-backed securities or
      other retained interests based on its ability and intent to sell or hold
      those investments. The statement is effective for the first fiscal quarter
      beginning after December 15, 1998. The management of the Company does not
      currently believe that its activities meet the definition of "mortgage
      banking activities," and therefore does not anticipate that this statement
      will have a material effect on the Company's financial position or
      operating results.

   Reclassifications

      Certain reclassifications have been made to the balances as of December
      31, 1997 and 1996, with no effect on net income, to be consistent with the
      classifications adopted for December 31, 1998.

Note 2.  Securities

   Securities available for sale are summarized as follows:

<TABLE>
<CAPTION>
                                                                               December 31, 1998                     
                                                      ---------------------------------------------------------------
                                                                            Gross          Gross        Approximate
                                                        Amortized        Unrealized     Unrealized         Market
                                                           Cost            Gains          Losses            Value    
                                                      --------------    ------------   -------------   --------------
                                                                                       (1,000's)                     
                                                      ---------------------------------------------------------------
         <S>                                          <C>               <C>            <C>              <C>

         U.S. government and agency securities                48,847             131             209           48,769
         State and municipal obligations                         660              12               0              672
         FRB stock                                               381               0               0              381
         FHLB stock                                            2,280               0               0            2,280
                                                      --------------    ------------   -------------   --------------
                                                      $       52,168    $        143   $         209   $       52,102
                                                      ==============    ============   =============   ==============
</TABLE>

                                       27
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 2.  Securities
<TABLE>
<CAPTION>

                                                                               December 31, 1997                     
                                                      ---------------------------------------------------------------
                                                                           Gross          Gross        Approximate
                                                       Amortized        Unrealized     Unrealized         Market
                                                          Cost             Gains          Losses           Value    
                                                      --------------    ------------   -------------  ---------------
                                                                                   (1,000's)                     
                                                      ---------------------------------------------------------------
         <S>                                          <C>               <C>            <C>             <C>
         U.S. government and agency securities        $       53,924    $        115   $         114   $       53,925
         State and municipal obligations                       1,000               2               2            1,000
         FRB stock                                               381               0               0              381
         FHLB stock                                            1,975               0               0            1,975
         Other                                                     2               0               0                2
                                                      --------------    ------------   -------------   --------------
                                                      $       57,282    $        117   $         116   $       57,283
                                                      ==============    ============   =============   ==============
</TABLE>


      The amortized cost and approximate market value of securities available
      for sale, by contractual maturity, are shown below. Expected maturities
      will differ from contractual maturities from call options.

<TABLE>
<CAPTION>
                                                                               December 31,                            
                                                     ------------------------------------------------------------------
                                                                  1998                                 1997                
                                                     --------------------------------  --------------------------------
                                                                         Approximate                      Approximate
                                                      Amortized           Market         Amortized          Market
                                                         Cost              Value            Cost             Value    
                                                     --------------   --------------   --------------    --------------
                                                                                   (1,000's)                           
                                                     ------------------------------------------------------------------
      <S>                                            <C>              <C>              <C>               <C>

      Due in one year or less                        $        3,325   $        3,328   $       11,443    $       11,441
      Due after one year through five years                  22,646           22,615           12,038            12,041
      Due after five years through ten years                 23,534           23,496           31,442            31,442
      Due after ten years                                     2,663            2,663            2,359             2,359
                                                     --------------   --------------   --------------    --------------
                                                     $       52,168   $       52,102   $       57,282    $       57,283
                                                     ==============   ==============   ==============    ==============
</TABLE>


   Securities held to maturity are summarized as follows:

<TABLE>
<CAPTION>
                                                                                December 31, 1998                      
                                                     --------------------------------------------------------------------
                                                                          Gross             Gross           Approximate
                                                      Amortized        Unrealized       Unrealized            Market
                                                          Cost            Gains             Losses            Value 
                                                     --------------   --------------   --------------    ----------------
                                                                                    (1,000's)                       
                                                     --------------------------------------------------------------------
      <S>                                            <C>              <C>               <C>               <C>
      U.S. government and agency securities          $       11,450   $           49    $          5      $        11,494
      State and municipal obligations                         5,471              171               3                5,639
                                                     --------------   --------------   --------------    ----------------
                                                     $       16,921   $          220    $          8      $        17,133
                                                     ==============   ==============   ==============    ================
</TABLE>

                                       28
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Note 2.  Securities

<TABLE>
<CAPTION>

                                                                                December 31, 1997                        
                                                     --------------------------------------------------------------------
                                                                          Gross             Gross           Approximate
                                                      Amortized        Unrealized       Unrealized             Market
                                                          Cost            Gains            Losses              Value 
                                                     --------------   --------------    ---------------   ---------------
                                                                                          (1,000's)                      
                                                     --------------------------------------------------------------------
      <S>                                            <C>              <C>               <C>               <C>

      U.S. government and agency securities          $       11,695   $           23    $            12   $        11,706
      State and municipal obligations                         6,623               96                 22             6,697
                                                     --------------   --------------    ---------------   ---------------
                                                     $       18,318   $          119    $            34   $        18,403
                                                     ==============   ==============    ===============   ===============
</TABLE>



      The amortized cost and approximate market value of securities held to
      maturity, by contractual maturity, are shown below. Expected maturities
      will differ from contractual maturities from call and prepayment options.


<TABLE>
<CAPTION>
                                                                              December 31,                           
                                                     ----------------------------------------------------------------
                                                                  1998                               1997            
                                                     -------------------------------   ------------------------------
                                                                         Approximate                     Approximate
                                                      Amortized            Market        Amortized         Market
                                                          Cost             Value            Cost            Value    
                                                     --------------   --------------   -------------   --------------
                                                                                   (1,000's)                         
                                                     ----------------------------------------------------------------
      <S>                                            <C>              <C>              <C>             <C>
      Due in one year or less                                 3,249            3,271   $       7,021   $        7,018
      Due after one year through five years                  12,269           12,412           8,879            8,929
      Due after five years through ten years                  1,403            1,450           2,418            2,456
      Due after ten years                                         0                0               0                0
                                                     --------------   --------------   -------------   --------------
                                                             16,921           17,133   $      18,318   $       18,403
                                                     ==============   ==============   =============   ==============
</TABLE>


      Securities with a carrying amount of $41,011,000 and $29,681,000 at
      December 31, 1998 and 1997 were pledged to secure public deposits,
      repurchase agreements, and for other purposes as required or permitted by
      law.

      Proceeds from sales of securities, gross gains and gross losses from such
      sales were as follows:


<TABLE>
<CAPTION>

                                           Year Ended December 31,            
                               -----------------------------------------------
                                    1998             1997           1996      
                               --------------    ------------    -------------
                                                  (1,000's)                   
                               -----------------------------------------------
      <S>                      <C>               <C>             <C>
      Proceeds from sales      $            0    $      1,000    $           0
                               ==============    ============    =============

      Gross gains              $            0    $          0    $           0
      Gross losses                          0               0                0
                               --------------    ------------    -------------
                               $            0    $          0    $           0
                               ==============    ============    =============
</TABLE>

                                       29
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3.  Mortgage-Backed and Related Securities

      Mortgage-backed and related securities available for sale are summarized
      as follows:


<TABLE>
<CAPTION>
                                                                              December 31, 1998                      
                                                        --------------------------------------------------------------
                                                                             Gross           Gross         Approximate
                                                        Amortized          Unrealized      Unrealized         Market
                                                           Cost              Gains           Losses            Value    
                                                        ---------          ----------      ----------      -----------
                                                                                   (1,000's)                    
                                                        --------------------------------------------------------------
     <S>                                             <C>               <C>             <C>             <C>
     GNMA certificates                               $       26,843               88              19           26,912
     GNMA collateralized
       mortgage obligations                                     998                7               7              998
     FNMA certificates                                        1,509               35               2            1,542
     FNMA collateralized mortgage obligations                 2,375               11              34            2,352
     FHLMC certificates                                       3,960               55              33            3,982
     FHLMC collateralized
       mortgage obligations                                   7,042               14              45            7,011
                                                     --------------             ----            ----          -------
                                                             42,727              210             140           42,797
                                                     ==============             ====            ====          =======
<CAPTION>

                                                                              December 31, 1997                      
                                                        --------------------------------------------------------------
                                                                             Gross           Gross         Approximate
                                                        Amortized          Unrealized      Unrealized         Market
                                                           Cost              Gains           Losses            Value    
                                                        ---------          ----------      ----------      -----------
                                                                                   (1,000's)                    
                                                        --------------------------------------------------------------
     <S>                                             <C>              <C>              <C>             <C>
     GNMA certificates                               $        2,454   $          130   $           0   $        2,584
     GNMA collateralized
       mortgage obligations                                   1,121                8              29            1,100
     FNMA certificates                                        2,158               55              18            2,195
     FNMA collateralized mortgage obligations                 3,077                2              67            3,012
     FHLMC certificates                                       5,358               99              80            5,377
     FHLMC collateralized
       mortgage obligations                                   9,710               40             123            9,627
                                                     --------------   --------------   -------------   --------------
                                                     $       23,878   $          334   $         317   $       23,895
                                                     ==============   ==============   =============   ==============
</TABLE>

      Mortgage-backed and related securities held to maturity are summarized as
      follows:

<TABLE>
<CAPTION>
                                                                                December 31, 1998                    
                                                        --------------------------------------------------------------
                                                                             Gross           Gross         Approximate
                                                        Amortized          Unrealized      Unrealized         Market
                                                           Cost              Gains           Losses            Value    
                                                        ---------          ----------      ----------      -----------
                                                                                   (1,000's)                    
                                                        --------------------------------------------------------------
     <S>                                             <C>              <C>              <C>             <C>
      GNMA certificates                              $          364   $           18   $           0   $          382
      FHLMC certificates                                         78                3               0               81
                                                     --------------    -------------    ------------    -------------
                                                     $          442    $          21    $          0    $         463
                                                     ==============    =============    ============    =============
</TABLE>

                                       30
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3.  Mortgage-Backed and Related Securities

<TABLE>
<CAPTION>

                                                         December 31, 1997                    
                                   ------------------------------------------------------------
                                                       Gross            Gross       Approximate
                                   Amortized        Unrealized      Unrealized          Market
                                       Cost           Gains            Losses            Value    
                                   ---------        ----------      ----------      -----------
                                                              (1,000's)                      
                                   ------------------------------------------------------------
      <S>                         <C>              <C>              <C>             <C>
      GNMA certificates           $    475         $     30         $     0         $    505
      FNMA collateralized                                                                
        mortgage obligations           314                2               0              316
      FHLMC certificates               102                4               0              106
                                  --------         --------         -------         --------
                                  $    891         $     36         $     0         $    927
                                  ========         ========         =======         ========
</TABLE>


      Mortgage-backed and related securities with a carrying amount of
      $17,369,000 and $15,233,000 at December 31, 1998 and 1997, respectively,
      were pledged to secure public deposits, repurchase agreements, and for
      other purposes as required or permitted by law.

      The weighted average interest rate on mortgage-backed and related
      securities is 6.62% and 6.59% at December, 31, 1998 and 1997, 
      respectively.

      Expected maturities of mortgage-backed securities will differ from
      contractual maturities because issuers may have the right to prepay
      obligations with or without penalties. The contractual weighted average
      life of mortgage-backed securities is 20 years at December 31, 1998.

      The Bank had gross realized gains of $36,000 and gross realized losses of
      $2,000 on $632,000 of sales proceeds on mortgage-backed and related
      securities for the year ended December 31, 1997. There were no sales of
      mortgage-backed and related securities for the years ended December 31,
      1998 and 1996.

                                       31
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4.  Loans Receivable

   Loans receivable consisted of the following:
<TABLE>
<CAPTION>

                                                                 December 31,          
                                                            -----------------------
                                                              1998           1997     
                                                            ------------------------
                                                                    (1,000's)        
                                                            ------------------------
      <S>                                                   <C>         <C>
      Real estate loans:
         Single-family residential                          $  68,057   $    69,188
         Construction                                           4,470         3,174
         Multi-family residential and commercial                9,451         9,682
         Agricultural                                           6,988         5,482
         Commercial                                            12,954        15,096
                                                                           
      Other loans:                                                         
         Agricultural                                          10,636        12,383
         Commercial                                            11,752        11,415
         Automobile                                            24,199        27,104
         Credit card                                            2,015         2,107
         Mobile home                                              997           905
         Educational                                               13            25
         Deposit accounts                                       1,697         1,552
         Home improvement                                         852           560
         Other                                                  5,486         6,448
                                                            ---------   -----------   
                                                              159,567       165,121
       Less:                                                               
         Loans in process                                         381           869
         Allowance for losses                                   1,979         1,934
                                                            ---------   -----------   
                                                            $ 157,207   $   162,318
                                                            =========   ===========
</TABLE>


      Certain consumer loans are shown net of add on interest at December 31,
      1998 and 1997. The add on interest amounted to $397,000 and $1,097,000,
      respectively.

      Changes in allowance for loan losses are as follows:

<TABLE>
<CAPTION>
                                                                                        December 31,              
                                                                      ----------------------------------------------
                                                                           1998            1997             1996     
                                                                      ----------------------------------------------
                                                                                          (1,000's)                      
                                                                      -----------------------------------------------
      <S>                                                             <C>               <C>             <C>
      Balance at January 1                                            $        1,934    $      1,520    $       1,514

         Provision for loan losses                                               441             236               10
         Recoveries                                                              280             238              397
         Loans charged off                                                      (676)           (510)            (401)
         Adjustments:  changes incident to acquisitions                            0             450                0
                                                                      --------------    ------------    -------------
      Balance at December 31                                          $        1,979    $      1,934    $       1,520
                                                                      ==============    ============    =============
</TABLE>

                                       32
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4.  Loans Receivable

      Principal balance of non-accrual loans totaled approximately $1,201,000
      and $1,676,000 at December 31, 1998 and 1997, respectively. The interest
      discontinues accruing when the loan becomes more than ninety days past due
      and in management's judgment, the collection of interest is impaired. The
      amount of interest not recognized was $49,000, $71,000, and $21,000 for
      the years ended December,31, 1998, 1997, and 1996, respectively. Interest
      income recognized on nonaccrual loans during the years ended December 31,
      1998, 1997, and 1996 was insignificant.

      Weighted average interest rate on loans consisted of the following:

<TABLE>
<CAPTION>

                                                            December 31,       
                                                   ----------------------------
                                                       1998            1997    
                                                   ----------------------------
      <S>                                         <C>              <C>
      Mortgage loans                                   8.44%           8.50%
      Other loans                                      8.93%           9.09%
         Total loans                                   8.68%           8.81%
</TABLE>

Note 5.  Accrued Interest Receivable

      Accrued interest receivable consisted of the following:

<TABLE>
<CAPTION>
                                                           December 31,        
                                                 ------------------------------
                                                     1998             1997     
                                                 ------------------------------
                                                             (1,000's)         
                                                 ------------------------------
         <S>                                     <C>             <C>
         Loans                                   $       1,679   $        1,547
         Mortgage-backed and related securities            261              149
         Securities                                      1,154              979
                                                 -------------   --------------
                                                 $       3,094   $        2,675
                                                 =============   ==============
</TABLE>

Note 6.  Premises and Equipment

      Premises and equipment are summarized by major classifications as
      presented below:.

<TABLE>
<CAPTION>
                                                December 31,   
                                       -----------------------------
                                           1998            1997     
                                       -----------------------------
                                                   (1,000's)        
                                       -----------------------------
         <S>                           <C>            <C>
         Land                          $    1,317    $       890
         Building                           5,844          5,291
         Furniture and equipment            4,009          2,779
                                       ----------    -----------
                                           11,170          8,960
         Accumulated depreciation          (3,535)        (3,107)
                                       ----------    -----------
                                       $    7,635    $     5,853
                                       ==========    ===========
</TABLE>


      Depreciation included in the consolidated statements of income amounted to
      $552,000, $342,000, and $240,000 for the years ended December 31, 1998,
      1997 and 1996, respectively.

      Improvements to the bank facility are being constructed in Highland,
      Illinois at a project cost of $837,000 with cost incurred in 1998 of
      $396,000. Completion of this project is anticipated during second quarter
      of 1999.

                                                   

                                       33
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7.  Deposit Analysis

      Deposits and weighted average interest rates are summarized as follows
      (amounts in thousands):

<TABLE>
<CAPTION>
                                                                                         December 31,                    
                                                              ---------------------------------------------------------
                                                                           1998                           1997         
                                                              ----------------------------- ---------------------------  
                                                                                 Weighted                      Weighted
                                                                                  Average                      Average
                                                                Amount             Rate        Amount            Rate  
                                                              -------------- -------------- --------------- -----------
         <S>                                                  <C>              <C>           <C>             <C>
         Demand deposits, non-interest bearing                $      12,548          0.00%   $      13,530       0.00%
         Demand deposits, interest bearing                           27,933          2.17%          25,733       3.19%
         Passbook                                                    26,111          2.90%          25,999       2.89%
         Money market                                                22,462          3.52%          23,499       3.70%
         Certificates                                               134,879          5.55%         130,154       5.66%
                                                              -------------                   ------------           
                                                              $     223,933          4.31%    $    218,915       4.48%
                                                              =============                   ============
</TABLE>


      Certificates had the following remaining maturities (amounts in
      thousands):

<TABLE>
<CAPTION>
                                                       December 31, 1998                         
                     ---------------------------------------------------------------------------
                                                           Two
                         Less Than      One to Two      to Three      After Three
           Rate          One Year          Years          Years          Years          Totals   
           ----      ------------- --------------- -------------- ----------------- ----------------  
       <S>           <C>            <C>             <C>            <C>             <C>
       2 - 3.99%     $          76  $           0   $          0   $           1   $          77
       4 - 5.99%            70,791         18,751          7,480           4,096         101,118
       6 - 7.99%            19,682          9,883            990           1,922          32,477
       8 - 9.99%               691            516              0               0           1,207
                     -------------  -------------   ------------   -------------   -------------
                     $      91,240  $      29,150   $      8,470   $       6,019   $     134,879
                     =============  =============   ============   =============   =============
<CAPTION>
                                               December 31, 1997                       
                     ---------------------------------------------------------------------------
                                                         Two
                         Less Than     One to Two     to Three       After Three
           Rate          One Year        Years           Years          Years          Totals   
           ----      ------------- --------------- -------------- ----------------- ----------------
       <S>           <C>            <C>             <C>            <C>             <C>
       2 - 3.99%     $          73  $           0   $          0   $           0   $          73
       4 - 5.99%            66,100         28,028          4,310           2,498         100,936
       6 - 7.99%             8,226          9,001          9,250           1,469          27,946
       8 - 9.99%               691              0            508               0           1,199
                     -------------  -------------   ------------   -------------   -------------
                     $      75,090  $      37,029   $     14,068   $       3,967   $     130,154
                     =============  =============   ============   =============   =============

</TABLE>

                                       34
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 7.  Deposit Analysis

      Interest expense on deposits is summarized as follows:

<TABLE>
<CAPTION>
                                    Year Ended December 31,          
                         --------------------------------------------
                             1998           1997            1996     
                         --------------------------------------------
                                             (1,000's)               
                         --------------------------------------------
      <S>                <C>            <C>             <C>
      Passbook           $        837   $         577   $         406
      Demand deposits             713             487             351
      Money market                838             679             662
      Certificates              7,477           5,439           4,903
                         ------------   -------------   -------------
                         $      9,865   $       7,182   $       6,322
                         ============   =============   =============
</TABLE>


      At December 31, 1998 and 1997, the Bank had $43,713,000 and $33,758,000,
      respectively, of deposit accounts with balances in excess of $100,000. The
      Bank did not have brokered deposits at December 31, 1998 and 1997.
      Deposits in excess of $100,000 are not federally insured.

      The Bank has pledged mortgage-backed and related securities, when required
      by depositors, for deposits of $100,000 or more. Deposits which had
      securities pledged amounted to $27,032,000 and $31,837,000 at December,31,
      1998 and 1997, respectively.

Note 8.  Other Borrowed Funds

      Advances from the FHLB consisted of fixed rate callable notes as of
      December 31, 1998 and 1997. The advances all have a call date at one year
      with quarterly calls thereafter. Advances are secured by FHLB stock,
      investment securities, and a blanket assignment of unpledged qualifying
      mortgage loans. Interest expense for advances amounted to $2,384,000,
      $1,196,000, and $305,000 for the years ended December 31, 1998, 1997, and
      1996, respectively. The advances at December 31, 1998 consisted of the
      following (amounts in thousands):

<TABLE>
<CAPTION>

                    Issue                Maturity                       Interest
                    Date                   Date           Amount          Rate  
            -----------------       -----------------   -----------   ----------
            <S>                     <C>                 <C>           <C>
            June 17, 1997           June 18, 2002       $     5,000        5.71%
            July 28, 1997           July 31, 2000             5,000        5.71%
            August 6, 1997          August 8, 2002           15,000        5.40%
            December 8, 1997        December 11, 2002         6,000        5.19%
            December 8, 1997        December 11, 2002         6,000        5.19%
            January 16, 1998        January 16,2008           5,000        5.30%
            February 19, 1998       February 19, 2008         1,000        4.75%
            April 6, 1998           April 6, 2008             1,100        4.80%
                                                        -----------
                                                        $    44,100
                                                        ===========
</TABLE>

      Scheduled principal reduction of these advances at December 31, 1998 is as
      follows: 1999 - $0; 2000 - $5,000,000; 2001 - $0; 2002 - $32,000,000; and
      2008 - $7,100,000.

                                                        

                                       35
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8.  Other Borrowed Funds

      The advances at December 31, 1997 consisted of the following (amounts in
      thousands):

<TABLE>
<CAPTION>

             Issue              Maturity                        Interest
             Date                 Date              Amount        Rate  
     ----------------      -----------------       --------     ---------
     <S>                   <C>                     <C>          <C>
     June 17, 1997         June 18, 2002           $  5,000       5.71%
     July 28, 1997         July 31, 2000              5,000       5.71%
     August 6, 1997        August 8, 2002            15,000       5.40%
     December 8, 1997      December 11, 2002          6,000       5.19%
     December 8, 1997      December 11, 2002          6,000       5.19%
                                                   --------
                                                   $ 37,000
                                                   ========     
</TABLE>


      Scheduled principal reduction of these advances at December 31, 1997 is as
      follows: 1998 - $0; 1999 - $0; 2000 - $5,000,000; 2001 - $0; and 2002 -
      $32,000,000.

      The subsidiary banks have entered into repurchase agreements with
      customers at various interest rates and average maturities of less than
      three months. Interest expense amounted to $264,000, $242,000, and
      $101,000 for years ended December 31, 1998, 1997, and 1996, respectively.
      These agreements are not insured by FDIC.

      The Company entered into a loan agreement with UMB Bank of St. Louis
      during 1997 which provides the availability of $10,000,000 at prime
      interest rate payable quarterly. The Company borrowed $5,600,000 during
      1997. At maturity of this loan on October 31, 1998, the loan will be
      converted to a one year note, at prime rate of interest, with a ten year
      amortization period and renewed on an annual basis subject to approval of
      UMB Bank. This loan is secured by 100% of the outstanding stock of
      Community Bank & Trust, N.A., The Egyptian State Bank, Saline County State
      Bank, and MidAmerica Bank of St. Clair County. Interest expense amounted
      to $50,000 for the year ended December 31, 1997. The loan was paid off
      during 1998 and interest expense amounted to $302,000 for year ended
      December 31, 1998.

<TABLE>
<CAPTION>
                                                       FHLB
                                                      Advances
                                                        Term        Repurchase     Short Term
                     1998                               Notes      Agreements         Notes 
      -------------------------------------------    ---------    -----------      -----------
      <S>                                            <C>          <C>              <C> 
      Balance at December 31                            44,100        4,296                0
      Average amount outstanding during the year        43,742        4,963            3,554
      Maximum amount outstanding at any month end       44,100        5,874            5,600
      Weighted average interest rate:                                          
         During the year                                 5.45%        5.26%            8.50%
         End of year                                     5.37%        4.92%            0.00%
</TABLE>

                                       36
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 8.  Other Borrowed Funds

<TABLE>
<CAPTION>
                                                        FHLB Advances         
                                                  -------------------------                              
                                                   Open Line        Term       Repurchase   Short Term
                    1997                           of Credit        Notes      Agreements      Notes 
      ------------------------------------------  ------------  -----------   ------------  -----------
      <S>                                         <C>             <C>         <C>           <C>
      Balance at December 31                      $        0        37,000    $      5,323  $   5,600
      Average amount outstanding during the year       9,264        11,375           4,340        568
      Maximum amount outstanding at any month end     19,500        37,000           5,627      5,600
      Weighted average interest rate:
         During the year                               6.13%         5.53%           5.58%      8.50%
         End of year                                   0.00%         5.45%           5.37%      8.50%
</TABLE>


Note 9.  Stockholders' Equity

   Regulatory Restrictions and Capital Requirements

      The principal source of income and funds for the Company is dividends from
      its banking subsidiaries. During 1998, the amount of dividends that the
      bank subsidiaries could pay to the Company without prior regulatory
      approval was exceeded. The Company received $3,500,000 in dividends from
      the bank subsidiaries to repay debt incurred with the 1997 bank
      acquisitions with prior regulatory approval. During 1997, the amount of
      dividends that the banking subsidiaries could pay to the Company without
      prior regulatory approval was exceeded. The Company received $6,500,000 in
      dividends from banking subsidiaries to fund acquisitions in 1997 with
      prior regulatory approval. As a practical matter, the banks may restrict
      dividends to a lesser amount because of the need to maintain adequate
      capital structures.

      The Company and its banking subsidiaries are subject to various regulatory
      capital requirements administered by the regulatory banking agencies.
      Failure to meet minimum capital requirements can initiate certain
      mandatory, and probable additional discretionary, actions by regulators
      that, if undertaken, could have a direct material effect on the Company's
      consolidated financial statements. Under capital adequacy guidelines and
      the regulatory framework for prompt corrective action, the Company and its
      banking subsidiaries must meet specific capital guidelines that involve
      quantitative measures of their respective assets, liabilities and certain
      off-balance-sheet items as calculated under regulatory accounting
      practices. The Company and its banking subsidiaries' 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 its banking subsidiaries to maintain minimum amounts and ratios.
      Management believes, that as of December 31, 1998, the Company and its
      banking subsidiaries meet all capital adequacy requirements to which it is
      subject.

                                       37
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9.  Stockholders' Equity

      The subsidiary banks' actual and minimum required capital amounts and
      ratios as mandated by the Federal Reserve Board at December 31, 1998, were
      as follows:

<TABLE>
<CAPTION>
                                                                                                        Requirements
                                                                                 Minimum               To be Classified
                                                          Actual              Requirements          as "Well Capitalized"
      Risk-Based Capital to                       ---------------------    ---------------------    ---------------------
         risk weighted assets                        Amount     Ratio         Amount      Ratio       Amount       Ratio   
                                                  ----------  ---------    ----------  ---------    -----------  --------
      <S>                                         <C>         <C>          <C>         <C>          <C>         <C>
      Community Financial Corp.                     $ 32,438      20.69%   $   12,540       8.00%   $   15,675      10.00%
      Community Bank and Trust, N.A.                  20,137      17.84%        9,030       8.00%       11,287      10.00%
      American Bank of Illinois                        1,559      10.03%        1,243       8.00%        1,554      10.00%
      Egyptian State Bank                              3,183      20.02%        1.272       8.00%        1,590      10.00%
      Saline County State Bank                         1,273      18.12%          562       8.00%          703      10.00%
      MidAmerica Bank of St. Clair County              3,536      16.45%        1,720       8.00%        2,150      10.00%
 
      Tier 1 Capital to risk weighted assets

      Community Financial Corp.                       30,459      19.43%        6,270       4.00%        9,405       6.00%
      Community Bank and Trust, N.A.                  18,725      16.59%        4,515       4.00%        6,772       6.00%
      American Bank of Illinois                        1,439       9.26%          621       4.00%          932       6.00%
      Egyptian State Bank                              3,094      19.46%          636       4.00%          954       6.00%
      Saline County State Bank                         1,179      16.78%          281       4.00%          422       6.00%
      MidAmerica Bank of St. Clair County              3,121      14.52%          860       4.00%        1,290       6.00%

      Tier 1 Capital to average assets

      Community Financial Corp.                       30,459       9.84%       12,376       4.00%       15,470       5.00%
      Community Bank and Trust, N.A.                  18,725       8.64%        8,667       4.00%       10,834       5.00%
      American Bank of Illinois                        1,439       5.58%        1,031       4.00%        1,289       5.00%
      Egyptian State Bank                              3,094      13.11%          944       4.00%        1,180       5.00%
      Saline County State Bank                         1,179       7.36%          641       4.00%          801       5.00%
      MidAmerica Bank of St. Clair County              3,121      13.86%          901       4.00%        1,126       5.00%
</TABLE>



      At the time of the conversion of Community Bank & Trust, N.A. to a stock
      organization, a special liquidation account was established for the
      benefit of eligible account holders and the supplemental eligible account
      holders in an amount equal to the net worth of the Bank. The special
      liquidation account, $13,950,000, will be maintained for the benefit of
      eligible account holders and the supplemental eligible accounts holders
      who continue to maintain their accounts in the Bank after the conversion
      in June of 1995. In the event of a complete liquidation, each eligible and
      the supplemental eligible account holders will be entitled to receive a
      liquidation distribution from the liquidation account in an amount
      proportionate to the current adjusted qualifying balances for accounts
      then held. Community Bank & Trust, N.A. may not declare or pay cash
      dividends on or repurchase any of its common stock if stockholders' equity
      would be reduced below applicable regulatory capital requirements or below
      the special liquidation account.

                                       38
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 9.  Stockholders' Equity

    Treasury Stock

      During 1998, the Company authorized purchasing 5% of the outstanding
      shares of stock as of December 31, 1997. The Company purchased 118,500
      shares, or 5.0% of outstanding shares, for $1,470,000 with an average cost
      per share of $12.46.

      During 1997, the Company authorized purchasing 5% of the outstanding
      shares of stock as of December 31, 1996. The Company purchased 26,500
      shares, or 1.11% of outstanding shares, for $392,000 with an average cost
      per share of $14.80.

      During 1996, the Company authorized the purchase of up to 257,888 shares
      of the Company's stock which represented approximately 9.75% of the
      outstanding stock at December 31, 1995. These shares were purchased in
      1996 at a cost of $3,411,000 with an average cost per share of $13.23.

Note 10.  Non-Interest Income and Expense

   Non-interest income and expense is summarized as follows:

<TABLE>
<CAPTION>
                                                                                         Year Ended December 31,           
                                                                                 --------------------------------------
                                                                                     1998         1997         1996  
                                                                                 -----------  -------------  ----------
                                                                                                (1,000's)
                                                                                 --------------------------------------
     <S>                                                                         <C>           <C>           <C>           

     Non-interest income
      Service fees                                                               $     1,370   $       830   $       505
      Insurance and annuity commissions                                                  203           214           210
      Net gain on sale of mortgage-backed securities                                       0            34             0
      Net gain (loss) on sale of assets                                                  (18)           (2)            0
      Other                                                                              108            51            62
                                                                                 -----------   -----------   -----------
                                                                                 $     1,663   $     1,127   $       777
                                                                                 ===========   ===========   ===========
     Non-interest expense
      Salaries and employee benefits                                             $     4,322   $     4,319    $    3,580
      Occupancy expense                                                                  503           328           221
      Equipment and furnishing expense                                                   563           484           383
      Data processing expense                                                            659           497           412
      Professional fees                                                                  363           284           223
      Federal insurance premium                                                           97            89         1,275
      Amortization of intangibles                                                        366            73             0
      Other                                                                            2,007         1,078           704
                                                                                 -----------   -----------   -----------
                                                                                 $     8,880   $     7,152   $     6,798
                                                                                 ===========   ===========   ===========
</TABLE>
                                    

                                       39
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11. Income Tax 

      The components of the provision for income taxes are summarized as
      follows: 
<TABLE>
<CAPTION>
                                                Year Ended December 31, 
                                        --------------------------------------
                                           1998          1997          1996 
                                        ----------  -------------  -----------
                                                      (1,000's)
                                        --------------------------------------
<S>                                     <C>           <C>          <C>
      Currently payable:   Federal      $   514    $      662   $       281
                           State              0            17            52
      Deferred:   Federal                     7            (3)            8
                  State                       0            (1)            2
                                        -------    ----------   -----------
                                        $   521    $      675   $       343
                                        =======    ==========   ===========
</TABLE>

      Income tax expense for the years ended December 31, 1998, 1997 and 1996
      has been provided at an effective rate of approximately 29.64%, 32.50% and
      30.74%, respectively. An analysis of such expense for the three years
      setting forth the reasons for the variations from the federal statutory
      rates is as follows:

<TABLE>
<CAPTION>
                                                                                       Year Ended December 31,        
                                                                                  --------------------------------------
                                                                                     1998         1997          1996  
                                                                                  ----------   -----------   -----------
                                                                                                   (1,000's)          
                                                                                  --------------------------------------
      <S>                                                                         <C>           <C>          <C>
      Computed tax at statutory rates                                             $      598    $      706   $       383
      Increase (decrease) in tax expense resulting from:
         State income tax, net                                                             0            12            36
         Other                                                                            (8)            1           (28)
         Tax exempt income - net                                                         (69)          (44)          (48)
                                                                                 -----------    ----------   -----------
      Income tax expense                                                         $       521    $      675   $       343
                                                                                 ===========    ==========   ===========
</TABLE>

      The tax effects of temporary differences that give rise to the deferred
      tax assets and deferred tax liabilities are as follows: 

<TABLE>
<CAPTION>
                                                                      December 31, 
                                                                     1998      1997 
                                                                     ------  ------   
                                                                        (1,000's) 
                                                                     ---------------
<S>                                                                  <C>       <C>
Deferred tax assets: 
  Allowance for loan losses                                          $ 606     $ 703
  Acquisition adjustments                                              135       182 
  Other                                                                  5        21 
                                                                     -----     -----
                                                                       746       906
                                                                     -----     ----- 
Deferred tax liabilities: 
  Allowance for unrealized gains on securities available for sale        0         7 
  Recapture of bed debt reserves                                       180       270 
  Federal Home Loan Bank stock                                          29        29 
  Premises and equipment                                                86       118 
  Core deposit intangible                                              120       152
      Other                                                             56        41
                                                                     -----     ----- 
                                                                       471       617
                                                                     -----     ----- 
  Net deferred tax asset                                             $ 275     $ 289
                                                                     =====     =====
</TABLE>

                                                     

                                       40
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 11.  Income Tax

      In assessing the realizability of deferred tax assets, management
      considers whether it is more likely than not that some portion or all of
      the deferred tax assets will not be realized. The ultimate realization of
      deferred tax assets is dependent upon the existence of, or generation of,
      taxable income in the periods which those temporary differences are
      deductible. Management considers the scheduled reversal of deferred tax
      liabilities, taxes paid in carryback years, projected future taxable
      income, and tax planning strategies in making this assessment. Based upon
      the level of historical taxable income and projection for future taxable
      income over the periods which the deferred tax assets are deductible, at
      December 31, 1998 and 1997, management believes it is more likely than not
      that the Bank will realize the benefits of these deductible differences.

      During 1995, the Community Bank & Trust, N.A. sold the insurance agency of
      the service corporation at a gain of $187,000. This gain, for tax
      purposes, has been offset against the capital loss carryover. The capital
      loss carryover, as of December 31, 1996, amounts to $329,000 and will
      start to expire in 2006. No deferred taxes have been recorded for this
      carryover.

Note 12.  Employee Benefit Plans

      The Olney Savings and Loan Association Defined Benefit Pension Plan was
      terminated and benefits were frozen as of May 31, 1996. Olney Savings and
      Loan Association was predecessor of Community Bank & Trust, N.A. The plan
      termination date was tentatively set at April 30, 1997. The actuary for
      the plan performed a preliminary calculation and has determined that the
      plan assets are underfunded by approximately $622,000. This liability was
      accrued in 1996. The Company incurred $4,000 in fees during 1997 and
      $147,000 additional funding with $7,000 administration fees during 1998.

      The Company participates in the Manulife 401K Plan. Under the plan,
      voluntary contributions made by eligible employees are matched 100% by
      contributions up to a specified percent of their compensation. The cost of
      the plan was $44,000, $66,000 and $72,000 for the years ended December 31,
      1998, 1997 and 1996, respectively, and is included in compensation and
      employee benefits in the consolidated statements of income.

Note 13.  Commitments and Contingencies

      In the ordinary course of business, the Banks have various outstanding
      commitments and contingent liabilities that are not reflected in the
      accompanying consolidated financial statements. In addition, the Banks are
      defendants in various matters of litigation generally incidental to their
      business. In the opinion of management, after consultation with legal
      counsel, the ultimate disposition of these matters is not expected to have
      a material adverse effect on the consolidated financial position,
      liquidity, and operating results of the Banks.

                                       41
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 13.  Commitments and Contingencies

      The subsidiary banks had outstanding firm commitments to originate loans
      as follows:

<TABLE>
<CAPTION>
                                                    December 31,      
                                            --------------------------
                                                1998           1997   
                                            -----------    -----------
                                                       (1,000's)      
                                            --------------------------
      <S>                                   <C>            <C>
      Real estate                           $     1,316    $       869
      Credit card loans                           6,807          6,342
                                            -----------    -----------
      Commitments to originate loans        $     8,123    $     7,211
                                            ===========    ===========    
      Unused lines of credit                $     8,655    $     8,453
                                            ===========    ===========

</TABLE>

      Interest rates on the above commitments ranged from 6.66% to 16.90% and
      7.25% to 16.90% at December 31, 1998 and 1997, respectively.

      There were no outstanding commitments to purchase or sell securities at
      December 31, 1998 and 1997, respectively.

      The subsidiary banks are a 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 include
      commitments to extend credit and standby letters of credit. These
      instruments involve, to varying degrees, elements of credit and interest
      rate risk in excess of the amounts recognized in the consolidated balance
      sheets.

      The subsidiary banks exposure to credit loss in the event of
      nonperformance by the other party to the financial instruments for
      commitments to extend credit and standby letters of credit is represented
      by the contractual notional amount of these instruments. The same credit
      policies are used in making commitments and conditional obligations as for
      on-balance-sheet instruments.

      Commitments to extend credit are agreements to lend to a customer as long
      as there is no violation of any condition established in the contract.
      Commitments generally have fixed expiration dates or other termination
      clauses and may require payment of a fee. Since many of the commitments
      are expected to expire without being drawn upon, the total commitment
      amounts do not necessarily represent future cash requirements. Each
      customer's creditworthiness is evaluated on a case-by-case basis. The
      amount and type of collateral obtained, if deemed necessary upon extension
      of credit, varies and is based on management's credit evaluation of the
      counterparty.

      Standby letters of credit are conditional commitments issued to guarantee
      the performance of a customer to a third party. Standby letters of credit
      generally have fixed expiration dates or other termination clauses and may
      require payment of a fee. The credit risk involved in issuing letters of
      credit is essentially the same as that involved in extending loan
      facilities to customers. Policy for obtaining collateral, and the nature
      of such collateral, is essentially the same as that involved in making
      commitments to extend credit. Generally, signed notes are required to be
      executed when a letter of credit is exercised.

                                       42
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 14.  Related Parties

      The Banks have entered into transactions with its directors, key
      management and their affiliates (Related Parties). Such transactions were
      made in the ordinary course of business on substantially the same terms
      and conditions, including interest rates and collateral, as those
      prevailing at the same time for comparable transactions with other
      customers, and did not, in the opinion of management, involve more than
      normal credit risk or present other unfavorable features. A summary of
      loans to such related parties is as follows:

<TABLE>
<CAPTION>
                                               December 31,       
                                         -------------------------
                                            1998           1997   
                                         ----------     ----------
                                                  (1,000's)      
                                         -------------------------
      <S>                                <C>            <C>
      Balance December 31                $      967     $      552
      Loans incident to acquisitions              0            404
      New loans                                 823            283
      Repayments                                (78)          (272)
                                         ----------     ----------
      Balance December 31                $    1,712     $      967
                                         ==========     ==========
</TABLE>

Note 15.  Carrying Amounts and Fair Value of Financial Instruments

      In December 1991, the Financial Accounting Standards Board issued Standard
      No.107, "Disclosures about Fair Value of Financial Instruments," which
      requires disclosing information about the fair value of all financial
      instruments, both assets and liabilities on and off balance sheet, for
      which it is practicable to estimate their values and pertinent
      descriptions of those instruments for which such values are not readily
      available. Accordingly, the following information is set forth below.

<TABLE>
<CAPTION>
                                                                        1998                       1997             
                                                             -------------------------  ------------------------
                                                               Carrying     Estimated     Carrying   Estimated
                                                                Amount      Fair Value     Amount    Fair Value
                                                             ------------  ----------- -----------  ------------
                                                                      (1,000's)                (1,000's)    
                                                             ------------------------- -------------------------
<S>                                                          <C>            <C>        <C>          <C>         
Financial Assets
Cash and cash equivalents                                    $     22,902   $  22,902  $  26,724    $  26,724
Securities                                                         69,023      69,235     75,601       75,686
Mortgage-backed and related securities                             43,239      43,260     24,786       24,822
Loans receivable                                                  157,207     157,632    162,318      162,876
Accrued interest receivable                                         3,094       3,094      2,675        2,675

Financial Liabilities
Deposits                                                          223,933     222,240    218,915      215,738
FHLB advances                                                      44,100      41,864     37,000       35,695
Repurchase agreements                                               4,296       4,296      5,323        5,323
Other borrowings                                                        0           0      5,600        5,600
Accrued interest payable                                              493         493        457          457
Advances for taxes and insurance                                       32          32         41           41
</TABLE>

      The fair value of cash and interest bearing deposits, including federal
      funds sold, are considered short term investments and carrying value was
      considered to be a reasonable estimate of fair value.

                                       43
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15.  Carrying Amounts and Fair Value of Financial Instruments

      The fair value of securities and mortgage-backed securities is based on
      quoted market prices or dealer quotes. The fair value of these financial
      instruments represent the estimated amount the Company would receive or
      pay to terminate the contracts or agreements, taking into account current
      interest rates and, when appropriate, the current creditworthiness of the
      counterparties. If a quoted market price is not available, fair value is
      estimated using quoted market prices for similar securities.

      Fair values are estimated for loans with similar financial
      characteristics. These loans are segregated by type of loan and each loan
      category is further segmented into fixed and adjustable rate categories.
      The fair values of performing loans for all portfolios, except residential
      mortgage loans, are calculated by discounting scheduled cash flows through
      estimated maturity dates. Expected cash flows are discounted using
      estimated market yields that reflect the credit and interest rate risks
      inherent in each category of loans. Estimated market yields also reflect a
      component for the estimated cost of servicing the portfolio. For
      performing residential mortgage loans, fair values are estimated by coupon
      rates, maturities, prepayment assumptions and credit risk, and comparing
      the values to prevailing market rates. It is not considered practicable to
      calculate a fair value for nonperforming loans less than $1,000,000.
      Accordingly, they are included in fair value disclosures at net cost.

      The fair value for Federal Home Loan Bank advances was based upon the
      discounted value of the cash flows. The discount rates utilized were based
      on rates currently available with similar terms and maturities.

      The fair value of repurchase agreements and other borrowings are
      considered short term liabilities and the carrying value was considered to
      be a reasonable estimate of fair value.

      The fair value of noninterest bearing deposits, savings and NOW accounts,
      and money market accounts is the amount payable on demand at December 31,
      1998 and 1997. The fair value of fixed-maturity certificates of deposit is
      estimated based on the discounted value of contractual cash flows using
      the rates currently offered for deposits of similar remaining maturities.
      The fair value estimates above do not include the benefit that results
      from the low-cost funding provided by deposit liabilities compared to the
      cost of borrowing funds in the market. This value, which includes such
      cost assumptions related to interest rates, deposit run-off, maintenance
      costs and float opportunity costs, is presented on a discounted cash flow
      basis. The value related to the recorded cost of acquired deposits is also
      included therein.

      The foregoing fair value estimates are made at a specific point in time,
      based on pertinent market data and relevant information on the financial
      instrument. These estimates do not include any premium or discount that
      could result from an offer to sell, at one time, an entire holding of a
      particular financial instrument or category thereof. Since no market
      exists for a substantial portion of the financial instruments, fair value
      estimates were necessarily based on judgements with respect to future
      expected loss experience, current economic conditions, risk assessments of
      various financial instruments involving a myriad of individual borrowers,
      and other factors. Given the innately subjective nature of these
      estimates, the uncertainties surrounding them and the matters of
      significant judgement that must be applied, these fair value estimations
      cannot be calculated with precision. Modifications in such assumptions
      could meaningfully alter these estimates.

                                       44
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 15.  Carrying Amounts and Fair Value of Financial Instruments

      Since these fair value approximations were made solely for on and
      off-balance sheet financial instruments, no attempt was made to estimate
      the value of anticipated future business and the value of nonfinancial
      statement assets and liabilities. Other important elements which are not
      deemed to be financial assets or liabilities include the value of the
      retail branch delivery system, its existing core deposit base, premises
      and equipment and goodwill. Further, certain tax implications related to
      the realization of the unrealized gains and losses could have a
      substantial impact on these fair value estimates and have not been
      incorporated into any of the estimates.


Note 16.  Employee Stock Ownership Plan (ESOP)

      In June 1995, the Company established an Employee Stock Ownership Plan
      (the ESOP) in connection with the stock conversion in which employees
      meeting age and service requirements are eligible to participate. A
      participant is 100% vested after three years of credit service. The ESOP
      borrowed $2,116,000 from the Company and purchased 211,600 shares of
      common stock of the Company at the date of the conversion. This debt
      carries an interest rate at prime, as stated in the Wall Street Journal on
      January 1, and requires annual principal and interest payments. The
      Company has committed to make annual contributions to the ESOP necessary
      to repay the loan including interest.

      As the debt is repaid, ESOP shares which were initially pledged as
      collateral for its debt, are released from collateral and allocated to
      active employees, based on the proportion of debt service paid in the
      year. The Company accounts for its ESOP in accordance with Statement of
      Position 93-6, "Employers' Accounting for Employee Stock Ownership Plans."
      Accordingly, the shares pledged as collateral are reported as unearned
      ESOP shares in the consolidated balance sheets. As shares are determined
      to be ratably released from collateral, the Company reports compensation
      expense equal to the current market price of the shares, and the shares
      become outstanding for earnings per share computations. Dividends on
      allocated ESOP shares are recorded as a reduction of stockholders' equity
      and dividends on unallocated ESOP shares are used to release additional
      shares. The trustees' of the plan may direct payments of cash dividends be
      paid to the participants or to be credited to participant accounts and
      invested. Compensation expense for the ESOP was $403,000, $422,000 and
      $270,000 for December 31, 1998, 1997 and 1996. The ESOP shares were as
      follows:

<TABLE>
<CAPTION>
                                                                          1998         1997   
                                                                       ----------   ----------
            <S>                                                        <C>          <C>
            Allocated shares                                               74,033       47,610
            Shares ratably released for allocation                         21,160       21,160
            Unallocated shares                                            116,407      142,830
                                                                       ----------   ----------
            Total ESOP shares                                             211,600      211,600
                                                                       ==========   ==========
            Fair value of unreleased shares at December 31             $1,310,000   $2,589,000
                                                                       ==========   ==========
</TABLE>


Note 17.  Management Recognition Plans

      The Company adopted a Management Recognition Plan (the MRP) on January 12,
      1996 in connection with the stock conversion. The plan provides for the
      granting of shares of stock to eligible directors and officers, which vest
      over a five-year period at the rate of 20% per year, unless disabled or
      retired, then the shares immediately vest. Under the plan, 105,800 shares
      of stock were granted.

                                       45
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 17.  Management Recognition Plans

      During 1996, the Company purchased shares to fund the MRP plan on the open
      market. The cost of these shares amounted to $1,403,000 or at an average
      cost of $13.26 per share. The plan provides for additional shares to be
      granted for new members of the Board of Directors. During 1998, the
      Company purchased additional 6,348 shares for new board members at a cost
      of $16.63 per share. In addition to the MRP plan, the Company approved the
      tax bonus plan for the recipients of the MRP shares in the amount of 40%
      of the MRP amount.

      Compensation expense for the Management Recognition Plan was as follows:

<TABLE>
<CAPTION>
                                            December 31,           
                                      ----------------------
                                       1998    1997     1996    
                                      -----  -------  ------
                                             (1,000's)                
      <S>                             <C>     <C>     <C>
      MRP vesting                     $ 253   $ 358   $ 275
      MRP tax bonus                      94     129     110
      Retirement MRP vesting             31      48       0
      Retirement MRP tax bonus           11      19       0
                                      -----   -----   -----
                                      $ 389   $ 554   $ 385
                                      =====   =====   =====
</TABLE>


Note 18.  Stock Appreciation Rights

      The Company, at its sole discretion, may from time to time grant stock
      appreciation rights (SARs) to employees either in conjunction with, or
      independently of, any options granted. The exercise price as to any SARs
      shall not be less than the market value of the shares at the time of the
      grant. No SARs had been granted.

Note 19.  Early Retirement Plan

      In December of 1996, the Board approved an early retirement plan for all
      employees age 50 or older. This plan effective date was in January of 1997
      and was offered to twelve employees of which seven took early retirement.
      This plan includes provisions for length of employment, one month of
      salary per year of service, and immediate vesting in the MRP plan, stock
      option plan, and bonus plan on the MRP plan amount. The stock option plan
      had a ninety-day period during which the options could be exercised.
      Employees exercised stock options, a total of 23,805 shares, in February
      of 1997. Total estimated cost to the Company for the early retirement plan
      was as follows:

<TABLE>
<CAPTION>
                                   December 31,
                                      1997     
                                    ---------
                                    (1,000's)  
                                    ---------
      <S>                           <C>
      Stock options exercised       $  80,000
      MRP allocation                   91,000
      MRP tax bonus                    36,000
      Compensation package            231,000
                                    ---------
                                    $ 438,000
                                    =========
</TABLE>

                                        

                                       46
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 20.  Stock Option and Incentive Plan

      Also on January 12, 1996, the stockholders of the Company approved a fixed
      stock option and incentive plan. The option plan provides for the granting
      of stock options and stock appreciation rights to certain employees and
      directors and has a term of ten years from the effective date of the plan
      after which no awards may be granted. The plan reserved 264,506
      authorized, but unissued shares (or treasury shares) of common stock for
      issuance upon the future exercise of options or stock appreciation rights.
      At the effective date of the plan, certain executive officers and
      directors received a grant to purchase up to 264,506 shares of common
      stock at an exercise price per share equal to its fair market value on
      that date. The plan provides for additional stock options to be granted
      for new members to the Board of Directors. The additional stock options
      are granted at a rate of two percent for each director of the original
      offering. During the current year additional options were granted to new
      directors. The Company applies APB Opinion 25 in accounting for its fixed
      stock option plan. Recognition of compensation expense for stock options
      is not required when options are granted at an exercise price equal to or
      exceeding the fair market value of the Company's common stock on the date
      the option is granted. Therefore, no expense related to the fixed stock
      option plan is reflected on the accompanying financial statements.

      Had compensation cost been determined on the basis of fair value pursuant
      to FASB Statement No. 123, net income and earnings per share would have
      been reduced as follows:

<TABLE>
<CAPTION>
                                          1998       1997      
                                        -------    -------
                                             (1,000's)         
                                        ------------------      
         <S>                            <C>        <C>
         Net income
         ----------
            As reported                 $ 1,237    $ 1,402
                                        =======    =======
            Pro forma                   $ 1,049    $ 1,142
                                        =======    =======

         Basis earnings per share
         ------------------------
            As reported                 $   .57    $   .62
                                        =======    =======
            Pro forma                   $   .48    $   .50
                                        =======    =======
        
         Diluted earnings per share
         --------------------------       
            As reported                 $   .55    $   .60
                                        =======    =======
            Pro forma                   $   .47    $   .49
                                        =======    =======
</TABLE>

      The fair value of the options granted was estimated using the
      Black-Scholes model with the following assumptions: dividend yield of
      2.5%; expected life of 7 years; volatility of 25% and a risk-free interest
      rate of 5.5%. No options were granted during the year ended December 31,
      1996. The effects of applying SFAS No. 123 in this pro-forma disclosure
      may not be indicative of future results.

      The following is a summary of the status of the fixed plan:

<TABLE>
<CAPTION>
                                                        1998                             1997         
                                               -------------------------------------------------------
                                               Number of         Exercise       Number of     Exercise
                                                Shares            Price          Shares       Price   
                                               ---------        ---------       ---------    --------- 
<S>                                             <C>         <C>                 <C>          <C>
       Outstanding at beginning of year         240,701             $13.125            0     $     0
       Granted                                   10,580              18.375      264,506      13.125
       Exercised                                 (9,919)             13.125      (23,805)     13.125
       Forfeited                                      0                                0
                                                -------                          -------
       Outstanding at end of year               241,362    13.125 to 18.375      240,701      13.125
                                                =======                          ======
       Options exercisable at end of year       241,362   $13.125 to 18.375      240,701     $13.125
                                                =======                          =======
</TABLE>

                                       47
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                          NOTES TO FINANCIAL STATEMENTS

Note 20.  Stock Option and Incentive Plan

      The following is a summary of the status of fixed options outstanding at
      December 31, 1998:

<TABLE>
<CAPTION>
                                      Outstanding Options              Exercisable Options  
                                ----------------------------------     -------------------
                                            Average       Weighted                Weighted
                                           Remaining       Average                Average
               Exercise                   Contractual     Exercise                Exercise
              Price Range       Number        Life          Price       Number     Price 
          ------------------    -------   -----------     --------     -------   ---------
          <S>                   <C>       <C>             <C>          <C>       <C>
          $13.125 to $18.375    241,362     8 years       $ 13.355     241,362   $ 13.355
</TABLE>

      The Company is considering a stock option reload plan for 1999. This plan
      will allow exercising previously approved stock options by employees and
      to reload the stock options for an additional 10 years at fair market
      value of the stock at the reload date.

Note 21.  Earnings per Share

      The following data shows the amounts used in computing earnings per share
      and the effect on income and the weighted average number of shares of
      dilutive potential common stock.

<TABLE>
<CAPTION>
                                                                    1998            1997          1996   
                                                                 -----------   -------------  -----------
                                                                                  (1,000's)
                                                                 ----------------------------------------
      <S>                                                          <C>           <C>            <C>
      Income available to common stockholders used in basic EPS   $    1,237      $   1,402       $  773
                                                                  ==========      =========    =========
      Income available to common stockholders after assumed
        conversions of dilutive securities                        $    1,237      $   1,402       $  773
                                                                  ==========      =========    =========

      Weighted average number of common shares used in basic EPS   2,189,020      2,275,233    2,319,798

      Effect of dilutive securities:
         Stock options                                                61,882         48,140            0
                                                                  ----------      ---------    ---------

      Weighted number of common shares and dilutive
        potential common stock used in diluted EPS                 2,250,902      2,323,373    2,319,798
                                                                  ==========      =========    =========
</TABLE>


      Earnings per share amounts for 1996 have been restated to give effect to
      the application of SFAS No. 128 which was adopted by the Company in 1997.

Note 22.  Employment Agreements

      The Company has entered into separate employment agreements with certain
      officers of the Company. These agreements provide for salary terms,
      potential severance benefits, and potential benefits which could be due to
      these officers in the event of a change in control of the Company.


                                       48
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 23.  Community Financial Corp. Condensed Financial Information

      The parent company's principal assets are its investment in subsidiary
      banks, investment securities, and receivables from subsidiaries. The
      following are the condensed balance sheets for the parent company only as
      of December 31, 1998 and 1997 and its condensed statements of income and
      cash flows for the years ended December 31, 1998, 1997, and 1996.


                             CONDENSED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                     At December 31,       
                                                               ----------------------------
                                                                   1998            1997    
                                                               ------------     -----------
   <S>                                                         <C>              <C>
   Assets:
      Cash and cash equivalents                                $      2,223     $     2,827
      Securities held to maturity                                       896           1,651
      Securities available for sale                                       0           1,247
      Investment in subsidiaries                                     29,496          34,237
      Premise and equipment, net                                      1,003               5
      Receivable from subsidiaries                                    1,203           1,428
      Other assets                                                    1,419             888
                                                               ------------     -----------
                                                               $     36,240     $    42,283
                                                               ============     ===========
    Liabilities and Stockholders' Equity:
      Accrued expenses and other liabilities                   $        862     $       956
      Other borrowings                                                    0           5,600
      Payable to subsidiaries                                           112               0
                                                               ------------     -----------
         Total liabilities                                              974           6,556
                                                               ------------     -----------
    Stockholders' equity:
      Common stock                                                       26              26
      Additional paid-in capital                                     25,649          25,754
      Unearned MRP shares                                              (569)           (750)
      Treasury stock                                                 (5,273)         (3,803)
      Unearned ESOP shares                                           (1,164)         (1,428)
      Unrealized gain (loss) on securities
        available for sale, net                                           4              11
      Retained earnings, subject to certain restrictions             16,593          15,917
                                                              -------------     -----------
         Total stockholders' equity                                  35,266          35,727
                                                              -------------     -----------
                                                               $     36,240     $    42,283
                                                               ============     ===========
</TABLE>


                                       49
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 23.  Community Financial Corp. Condensed Financial Information

                         CONDENSED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,            
                                                                   ---------------------------------------------
                                                                      1998           1997              1996     
                                                                   -----------    ------------    --------------
   <S>                                                             <C>            <C>             <C>
   Dividends from subsidiary banks                                 $     3,500    $      6,500    $        3,000
   Interest income from subsidiary banks                                   117             136               151
   Interest income                                                         187             449               441
   Non-interest income                                                       7               0                 0
   Interest expense                                                       (302)            (50)                0
   Non-interest expense                                                 (1,183)         (1,393)             (648)
                                                                   -----------    ------------    --------------
      Income before income taxes                                         2,326           5,642             2,944
   Benefit from income taxes                                               419             356                46
                                                                   -----------    ------------    --------------
      Income before undistributed earnings of subsidiaries               2,745           5,998             2,990
   Undistributed (distributions in excess of) earnings of
      subsidiaries                                                      (1,508)         (4,596)           (2,217)
                                                                   -----------    ------------    --------------
      Net income                                                   $     1,237    $      1,402    $          773
                                                                   ===========    ============    ==============
</TABLE>


                        CONDENSED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,           
                                                                  ----------------------------------------------
                                                                      1998           1997              1996     
                                                                  ------------    ------------    --------------
    <S>                                                           <C>             <C>             <C>
    Cash flows from operating activities:
       Net income                                                  $     1,237    $      1,402    $          773
      Adjustments to reconcile net income to net
         cash provided by operating activities
       Equity in earnings of subsidiaries                               (1,992)         (1,904)             (783)
       Dividends received from subsidiaries                              3,500           6,500             3,000
       Stock employee benefit plans                                        456           1,016               387
       Other, net                                                         (378)            564               194
                                                                  ------------    ------------    --------------
         Net cash provided by operating activities                       2,823           7,578             3,571
                                                                  ------------    ------------    --------------

   Cash flows from investing activities:
      Purchase investment in subsidiaries                                    0         (15,515)                0
      Purchases of investment securities                                     0            (515)          (11,490)
      Maturities of investment securities                                1,990              69            16,081
      Receivable from subsidiaries                                         225             266               526
      Purchase of premise and equipment                                 (1,041)             (5)                0
      Proceeds from redemption of subsidiaries stock                     3,030               0                 0
                                                                  ------------    ------------    --------------
         Net cash provided by (used in)
            investing activities                                         4,204         (15,700)            5,117
                                                                  ------------    ------------    --------------
</TABLE>

                                 

                                       50
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 23.  Community Financial Corp. Condensed Financial Information

                        CONDENSED STATEMENTS OF CASH FLOW

<TABLE>
<CAPTION>
                                                                              Year Ended December 31,           
                                                                  ----------------------------------------------
                                                                      1998           1997              1996     
                                                                  -------------  -------------   ---------------
   <S>                                                            <C>            <C>             <C>
   Cash flows from financing activities:
      Common stock repurchased                                     $    (1,470)   $       (392)   $       (4,814)
      Proceeds from other borrowings                                         0           5,600                 0
      Repayment of other borrowings                                     (5,600)              0                 0
      Dividends paid on common stock                                      (561)           (590)                0
                                                                   -----------    ------------    --------------
         Net cash (used in) provided by
            financing activities                                        (7,631)          4,618            (4,814)
                                                                   -----------    ------------    --------------

   Net increase in cash and cash equivalents                              (604)         (3,504)            3,874
   Cash and cash equivalents at beginning of year                        2,827           6,331             2,457
                                                                   -----------    ------------    --------------
   Cash and cash equivalents at end of year                        $     2,223    $      2,827    $        6,331
                                                                   ===========    ============    ==============
</TABLE>

Note 24.  Acquisitions

      During 1997, Community Financial Corp. completed cash acquisitions of two
      bank holding companies and one bank accounted as purchase transactions.
      The consolidated statement of income for 1997 includes the results of
      operations from the acquisition dates. Under this method of accounting,
      assets and liabilities of the acquired are adjusted to their estimated
      fair value and combined with the historical recorded book values of the
      assets and liabilities of Community Financial Corp. The actual revaluation
      of the acquired net assets is subject to the completion of studies and
      evaluations by management. Community Financial Corp. purchased all of the
      outstanding shares of the businesses acquired for cash of $15,515,000.
      Community Financial Corp. borrowed $5,600,000 from UMB Bank of St. Louis
      to fund these acquisitions. The premiums paid and estimated fair value
      adjustments have been pushed down to the acquired banks.

      During 1998, the Company finalized its allocation of purchase price
      related to the acquisitions. Changes in preliminary estimates of the fair
      values were as follows:

<TABLE>
<S>                                             <C>
       Decrease in core deposit intangibles     $     (367)
       Increase in other assets                         97
       Decrease in deferred tax asset                 (173)
                                               -----------
       Increase in goodwill                     $     (443)
                                               ===========
</TABLE>

                                       51
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 25.  Segment information

            Information concerning operating segments by geographical locations
            was as follows (in thousands):
<TABLE>
<CAPTION>
                                                      Financial Institutions          
                                             -------------------------------------     
                                              East                         West
                                            Central  Central   Southern   Central                   Adjust-
                                            Illinois Illinois  Illinois   Illinois  Company  Other   ments    Total  
                                          ----------------------------------------  ---------------------------------
       <S>                                <C>        <C>      <C>       <C>        <C>      <C>     <C>      <C>
       Year Ended December 31, 1996

       Interest Income:
          Loans                           $ 10,462   $        $           $         $    151 $     0   $(151) $ 10,462
          Other                              2,973                                       440       0       0     3,413
                                          --------   -------  ---------   --------  -------- -------   -----  --------
                                            13,435                                       591       0    (151)   13,875
                                          --------   -------  ---------   --------  -------- -------   -----  --------
       Interest Expense:
          Deposits                           6,322                                         0       0       0     6,322
          Other                                406                                         0       0       0       406
                                          --------   -------  ---------   --------  -------- -------   -----  --------
                                             6,728                                         0       0       0     6,728
                                          --------   -------  ---------   --------  -------- -------   -----  --------
       Net interest income                   6,707                                       591       0    (151)    7,147   
       Provision for loan losses                10                                         0       0       0        10
                                          --------   -------  ---------   --------  -------- -------   -----  --------
          Net interest income   
            after provision                  6,697                                       591       0    (151)    7,137
       Non-interest income                     566                                         1     210       0       777
       Non-interest expense                  6,301                                       648       0    (151)    6,798
                                          --------   -------  ---------   --------  -------- -------   -----  --------
          Income before taxes                  962                                       (56)    210       0     1,116
       Provision for (benefit from) taxes      389                                       (46)      0       0       343
                                          --------   -------  ---------   --------  -------- -------   -----  --------
          Net Income                      $    573   $      0 $       0   $      0  $    (10)$   210   $   0  $    773
                                          ========   =======  =========   ========  ======== =======   =====  ========
       Year Ended December 31, 1997

       Interest Income:
          Loans                           $ 10,822   $   978  $     238   $    105  $    135 $     0   $(135) $ 12,143
          Other                              3,681       427        235         22       500       0       0     4,865
                                          --------   -------  ---------   --------  -------- -------   -----  --------
                                            14,503     1,405        473        127       635       0    (135)   17,008
                                          --------   -------  ---------   --------  -------- -------   -----  --------
       Interest Expense:
          Deposits                           6,287       602        221         72         0       0       0     7,182
          Other                              1,438         0          0          0        50       0       0     1,488
                                          --------   -------  ---------   --------  -------- -------   -----  --------
                                             7,725       602        221         72        50       0       0     8,670
                                          --------   -------  ---------   --------  -------- -------   -----  --------
       Net interest income                   6,778       803        252         55       585       0    (135)    8,338
       Provision for loan losses               194         1         29         12         0       0       0       236
                                          --------   -------  ---------   --------  -------- -------   -----  --------
          Net interest income
             after provision                 6,584       802        223         43       585       0    (135)    8,102
       Non-interest income                     728       155         20         10         0     214       0     1,127
       Non-interest expense                  4,852       746        176         69     1,444       0    (135)    7,152
                                          --------   -------  ---------   --------  -------- -------   -----  --------
          Income before taxes                2,460       211         67        (16)     (859)    214       0     2,077
       Provision for (benefit from) taxes      938        74         19          0      (356)      0       0       675
                                          --------   -------  ---------   --------  -------- -------   -----  --------
          Net Income                      $  1,522   $   137  $      48   $    (16) $   (503)$   214   $   0  $  1,402
                                          ========   =======  =========   ========  ======== =======   =====  ========
       Year Ended December 31, 1998                                                                                   
                                                                                                                      
       Interest Income:                                                                                               
          Loans                           $ 10,294   $ 1,149  $   1,402   $  1,147  $    117 $     0   $(117) $ 13,992 
          Other                              5,798       509      1,367        378       187       0       0     8,239 
                                          --------   -------  ---------   --------  -------- -------   -----  -------- 
                                            16,092     1,658      2,769      1,525       304       0    (117)   22,231 
                                          --------   -------  ---------   --------  -------- -------   -----  -------- 
       Interest Expense:                                                                                               
          Deposits                           6,856       746      1,321        943         0       0       0     9,866 
          Other                              2,566        81          0          0       302       0       0     2,949 
                                          --------   -------  ---------   --------   ------- -------   -----  -------- 
                                             9,422       827      1,321        943       302       0       0    12,815 
                                          --------   -------  ---------   --------   ------- -------   -----  -------- 
       Net interest income                   6,670       831      1,448        582         2       0    (117)    9,416 
       Provision for loan losses               271        10         58        102         0       0       0       441 
                                          --------   -------  ---------   --------   ------- -------   -----  -------- 
          Net interest income                                                                                          
            after provision                  6,399       821      1,390        480         2       0    (117)    8,975 
       Non-interest income                     926       262         76        190         7     202       0     1,663 
       Non-interest expense                  4,847       913      1,077        978     1,182       0    (117)    8,880 
                                          --------   -------  ---------   --------   ------- -------   -----  -------- 
          Income before taxes                2,478       170        389       (308)   (1,173)    202       0     1,758 
       Provision for (benefit from) taxes      886        61         87        (94)     (419)      0       0       521 
                                          --------   -------  ---------   --------   ------- -------   -----  -------- 
          Net Income                      $  1,592   $   109  $     302   $   (214)  $  (754)$   202   $   0  $  1,237 
                                          ========   =======  =========   ========   ======= =======   =====  ======== 
</TABLE>
                                       52
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 25.  Segment information

     During 1997, four additional geographical operating segments were
     purchased. Accordingly, 1996 information does not include operating results
     prior to the acquisition. The operating results for 1997 reflect only the
     operations subsequent to the acquisitions. The 1998 operating results
     consist of a full year of operations from all locations.

     Other significant items:

<TABLE>
<CAPTION>
                                                      Financial Institutions          
                                          ----------------------------------------     
                                              East                         West
                                            Central  Central   Southern   Central                   Adjust-
                                            Illinois Illinois  Illinois   Illinois  Company  Other   ments    Total  
                                          ----------------------------------------  ---------------------------------
       <S>                                <C>        <C>      <C>       <C>        <C>      <C>     <C>      <C>
       Year Ended December 31, 1996
 
       Depreciation                          $   240                                $     0 $     0 $     0  $    240
       Expenditures for premise
         and equipment                           485                                      0       0       0       485
       Dividends paid                          3,000                                    596       0  (3,000)      596
       Undistributed earnings                 (2,427)                                     0     210   2,217         0

       Year Ended December 31, 1997

       Depreciation                          $   292  $    39   $     5   $      5  $     1       0       0       342
       Amortization                                0       35        26         12        0       0       0        73
       Expenditures for premise
          and equipment                          941        9         8          0        5       0       0       963
       Dividends paid                          6,500        0         0          0      590       0  (6,500)      590
       Undistributed earnings                 (4,978)     137        48        (16)       0     214   4,595         0

       Year Ended December 31, 1998

       Depreciation                          $   337  $    39   $    26   $    107       43       0       0       552
       Amortization                                0       60       153        153        0       0       0       366
       Expenditures for premise
          and equipment                          390      823        93          5    1,041       0       0     2,352
       Dividends paid                          3,500        0         0          0      561       0  (3,500)      561
       Undistributed earnings                 (1,908)     109       302       (214)       0     202   1,509         0
</TABLE>

     The Company adopted SFAS No. 131, Disclosures about Segments of an
     Enterprise and Related Information, during 1998. SFAS No. 131 establishes
     standards for reporting information about operating segments in the annual
     consolidated financial statements and requires selected financial
     information about operating segments in the interim consolidated financial
     statements. It also establishes standards for related disclosures about
     products and services, and geographical areas. Operating segments are
     defined as components of an enterprise about which separate financial
     information is available and is evaluated regularly by the chief operating
     officers and the Board of Directors. The Company has determined the
     operating segments are the bank affiliates by geographical location. Each
     operating segment is managed independently with separate Board of
     Directors. The accounting policies of the operating segments are the same
     as those described in the summary of significant policies. Other consists
     of revenue generated by trust department, annuity sales, and broker
     services which are evaluated from a gross revenue approach on a regular
     basis with the operating segments.

                                       53
<PAGE>
 
                   COMMUNITY FINANCIAL CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 26.  Condensed Quarterly Results of Operations

<TABLE>
<CAPTION>
                                                                     1998                     
                                                    ---------------------------------------
                                                     Fourth     Third     Second     First
                                                     Quarter   Quarter   Quarter    Quarter
                                                    --------- --------- ---------- --------
      <S>                                           <C>       <C>       <C>        <C>      
      Interest income                                $ 5,623   $ 5,566   $ 5,546    $5,496
      Interest expense                                (3,234)   (3,266)   (3,183)   (3,132)
         Net interest income                           2,389     2,300     2,363     2,364
                                                    --------- --------- ---------- --------
      Provision for loan losses                          (84)      (90)     (132)     (135)
      Non-interest income                                416       443       426       378
      Non-interest expense                            (2,330)   (2,057)   (2,119)   (2,374)
                                                    --------- --------- ---------- --------
      Income before income tax expense                   391       596       538       233
                                                 
      Income tax expense                                 (65)     (185)     (191)      (80)
                                                    --------- --------- ---------- --------
      Net income                                     $   326   $   411   $   347    $  153
                                                    ========= ========= ========== ========
      Earnings per share:     Basic                  $  0.15   $  0.19   $  0.16    $ 0.07
                              Diluted                $  0.15   $  0.19   $  0.15    $ 0.07


                                                                     1997                     
                                                    ---------------------------------------
                                                     Fourth     Third     Second     First
                                                     Quarter   Quarter   Quarter    Quarter
                                                    --------- --------- ---------- --------

      Interest income                                $  5,064  $  4,311  $   4,131 $  3,502
      Interest expense                                 (2,751)   (2,227)    (2,002)  (1,690)
                                                    --------- --------- ---------- --------
         Net interest income                            2,313     2,084      2,129    1,812

      Provision for loan losses                          (122)      (59)       (22)     (33)
      Non-interest income                                 319       304        282      222
      Non-interest expense                             (2,134)   (1,672)  (  1,409)  (1,937)
                                                    --------- --------- ---------- --------
      Income before income tax expense                    376       657        980       64

      Income tax (expense) benefit                         15      (271)      (397)     (22)
                                                    --------- --------- ---------- --------
      Net income                                     $    391  $    386 $      583  $    42
                                                    ========= ========= ========== ========
      Earnings per share:     Basic                  $   0.17  $   0.18 $     0.27  $  0.02
                              Diluted                $   0.16  $   0.18 $     0.27  $  0.02
</TABLE>

                                       54
<PAGE>
 
<TABLE>
<CAPTION> 
                                        BOARD OF DIRECTORS

<S>                                 <C>                                       <C>
Roger A. Charleston                 Shirley B. Kessler                        Brad A. Jones
Chairman of the Board               President                                 Co-Owner of Rural King Supply
Civil Engineer; Owner, Charleston                       
Engineering                         Allen D. Welker                           Roger L. Haberer
                                    Retired                                   Information Services 
Michael F. Bauman                                                             Manager of Westaff
Retired                             Clyde R. King
                                    Retired

                  Wayne H. Benson                       Gary L. Graham
                  Chief Executive Officer               Mayor, City of O'Fallon, IL
                                                        Owner of LUCO, Inc. (River Barge Business)



                                        EXECUTIVE OFFICERS
<CAPTION>
<S>                                 <C>                                       <C>
Shirley B. Kessler             Wayne H. Benson                                Douglas W. Tompson
President                      Chief Executive Officer                        Chief Financial Officer



                                        SUBSIDIARY BANKS
<CAPTION>
<S>                                 <C>                                       <C>
Community Bank & Trust, N.A.  American Bank of Illinois in Highland           The Egyptian State Bank  
240 E. Chestnut               12616 Route 143                                 2 South Main Street      
Olney, IL 62450               Highland, IL  62249                             Carrier Mills, IL  62917 

Saline County State Bank      MidAmerica Bank of St. Clair County
1115 Wilson Street            350 Hartman Lane
Stonefort, IL  62987          O'Fallon, IL  62269



                                        CORPORATE INFORMATION
<CAPTION>
<S>                                <C>                                        <C>
Independent Certified Accountants  Special Counsel                            Annual Report on Form 10-K           
Larsson, Woodyard & Henson, CPAs   Housley Kantarian & Bronstein, P.C.           
702 E. Court Street                1220 19th Street, N.W., Suite 700          A copy of the Company's Annual Report on Form 10-K
Paris, Illinois 61944              Washington, D.C.  20036                    for the fiscal year ended December 31, 1998 as filed
                                                                              with the Securities and Exchange Commission will be
General Counsel                    Annual Meeting                             furnished without charge to stockholders as of the
Ray W. Vaughn, Attorney            The 1999 Annual  Meeting of  Stockholders  record date for the 1999 Annual Meeting upon written
308 S. Kitchell                    will be held on  April  26,  1999 at 1:00  request to Corporate Secretary, Community Financial
Olney, Illinois  62450             p.m.  at the  Holiday  Motel  at  1300 S.  Corporation, 240 E. Chestnut Street, Olney,
                                   West Street, Olney, Illinois.              Illinois 62450-2295
Transfer Agent and Registrar                                                   
Registrar and Transfer Co.,                                                    
Cranford, New Jersey                                                           
</TABLE>