SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB40

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934

          For the fiscal year ended March 31, 1997

                                    OR

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

          For the transition period from ______ to _______

    Commission file number 0-18265.

                         COMMUNITY FINANCIAL CORPORATION
       (Exact Name of Small Business Issuer as Specified in its Charter)

            Virginia                                    54-1532044
    (State or other jurisdiction of                  (I.R.S. Employer
    incorporation or organization)                   Identification No.)

    38 North Central Avenue, Staunton, Virginia          24401
     (Address of principal executive offices)          (Zip Code)

         Issuer's telephone number, including area code: (540) 886-0796

        Securities Registered Pursuant to Section 12(b) of the Act: None

           Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                                (Title of Class)

     Check  whether  the Issuer (1) filed all  reports  required  to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past twelve  months (or for
such shorter period that the Issuer was required to file such reports),  and (2)
has been subject to such requirements for the past 90 days.
YES /X/    NO / /

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of  Regulation  S-B  contained  in  this  form,  and no  disclosure  will be
contained, to the best of Issuer's knowledge, in definitive proxy or information
statements  incorporated  by reference in Part III of this Form  10-KSB40 or any
amendment to this Form 10-KSB40. /X/

     The Issuer had  $13,296,729  in gross  income for the year ended  March 31,
1997.



<PAGE>




     As of May 31, 1997,  there were issued and outstanding  1,275,348 shares of
the Issuer's Common Stock.  The aggregate  market value of the voting stock held
by  non-affiliates  of the Issuer,  computed by  reference to the average of the
closing bid and asked price of such stock as of May 31, 1997, was  approximately
$23,300,000.  (The  exclusion from such amount of the market value of the shares
owned by any person  shall not be deemed an  admission  by the Issuer  that such
person is an affiliate of the Issuer.)

                       DOCUMENTS INCORPORATED BY REFERENCE

PART  III of  Form  10-KSB40 -- Proxy  Statement for  the  1997  Annual  Meeting
of Stockholders.

Transitional Small Business Disclosure Format
Yes / /; No /X/

                                        2

<PAGE>



                                     PART I

Item  1. Description of Business
--------------------------------

General
-------
     Community  Financial  Corporation  ("Community"  or  the  "Company")  is  a
Virginia  corporation  which  owns  Community  Bank (the  "Bank").  The Bank was
organized  in  1928  as a  Virginia-chartered  building  and  loan  association,
converted to a federally-chartered savings and loan association in 1955 and to a
federally-chartered  savings bank in 1983.  In 1988,  the Bank  converted to the
stock form of organization through the sale and issuance of shares of its Common
Stock.  The  Company  effected a  two-for-one  stock split in the form of a 100%
stock dividend in November 1994.

     The principal  asset of the Company is the  outstanding  stock of the Bank,
its wholly owned subsidiary.  The Company  presently has no separate  operations
and its business consists only of the business of the Bank. The Company's Common
Stock trades on The Nasdaq Stock Market under the symbol "CFFC."

     The  Company  and  the  Bank  are  subject  to  comprehensive   regulation,
examination and supervision by the Office of Thrift  Supervision,  Department of
the Treasury ("OTS") and by the Federal Deposit Insurance  Corporation ("FDIC").
The Bank is a member  of the  Federal  Home Loan Bank  ("FHLB")  System  and its
deposits are backed by the full faith and credit of the United States Government
and are  insured by the  Savings  Association  Insurance  Fund  ("SAIF")  to the
maximum extent permitted by the FDIC.

     At March 31,  1997,  Community  had $167.7  million in assets,  deposits of
$116.6 million and stockholders'  equity of $23.3 million.  Community's  primary
business consists of attracting deposits from the general public and originating
real estate loans and other types of investments  through its offices located in
Staunton,  Waynesboro,  and Stuart Drafts,  Virginia.  An additional  office was
opened in Virginia Beach, Virginia in April, 1997.

     Like all financial  institutions,  Community's  operations  are  materially
affected by general economic conditions, the monetary and fiscal policies of the
federal  government  and the  policies  of the various  regulatory  authorities,
including  the OTS and the Board of  Governors  of the  Federal  Reserve  System
("Federal Reserve Board").  Its results of operations are largely dependent upon
its net  interest  income,  which is the  difference  between  the  interest  it
receives on its loan portfolio and its investment  securities  portfolio and the
interest it pays on its deposit accounts and borrowings.

     Community's  main office is located at 38 North Central  Avenue,  Staunton,
Virginia 24401. The Company's telephone number is (540) 886-0796.

Lending Activities
------------------
     General. The Company, like most other thrift institutions, concentrates its
lending  activities on first mortgage  conventional loans secured by residential
and, to a lesser extent, commercial real estate with an emphasis on multi-family
housing.  The Company makes construction loans secured

                                        3

<PAGE>



by   commercial    real   estate   and   one-   to    four-family    residential
properties.Additionally,  the Company makes  consumer loans in order to increase
the diversification and decrease interest rate sensitivity of its loan portfolio
and to increase interest income.  Substantially,  all of the Company's loans are
originated within its market area which includes Shenandoah,  Rockingham,  Page,
Highland,  Augusta, Albemarle, Bath, Rockbridge and Nelson Counties in Virginia.
The Company opened an office in Virginia  Beach,  Virginia in April,  1997 which
will expand the Bank's market to the Hampton Roads area.

     Residential loan originations come primarily from walk-in  customers,  real
estate  brokers and  builders.  Commercial  real estate  loan  originations  are
obtained  through  broker  referrals,  direct  solicitation  of  developers  and
continued business from customers.  All completed loan applications are reviewed
by the Company's  salaried loan officers.  As part of the  application  process,
information is obtained concerning the income,  financial condition,  employment
and credit  history of the  applicant.  If  commercial  real estate is involved,
information  is also  obtained  concerning  cash flow  after debt  service.  The
quality of loans is analyzed  based on Company  experience  and on the Company's
guidelines with respect to credit  underwriting as well as the guidelines issued
by the  Federal  Home Loan  Mortgage  Corporation  ("FHLMC"),  Federal  National
Mortgage  Association  ("FNMA") and other purchasers of loans,  depending on the
type of loans involved.  The one-to four-family  adjustable-rate  mortgage loans
originated by the Company,  however,  are not readily  saleable in the secondary
market due to the fact that the  Company  does not  typically  require  surveys,
title  insurance  or written  verifications  of  employment  history and deposit
relationships.  All real estate is appraised by  independent  fee appraisers who
have been pre-approved by the Board of Directors.

     The Company's loan commitments are approved at different levels,  depending
on the size and type of the loan being sought. One-to four-family and commercial
real  estate  loans in the amount of  $150,000  or less may be  approved  by the
Vice-President/Director  of Lending.  Loans in excess of $150,000  but less than
$250,000 must be approved by a majority of the  Company's  Loan  Committee.  All
mortgage loans in excess of $250,000 must be approved by the Board of Directors.
Consumer  loans in  excess of  $100,000  on a secured  basis and  $50,000  on an
unsecured  basis  require the approval of the  President of the Company with the
concurrence of another member of senior management. Regardless of the individual
loan approval  authority,  the Board of Directors generally approves or ratifies
all loans.

     The aggregate amount of loans that the Bank is permitted to make to any one
borrower, including related entities, and the aggregate amount that the Bank may
invest in any one real estate project,  with certain  exceptions,  is limited to
the greater of 15% of unimpaired  capital and surplus or $500,000.  At March 31,
1997,  the maximum  amount  which the Bank could have loaned to one borrower and
the   borrower's   related   entities  and  invested  in  any  one  project  was
approximately  $3.0  million.  At March 31,  1997,  the Bank's  largest  lending
relationship to a single borrower,  or group of related borrowers,  consisted of
six  loans  totaling  $2.4  million.  At such  date,  all of  these  loans  were
performing in accordance with their repayment  terms. At March 31 1997, the Bank
had seven other loans with an outstanding balance in excess of $1.0 million, all
of which were  performing in accordance  with their repayment terms at March 31,
1997.

                                        4

<PAGE>



         Loan  Portfolio  Composition.   The  following  table  sets  forth  the
composition of the Company's  total loan portfolio in dollars and percentages as
of the dates indicated.
<TABLE>
<CAPTION>
                                                                 March 31,
                     ----------------------------------------------------------------------------------------------------
                           1997                 1996                1995                1994                  1993
                     ----------------------------------------------------------------------------------------------------
                      Amount   Percent     Amount   Percent    Amount   Percent    Amount   Percent      Amount   Percent
                     ----------------------------------------------------------------------------------------------------
                                                            (Dollars in Thousands)
<S>                  <C>        <C>       <C>        <C>       <C>        <C>       <C>       <C>         <C>        <C>
Real Estate Loans:
-----------------
Residential          $ 96,968   63.83%    $ 91,212   62.92%    $ 86,331   62.90%    $ 77,485   61.59%    $ 70,904   62.45%
Commercial             37,508   24.69       38,433   26.51       39,667   28.90       41,144   32.71       36,839   32.45
Construction            5,204    3.42        6,415    4.43        4,336    3.15        2,992    2.38        2,407    2.12
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
  Total real estate   139,680   91.94      136,060   93.86      130,334   94.95      121,621   96.68      110,150   97.02
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
Other Loans:
--------------
Consumer:
Unsecured personal      4,418    2.91        3,616    2.50        3,600    2.62        1,922    1.53        1,205    1.06
Automobile              1,646    1.08        1,470    1.01        1,072     .78          687     .55          534     .47
Home equity             1,630    1.07          380     .26          412     .30          505     .40          442     .39
Deposit account           339     .22          234     .16          267     .20          259     .21          316     .28
Other                     622     .41          496     .34        1,577    1.15          809     .63          887     .78
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
  Total consumer        8,655    5.69        6,196    4.27        6,928    5.05        4,182    3.32        3,384    2.98

Commercial business     3,588    2.37        2,709    1.87          ---     ---          ---     ---          ---     ---
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
Total loans
 receivable          $151,923  100.00%    $144,965  100.00%    $137,262  100.00%    $125,803  100.00%    $113,534  100.00%
                     --------  ======     --------  ======     --------  ======     --------  ======     --------  ======
Less:
Undisbursed loans in
 process                1,619                1,830                1,477                1,330                1,201
Deferred fees and
 unearned discounts       361                  396                  507                  625                  603
Allowance for losses    1,038                1,000                  763                  703                  655
                     --------             --------             --------             --------             --------
  Total net items       3,018                3,226                2,747                2,658                2,459
                     --------             --------             --------             --------             --------
  Total loans
   receivable, net   $148,905             $141,739             $134,515             $123,145             $111,075
                     ========             ========             ========             ========             ========
</TABLE>

                                        5

<PAGE>



     The following  table shows the  composition of the Company's loan portfolio
by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
                                                                 March 31,
                     ----------------------------------------------------------------------------------------------------
                           1997                 1996                1995                1994                  1993
                     ----------------------------------------------------------------------------------------------------
                      Amount   Percent     Amount   Percent    Amount   Percent    Amount   Percent      Amount   Percent
                     ----------------------------------------------------------------------------------------------------
                                                            (Dollars in Thousands)
<S>                  <C>        <C>       <C>        <C>       <C>        <C>       <C>       <C>         <C>       <C>
Fixed-Rate Loans:
Real Estate:
 Residential         $ 11,161    7.34%    $ 12,863    8.87%    $ 12,896    9.40%    $ 14,880   11.83%    $  9,350    8.24%
 Commercial             6,223    4.10        5,548    3.83        2,765    2.01        3,832    3.05        4,054    3.57
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
 Total real
  estate loans(1)      17,384   11.44       18,411   12.70       15,661   11.41       18,712   14.88       13,404   11.81
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
Consumer                8,114    5.33        5,902    4.07        6,516    4.75        3,677    2.92        2,942    2.59
Commercial business     3,588    2.37        2,709    1.87          ---     ---          ---     ---          ---     ---
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
 Total fixed-rate
   loans               29,086   19.14       27,022   18.64       22,177   16.16       22,389   17.80       16,346   14.40
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
Adjustable-Rate
 Loans:
Real Estate:
 Residential           87,336   57.49       80,773   55.72       75,023   54.66       64,532   51.30       62,371   54.93
 Commercial            34,960   23.01       36,876   25.44       39,650   28.88       38,377   30.50       34,375   30.28
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
 Total real estate
  loans               122,296   80.50      117,649   81.16      114,673   83.54      102,909   81.80       96,746   85.21
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
Consumer                  541     .36          294     .20          412     .30          505     .40          442     .39
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
 Total adjustable-
  rate loans          122,837   80.86      117,943   81.36      115,085   83.84      103,414   82.20       97,188   85.60
                     --------   -----     --------   -----     --------   -----     --------   -----     --------   -----
 Total loans
  receivable         $151,923  100.00%    $144,965  100.00%    $137,262  100.00%    $125,803  100.00%    $113,534  100.00%
                     --------  ======     --------  ======     --------  ======     --------  ======     --------  ======
</TABLE>
CONTINUED NEXT PAGE



                                        6

<PAGE>



<TABLE>
<CAPTION>

                                                                 March 31,
                     ------------------------------------------------------------------------------------------------------
                           1997                 1996                1995                1994                  1993
                     ------------------------------------------------------------------------------------------------------
                       Amount   Percent     Amount   Percent     Amount   Percent     Amount   Percent     Amount   Percent
                     ------------------------------------------------------------------------------------------------------
                                                            (Dollars in Thousands)
<S>                  <C>        <C>       <C>        <C>      <C>        <C>       <C>       <C>         <C>        <C>
Less:
Undisbursed loans
 in process             1,619                1,830                1,477                1,330                1,201
Deferred fees and
 unearned discounts       361                  396                  507                  625                  603

Allowance for losses    1,038                1,000                  763                  703                  655
                     --------             --------             --------             --------             --------
 Total net items        3,018                3,226                2,747                2,658                2,459
                     --------             --------             --------             --------             --------
 Total loans
  receivable, net    $148,905             $141,739             $134,515             $123,145             $111,075
                     ========             ========             ========             ========             ========

<FN>
------------
(1)  Includes   residential  real  estate   construction  loans  of  $1,529,000,
$2,424,000,  $1,588,000,  $1,927,000  and  $817,000 and  commercial  real estate
construction  loans  of  $3,675,000,   $3,991,000,  $2,748,000,  $1,065,000  and
$1,590,000 at March 31, 1997, 1996, 1995, 1994 and 1993, respectively.
</FN>

</TABLE>

                                        7

<PAGE>



Loan Maturity and Repricing
---------------------------

     The following table  illustrates the contractual  maturity of the Company's
loan portfolio at March 31, 1997. Mortgages which have adjustable interest rates
are shown as maturing based on  contractual  maturity and demand loans are shown
as maturing in one year or less.  This  schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.


<TABLE>
<CAPTION>

                                  Real Estate
                          --------------------------
                          Mortgage(1)   Construction     Consumer      Total
                          ---------------------------------------------------
                                          (In Thousands)
<S>                       <C>           <C>              <C>           <C>
Due During Years Ended
----------------------
04/01/97 - 03/31/98       $  3,767      $  5,204         $  7,875      $ 16,846
04/01/98 - 03/31/02         17,657             0            3,765        21,422
04/01/02 and following     113,052             0              603       113,655
                          --------      --------         --------      --------
     Total                $134,476      $  5,204         $ 12,243      $151,923
                          ========      ========         ========      ========

<FN>
----------
     (1)  Includes residential and commercial real estate loans.
</FN>

</TABLE>


     The total amount of loans due after March 31, 1998 which have predetermined
interest rates is $13.6 million,  while the total amount of loans due after such
date which have floating or adjustable interest rates is $121.5 million.

                                       8

<PAGE>



One- to Four-Family Residential Real Estate Lending
---------------------------------------------------

     The Company's  primary  lending program is the origination of loans secured
by one- to four-family residences, substantially all of which are located in the
Company's market area. The Company evaluates both the borrower's ability to make
principal  and interest  payments and the value of the property that will secure
the loan.  Although  federal law permits the Company to make loans in amounts of
up to 100% of the appraised  value of the  underlying  real estate,  the Company
generally makes one- to four-family  residential real estate loans in amounts of
80% or less of the appraised value thereof.  In certain  instances,  the Company
will lend up to 90% of the  appraised  value of the  underlying  real estate and
requires the  borrower to purchase  private  mortgage  insurance in an amount to
reduce the Company's exposure to 80% or less.

     Most savings institutions,  including Community,  historically made one- to
four-family  residential  mortgage loans on a 30-year  fixed-rate  basis. Due to
prepayments  and  refinancings,  the average actual maturity of 30-year loans is
generally substantially shorter.

     In order to reduce its exposure to changes in interest  rates,  the Company
has  de-emphasized  the  origination of 30-year  fixed-rate  one-to  four-family
residential  mortgage  loans for  retention in its own  portfolio.  For the year
ended  March  31,  1997,  90.1%  of  all  one-to-four-family  residential  loans
(excluding  residential  construction  loans)  originated  by  the  Company  had
adjustable interest rates.  Although,  due to competitive market pressures,  the
Company does originate  fixed-rate mortgage loans, it currently  underwrites and
documents all such loans to permit their sale in the secondary  mortgage market,
with a third-party  purchase  commitment  for the loan being  required  prior to
origination.  At March  31,  1997,  $9.7  million  (excluding  $1.5  million  of
residential  construction  loans) or 9.9%, of the Company's  one- to four-family
residential mortgage loan portfolio consisted of fixed-rate mortgage loans.

    The  Company's  current  one-  to  four-family  residential  adjustable-rate
mortgages  ("ARMs")  have  interest  rates that  adjust  primarily  every  year,
generally in accordance with the rates on one-year U.S. Treasury Bills. Although
the  Company's  primary  one- to  four-family  residential  loan is the one year
adjustable,  the Company  has begun to offer a  residential  loan which  adjusts
every  three years  generally  in  accordance  with the rates on three year U.S.
Treasury Bills. The Company's ARMs generally limit interest rate increases to 2%
each rate adjustment period and have an established ceiling rate at the time the
loans are made of up to 6% over the  original  interest  rate.  To compete  with
other lenders in its market area,  Community  makes one and  three-year  ARMs at
interest  rates which,  for the initial  period,  are below the index rate which
would otherwise apply to these loans.  Borrowers are qualified,  however, at the
fully indexed  interest rate. At March 31, 1997,  one- to four-family  ARM loans
totaled $87.3 million,  or 57.5%, of the Company's total loans receivable before
net items.  There are  unquantifiable  risks resulting from potential  increased
costs to the borrower as a result of repricing. It is possible,  therefore, that
during  periods  of rising  interest  rates,  the risk of  defaults  on ARMs may
increase due to the upward adjustment of interest costs to borrowers.


                                        9

<PAGE>



     All one- to four-family  real estate mortgage loans being originated by the
Company  contain a "due-on-sale"  clause  providing that the Company may declare
the unpaid  principal  balance  due and payable  upon the sale of the  mortgaged
property.  It is the  Company's  policy to  enforce  these  due-on-sale  clauses
concerning  fixed-rated  loan and to permit  assumptions  of ARMs, for a fee, by
qualified borrowers.

     The Company  requires,  in connection  with the  origination of residential
real estate loans, title opinions and fire and casualty insurance  coverage,  as
well as flood insurance where  appropriate,  to protect the Company's  interest.
The  cost of this  insurance  coverage  is paid  by the  borrower.  The  Company
generally does not require escrows for taxes and insurance.

Commercial Real Estate and Construction Lending
-----------------------------------------------

     The Company has originated and, in the past has purchased,  commercial real
estate loans and loan  participations.  The Company also makes  commercial  real
estate construction loans. The Company's commercial real estate and construction
loans  are  secured  by  various  types of  commercial  real  estate,  including
multi-family  residential  buildings,  hotels and  motels,  convenience  stores,
commercial and industrial buildings,  shopping centers and churches. The Company
has in recent years placed more emphasis on  multi-family  housing loans for its
commercial real estate loan portfolio. At March 31, 1997, commercial real estate
and construction  loans aggregated $41.2 million or 27.1% of the Company's total
loans  receivable  before net items.  The Company's  commercial  real estate and
construction  loans are secured by properties  located in the  Company's  market
area.

     The Company's  commercial  real estate loans are generally made at interest
rates that adjust based on yields for one-year U.S. Treasury securities,  with a
2% annual cap on rate  adjustments  and a 6% cap on interest rates over the life
of the loan. Typically,  the Company charges fees ranging from 1% to 2% on these
loans. At March 31, 1997, the Company had $6.2 million in fixed-rate  commercial
real estate and  construction  loans.  Commercial  real estate loans made by the
Company are fully amortizing with maturities ranging from five to 30 years.

     At March 31, 1997,  the Company had $3.7 million or 2.4% of its total loans
receivable before net items invested in commercial  construction  loans compared
to $4.0  million or 2.8% at March 31, 1996.  At March 31, 1997,  the Company had
six commercial construction loans, the largest one having an outstanding balance
of $900,000 at March 31, 1997.  All of these  construction  loans are  presently
performing in accordance with their terms. The Company's commercial construction
loans are generally  made for a one year term or less,  with a requirement  that
the borrower  have a commitment  for  permanent  financing  prior to funding the
construction  loan. The Company's  construction  loans  generally  provide for a
fixed rate of interest at the  prevailing  prime rate or  slightly  above.  Such
loans are  secured by the  personal  guarantees  of the  borrowers  and by first
mortgages on the projects.

     In its underwriting of commercial real estate and  construction  loans, the
Company  may  lend,  under  federal  regulations,  up to  100%  of the  security
property's  appraised value,  although the Company's loan to original  appraised
value ratio on such properties is generally 80% or less. The Company's

                                       10

<PAGE>



commercial real estate and construction  loan  underwriting  criteria require an
examination of debt service coverage ratios, the borrower's creditworthiness and
prior credit history and reputation, and the Company generally requires personal
guarantees or  endorsements of borrowers.  The Company also carefully  considers
the location of the security property.

     At March 31,  1997,  the Company had 10  commercial  real estate  loans (or
multiple  loans to one  borrower)  in excess of $1.0  million  with an aggregate
balance of $17.8  million,  all of which were current in interest and  principal
payments. The largest was a group of loans to a single borrower for $2.3 million
secured  primarily by multi-unit  apartments,  single family rental houses and a
restaurant.

     The following table presents information as to Community's  commercial real
estate  and  construction  lending  portfolio  as of March  31,  1997 by type of
project.

<TABLE>
<CAPTION>

                                               Number
                                                 of       Principal
                                                Loans      Balance
                                               ------    -----------
                                              (Dollars in Thousands)
<S>                                             <C>       <C>
Permanent financing:
  Multi-family residential
    building                                      52       $18,788
  Hotel and motel                                  4           384
  Commercial and industrial building              77        18,239
  Raw land                                         6            93
  Church                                           1             4
                                                 ---       -------
                                                 140        37,508
                                                 ---       -------
Acquisition and construction
  financing:
  Commercial and industrial building               6         3,675
                                                 ---       -------

   Total                                         146       $41,183
                                                 ===       =======

</TABLE>

     Commercial real estate and construction  lending is generally considered to
involve  a higher  level of  credit  risk than  one-to  four-family  residential
lending due to the  concentration  of principal in a limited number of loans and
borrowers  and the  effects  of  general  economic  conditions  on  real  estate
developers and managers.  The Company's  risk of loss on a construction  loan is
dependent  largely upon the accuracy of the initial  estimate of the  property's
sell out value upon  completion  of the  project and the  estimated  cost of the
project.  If the estimated  cost of  construction  or  development  proves to be
inaccurate, the Company may be required to advance funds beyond the amount

                                       11

<PAGE>



originally  committed to permit  completion  of the project.  If the estimate of
value proves to be inaccurate, the Company may be confronted, at or prior to the
maturity of the loan,  with a project with value which is insufficient to assure
full repayment.  Because the Company  usually  provides loans to a developer for
the entire  estimated  cost and interest of the  project,  defaults in repayment
generally  do not occur  during  the  construction  period  and it is  therefore
difficult to identify problem loans at an early stage. When loan payments become
due,  borrowers may experience  cash flow from the project which is not adequate
to service total debt. This cash flow shortage can result in the failure to make
loan payments.  In such cases,  the Company may be compelled to modify the terms
of the  loan.  In  addition,  the  nature  of these  loans is such that they are
generally less predictable and more difficult to evaluate and monitor.

Consumer Lending
----------------

     Federal  thrift  institutions  are  permitted  to  make  both  secured  and
unsecured consumer loans reasonably  incident to personal or household purposes.
In  general,  loans made under these  investment  powers may not exceed 30% of a
federally-chartered thrift institution's total assets.

     The Company offers various secured and unsecured consumer loans,  including
unsecured personal loans,  automobile loans, deposit account loans,  installment
and demand loans,  and home equity loans and credit card  receivables.  At March
31,  1997,  the Company had $8.7  million or 5.7% of its total loans  receivable
before net items invested in consumer  loans.  With the exception of $541,000 of
home equity loans at March 31, 1997,  the  Company's  consumer  loans have fixed
interest rates and generally have terms ranging from 90 days to five years.  The
largest  component of consumer loans are unsecured  personal  loans.  Such loans
were  generally  made to  customers  with  which the  Company  had  pre-existing
relationships in amounts  generally under $75,000.  Community  originates all of
its  consumer  loans in its market  area and intends to  continue  its  consumer
lending in this geographic area.

     The Company  offers VISA credit card  accounts.  At March 31,  1997,  1,099
credit card accounts had been issued,  with an aggregate  outstanding balance of
$361,402 and unused  credit  available of $2.8  million.  The Company  presently
charges no annual membership fee and an annual rate of interest of 15.98%.

     The  underwriting  standards  employed by the Company  for  consumer  loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing  obligations and payments on the proposed
loan.  The  stability of the  applicant's  monthly  income may be  determined by
verification of gross monthly income from primary  employment,  and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration, the underwriting process also includes a comparison
of the value of the security in relation to the proposed loan amount.

     Consumer loans may entail greater risk than do residential  mortgage loans,
particularly  in the case of consumer loans which are unsecured,  such as credit
card receivables,  or secured by rapidly depreciable assets such as automobiles.
In such cases, any repossessed  collateral for a defaulted consumer loan may not
provide an adequate  source of  repayment of the  outstanding  loan balance as a
result of the greater likelihood of damage, loss

                                       12

<PAGE>



or  depreciation.  The  remaining  deficiency  often  does not  warrant  further
substantial collection efforts against the borrower. In addition,  consumer loan
collections are dependent on the borrower's continuing financial stability,  and
thus are more likely to be adversely affected by job loss,  divorce,  illness or
personal bankruptcy.  Furthermore,  the application of various federal and state
laws,  including federal and state bankruptcy and insolvency laws, may limit the
amount which can be  recovered  on such loans.  Such loans may also give rise to
claims and defenses by a consumer loan borrower against an assignee of such loan
such as the Company,  and a borrower may be able to assert against such assignee
claims  and  defenses  which  it  has  against  the  seller  of  the  underlying
collateral.  The Company adds general provisions to its loan loss allowance,  in
amounts determined in accordance with industry standards,  at the time the loans
are  originated.  Consumer loan  delinquencies  often  increase over time as the
loans  age.  Accordingly,  although  the level of  non-performing  assets in the
Company's  consumer loan portfolio has generally been low ($400,000 at March 31,
1997),  there can be no assurance  that  delinquencies  will not increase in the
future.

Commercial Business Lending
---------------------------

     The Company also originates  commercial  business loans. At March 31, 1997,
the  Company  had  3.6  million  in  commercial   business  loans   outstanding,
representing  2.4% of the Company's  gross loan  portfolio.  The Company  offers
commercial  business loans to service  existing  customers,  to consolidate  its
banking  relationships with these customers,  and to further its asset/liability
management goals.

     Unlike residential  mortgage loans which generally are made on the basis of
the  borrower's  ability to make  repayment from his or her employment and other
income,  and which are  secured by real  property  whose  value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's  ability to make repayment from the cash
flow of the borrower's business.  As a result, the availability of funds for the
repayment of commercial  business loans may be dependent upon the success of the
business itself. The Company's  commercial  business loans almost always include
personal guarantees and are usually, but not always, secured by business assets.
However,  the  collateral  securing the loans may  depreciate  over time, may be
difficult  to appraise  and may  fluctuate  in value based on the success of the
business.  At March 31, 1997, the Company had $2.3 million of secured commercial
business loans and $1.3 million of unsecured commercial business loans.

         The Company  recognizes the generally  increased credit risk associated
with commercial  business  lending.  The Company's  commercial  business lending
practice  emphasizes  credit file  documentation  and analysis of the borrower's
character, management capabilities,  capacity to repay the loan, the adequacy of
the borrower's capital and collateral.  Analysis of the borrower's past, present
and  future  cash  flows is also an  important  aspect of the  Company's  credit
analysis.


                                       13

<PAGE>



Loan Originations, Purchases and Sales
--------------------------------------

     Federal  regulations  authorize  the  Company  to make  real  estate  loans
anywhere in the United States. However, at March 31, 1997,  substantially all of
the  Company's  real estate  loans were  secured by real  estate  located in the
Company's market area.

     Management  believes that  purchases of loans and loan  participations  are
generally  desirable only when local mortgage  demand is less than the supply of
funds available for local mortgage  origination.  Since fiscal 1985, the Company
has not purchased any loans or loan participations.

     Generally, the Company originates fixed-rate residential mortgage loans for
sale in the secondary market and retains adjustable-rate  mortgage loans for the
Company's portfolio. Prior to fiscal 1997 the Company retained the servicing for
mortgage  loans sold.  During  fiscal 1997 the Company  began to sell loans with
servicing released to be more competitive in that market.

                                       14

<PAGE>



     The  following  table  shows  the  loan  origination,  purchase,  sale  and
repayment  activities of the Company for the periods indicated.  For the periods
shown, the Company did not purchase any loans.


<TABLE>
<CAPTION>

                                                Year Ended March 31,
                                          -------------------------------
                                            1997        1996        1995
                                          -------------------------------
                                                 (In Thousands)
<S>                                       <C>         <C>         <C>
Origination by Type:
-------------------
Adjustable Rate:
 Real estate - one- to four-family
                residential               $21,687     $16,132     $18,425
             - commercial                   5,974       1,449       1,957
             - home equity                    230         311         184
                                          -------     -------     -------
     Total adjustable rate                 27,891      17,892      20,566
                                          -------     -------     -------
Fixed Rate:
----------
 Real estate - one- to four-family
               residential                  3,280       4,636       3,383
             - commercial                   1,092       2,109       1,867
 Non-real estate - consumer(1)             10,857       8,163       4,089
                                          -------     -------     -------
     Total fixed rate                      15,229      14,908       9,339
                                          -------     -------     -------
Sales:
-----
Real estate loans                           1,418       1,085       1,008
                                          -------     -------     -------
Principal repayments                       23,836      19,750      15,112
                                          -------     -------     -------
     Total reductions                      25,254      20,835      16,120
                                          -------     -------     -------
Increase (decrease) in other
 items, net                               (10,699)     (4,741)     (2,238)
                                          -------     -------     -------
     Net increase (decrease)              $ 7,167     $ 7,224     $11,321
                                          =======     =======     =======
<FN>
----------
     (1) Consumer loans include the amounts  outstanding on credit card accounts
opened by the Company and outstanding  lines of credit on home equity loans. The
total credit available was $4.1 million,  $3.6 million and $3.5 million at March
31, 1997,  1996 and 1995,  respectively,  which would have increased  fixed-rate
consumer loans to $14.9 million,  $12.2 million and $10.1 million at such dates,
respectively.
</FN>

 </TABLE>

                                       15

<PAGE>



Income From Lending Activities
------------------------------

     Community   realizes   interest  and  loan  fee  income  from  its  lending
activities.  The Company  receives loan fees on both  commercial real estate and
one-to four-family residential loans. The Company receives loan fees and charges
related to existing loans,  which include late charges.  Interest on loans, loan
fees  and  service  charges  together  comprised  97.2% of the  Company's  total
revenues for the year ended March 31, 1997. Income from loan fees and other fees
is a volatile  source of income,  varying  with the volume and type of loans and
commitments made and with competitive and economic conditions.

     Loan fees and loan  origination  cost are deferred and  amortized  over the
life of the  loans  to  which  they  relate.  The  remaining  deferred  fees are
amortized into income over the estimated  remaining  lives of the loans to which
they relate,  using a method  which  approximates  level yield.  The Company had
deferred fees net of direct underwriting costs of $359,993 at March 31, 1997.

Delinquent and Problem Loans
----------------------------

     When a borrower  fails to make a required  payment on a loan,  the  Company
attempts to cause the  deficiency  to be cured by  contacting  the  borrower.  A
notice is mailed to the  borrower  after a payment is 16 days past due and again
when the loan is 28 days past due.  For most loans,  if the  delinquency  is not
cured  within 30 days the Company  issues a notice of intent to foreclose on the
property and if the  delinquency  is not cured  within 60 days,  the Company may
institute  foreclosure  action.  If  foreclosed  on, real  property is sold at a
public sale and may be purchased by the Company. In most cases, deficiencies are
cured promptly.

     The following table sets forth information  concerning  delinquent mortgage
and other loans at March 31, 1997.  The amounts  presented  represent  the total
remaining  principal  balances  of the  related  loans,  rather  than the actual
payment amounts which are overdue.

<TABLE>
<CAPTION>

                         Residential          Commercial
                         Real Estate          Real Estate          Consumer
                      ------------------  ------------------  ------------------
                       Number    Amount    Number    Amount    Number    Amount
                      ------------------  ------------------  ------------------
                                        (Dollars in Thousands)
<S>                    <C>       <C>       <C>       <C>       <C>       <C>

Loans Delinquent for:
--------------------
30-59 days                7       $355        1      $900         6       $ 52
60-89 days                1         60        0         0         6         32
90 days and over          2        103        0         0         7        400
                         --       ----       --      ----        --       ----
Total delinquent loans   10       $518        1      $900        19       $484
                         ==       ====       ==      ====        ==       ====
</TABLE>

                                       16

<PAGE>




     Federal  regulations  provide for the classification of loans, debt, equity
securities and other assets considered to be of lesser quality as "substandard,"
"doubtful" or "loss" assets.  The regulations  require  insured  institutions to
classify their own assets and to establish prudent general allowances for losses
for assets  classified  "substandard"  or "doubtful."  For the portion of assets
classified as "loss," an  institution is required to either  establish  specific
allowances of 100% of the amount classified or charge such amount off its books.
Assets which do not currently expose the insured  institution to sufficient risk
to warrant  classification in one of the  aforementioned  categories but possess
potential  weaknesses  are  required  to  be  designated  "special  mention"  by
management.  In  addition,  the OTS may require the  establishment  of a general
allowance for losses based on assets  classified as "substandard" and "doubtful"
or based on the general  quality of the asset  portfolio of an  institution.  In
connection  with  the  filing  of its  periodic  reports  with  the  OTS  and in
accordance  with its  classification  of assets  policy,  the Company  regularly
reviews  the loans in its  portfolio  to  determine  whether  any loans  require
classification  in  accordance  with  applicable  regulations.  On the  basis of
management's review of its assets, at March 31, 1997, the Company had classified
$249,000 of its assets as  substandard,  $195,000 as doubtful  and none as loss.
All assets of the Company that have been classified are included below in either
the  table of  non-performing  assets  or under  "Other  Loans of  Concern."  In
addition,  the  Company  had  $1,334,000  in  special  mention  assets.  See  "-
Non-Performing Assets."

Non-Performing Assets
---------------------

  The table below sets forth the amounts and categories of non-performing assets
in the Company's loan  portfolio.  Non-performing  assets  include  non-accruing
loans,  accruing  loans  delinquent  90 days or more as to principal or interest
payments and real estate  acquired  through  foreclosure,  which include  assets
acquired in settlement of loans.  Typically,  a loan becomes nonaccruing when it
is 90 days delinquent.  Accruing mortgage loans delinquent more than 90 days are
loans  that the  Company  considers  to be well  secured  and in the  process of
collection. All consumer loans more than 120 days delinquent are charged against
the consumer  loan  allowance  for loan  losses.  For the years  presented,  the
Company has had no  troubled  debt  restructurings  (which  involve  forgiving a
portion  of  interest  or  principal  on any  loans  or  making  loans at a rate
materially less than that of market rates).

                                       17

<PAGE>




<TABLE>
<CAPTION>

                                                 March 31,
                               --------------------------------------------
                               1997      1996      1995      1994      1993
                               --------------------------------------------
                                          (Dollars in Thousands)
<S>                            <C>       <C>       <C>       <C>       <C>

Non-accruing loans:
  Consumer                     $400      $---      $  3      $---      $---
  Real Estate                   103       ---       ---       ---       ---

Accruing Loans Delinquent
 More Than 90 Days:
  Residential                   ---        52       ---        15        24
  Commercial                    ---       ---       ---        23       689
  Consumer                      ---       541       ---        18       ---
Real estate acquired
 through foreclosure            173       148       350       380       500
                               ----      ----      ----      ----      ----
     Total                     $676      $741      $353      $436    $1,213
                               ====      ====      ====      ====    ======
     Total as a percentage
      of total assets           .40%      .46%      .23%      .32%      .98%
                               ====      ====      ====      ====    ======
Unallocated allowance for
  loan losses                  $783      $791      $728      $628    $  580
                               ====      ====      ====      ====    ======

</TABLE>

     At March 31, 1997,  the Company's  non-performing  assets were comprised of
two single family  residential  properties which were more than ninety days past
due, real estate acquired through  foreclosure of a single family dwelling,  two
automobiles which were repossessed and various consumer loans which includes one
loan  relationship of approximately  $388,000 for which an allowance of $195,000
has been established.  Based on current market values of the properties securing
these  loans,  management  anticipates  no  significant  losses in excess of the
reserves for losses previously recorded.

Other Loans Of Concern
----------------------

     As of March 31,  1997,  there were $1.3  million  in loans with  respect to
which known  information  about the possible credit problems of the borrowers or
the cash flows of the security  properties have caused management to have doubts
as to the ability of the borrowers to comply with present loan  repayment  terms
and which may result in the future inclusion of such items in the non-performing
asset categories.


                                       18

<PAGE>



     The $1.3  million in other loans of concern  referred to above is comprised
of two  loans.  The first has a balance  of  $734,000  and is secured by a first
mortgage  on a  combination  condominium/office  complex.  The complex has a low
occupancy  rate but is current  in  payment.  The  second  loan has a balance of
$600,000  and is secured  by a first deed of trust on land which was  originally
intended for the  construction  of a fast food  restaurant  but which is now for
sale. The loan was made to individuals with substantial  aggregate net worth and
is current in  payment.  The Company is closely  monitoring  the status of these
loans.

     Although management believes that these loans are adequately secured and no
material loss is expected,  certain  circumstances  may cause the borrower to be
unable to comply with the present loan repayment terms at some future date.

Allowance for Losses on Loans and Real Estate
---------------------------------------------

     The Company provides valuation reserves for anticipated losses on loans and
real estate when its  management  determines  that a significant  decline in the
value of the  collateral  has  occurred,  as a result  of which the value of the
collateral  is less than the amount of the unpaid  principal of the related loan
plus  estimated  costs of  acquisition  and sale. In addition,  the Company also
provides reserves based on the dollar amount and type of collateral securing its
loans, in order to protect against  unanticipated  losses.  Although  management
believes   that  it  uses  the  best   information   available   to  make   such
determinations,  future adjustments to reserves may be necessary, and net income
could be significantly  affected, if circumstances differ substantially from the
assumptions used in making the initial determinations.  During 1997, the Company
increased  its  allowance  for losses on loans by $39,000 due  primarily  to the
increase in the allowance for one borrower of $50,000 to $195,000.  At March 31,
1997,  the Company had an  allowance  for loan losses of $1.0  million  which is
predominantly a general allowance of $783,700.

                                       19

<PAGE>



     The following  table sets forth an analysis of the Company's  allowance for
loan losses.

<TABLE>
<CAPTION>

                                          Year Ended March 31,
                              ----------------------------------------------
                               1997      1996      1995      1994      1993
                              ----------------------------------------------
                                          (Dollars in Thousands)
<S>                           <C>       <C>       <C>       <C>       <C>
Balance at beginning
  of period                   $1,000    $  763    $  661    $  613    $  477
                              ------    ------    ------    ------    ------
Provision charged to
 operations                      181       307       109        74       153
                              ------    ------    ------    ------    ------
Charge-offs:
-----------
  Residential real
   estate                         59       ---       ---       ---       ---
  Consumer                       110        71         7        28        19

Recoveries:
  Consumer                        27         1       ---         2         2
                              ------    ------    ------    ------    ------
Net charge-offs                  142        70         7        26        17
                              ------    ------    ------    ------    ------
Balance at end
 of period                    $1,039    $1,000    $  763    $  661    $  613
                              ======    ======    ======    ======    ======

Ratio of net charge-
 offs during the
 period to  average
 loans outstanding
 during the period               .01%      .01%      .01%      .01%      .01%
                                 ===       ===       ===       ===       ===


</TABLE>


                                       20

<PAGE>



     The  distribution  of the  allowance  for  losses  on  loans  at the  dates
indicated is summarized as follows:

<TABLE>
<CAPTION>
                                   Commercial
                      Residential  Real Estate  Construction  Consumer    Total
                      ----------------------------------------------------------
                                         (Dollars in Thousands)
<S>                   <C>          <C>          <C>           <C>       <C>
March 31, 1997
--------------
Amount of loan loss
 allowance            $   385      $   140      $   78       $   436    $  1,039
Loan amounts by        96,968       37,508       5,204        12,243     151,923
 category
Percent of loans in
 each category to
 total loans            63.83%       24.69%       3.42%         8.06%     100.0%

March 31, 1996
--------------
Amount of loan loss
 allowance            $   381      $   242      $   83       $   294    $  1,000
 Loan amounts by
 category              91,212       38,433       6,415         8,905     144,965
Percent of loans in
 each category to
 total loans             62.9%        26.5%        4.5%          6.1%     100.0%

March 31, 1995
--------------
Amount of loan loss
 allowance            $   216      $   374      $   72       $   101    $    763
Loan amounts by
 category              86,331       39,667       4,336         6,928     137,262
Percent of loans in
 each category to
 total loans             62.9%        28.9%        3.2%          5.0%     100.0%

March 31, 1994
--------------
Amount of loan loss
 allowance            $   193      $   408      $   23       $    79    $    703
Loan amounts by
 category              77,583       41,046       2,992         4,182     125,803
Percent of loans in
 each category to
 total loans             61.7%        32.6%        2.4%          3.3%     100.0%

March 31, 1993
--------------
Amount of loan loss
 allowance            $   180      $   364      $   36       $    75    $    655
Loan amounts by
 category              70,904       36,839       2,407         3,384     113,534
Percent of loans in
 each category to
 total loans             62.5%        32.4%        2.1%          3.0%     100.0%
</TABLE>

                                       21

<PAGE>



Subsidiary Activities
---------------------

     The Bank has not  established  any service  corporation  subsidiaries as of
March 31, 1997.

Investment Activities
---------------------

     Federal  thrift  institutions  have authority to invest in various types of
liquid assets,  including U.S.  Treasury  obligations  and securities of various
federal  agencies,  certificates  of deposit at insured  institutions,  bankers'
acceptances and federal funds.

     Federal  thrift  institutions  may also invest a portion of their assets in
certain   commercial  paper  and  corporate  debt  securities.   Federal  thrift
institutions  are also authorized to invest in mutual funds whose assets conform
to the  investments  that a federal  thrift  institution  is  authorized to make
directly. There are, however, various restrictions on the foregoing investments.

     As a member of the FHLB System, Community Bank must maintain minimum levels
of investments  that are liquid assets as specified by the OTS. See  "Regulation
-Liquidating."   Liquidity   may  increase  or  decrease   depending   upon  the
availability of funds and  comparative  yields on investments in relation to the
return on loans. See "Regulation - Liquidity."

     Historically,  the Bank has  maintained its liquid assets above the minimum
requirements  imposed by federal regulations and at a level believed adequate to
meet  requirements  of normal daily  activities,  repayment of maturing debt and
potential  deposit  outflows.  Cash flow projections are regularly  reviewed and
updated to assure that adequate liquidity is provided. As of March 31, 1997, the
Bank's  liquidity  ratio  (liquid  assets as a  percentage  of net  withdrawable
savings and current borrowings) was 7.2%. See "Regulation Federal Home Loan Bank
System."


                                       22

<PAGE>



     The  contractual  maturities and weighted  average yields of the investment
securities  portfolio,  excluding  FHLB of Atlanta stock and FHLMC common stock,
are indicated in the following table.

<TABLE>
<CAPTION>

                                       March 31, 1997
                      --------------------------------------------------
                        Within      1 to 5         Total Investment
                        1 Year       Years            Securities
                      ----------  ----------   -------------------------
                      Book Value  Book Value   Book Value   Market Value
                      ----------  ----------   ----------   ------------
                                  (Dollars in Thousands)
<S>                  <C>          <C>         <C>            <C>

Federal agency
 obligations          $ 1,500     $  3,376     $  4,876     $  4,856
Floating-rate notes
 and commercial
 paper                   ---           321          321          321
                       ------      -------     --------      -------
Total investment
 securities           $ 1,500      $ 3,697      $ 5,197     $  5,177
                       ======      =======      =======     ========
Weighted average
 yield                   7.49%        6.30%        6.64%        6.67%
                         ====         ====         ====         ====



</TABLE>

                                       23

<PAGE>



     The following table sets forth the composition of the Company's  investment
portfolio at the dates indicated.

<TABLE>
<CAPTION>

                                    March 31,
                        ----------------------------------------------
                            1997            1996            1995
                        ----------------------------------------------
                         Book    % of    Book    % of    Book     % of
                         Value   Total   Value   Total   Value   Total
                         -----   -----   -----   -----   -----   -----
                                    (Dollars in Thousands)
<S>                     <C>     <C>     <C>      <C>     <C>     <C>

Interest-bearing
 deposits with
 banks                   $1,015  100.0%   $1,147  100.0%  $2,166  100.0%
Federal funds sold                          ---    ---      ---    ---
                         ------  -----    ------   -----  ------  -----
     Total               $1,015  100.0%   $1,147  100.0%  $2,166  100.0%
                         ======  =====    ======   =====  ======  =====
Investment securities:
 U.S. government
  securities             $  ---   ---%   $  ---   --- %  $1,245    22.3%
 Federal agency
  obligations             4,876   55.2    5,749   62.7    2,498    44.6
 Floating-rate notes
  and commercial
  paper                     321    3.6      319    3.5      525     9.4
  FHLMC common
   stock                  2,243   25.4    1,754   19.1      525     1.4
                          -----  -----    -----   -----    -----  -----
     Subtotal             7,440   84.2    7,822   85.3    4,793    77.7

FHLB stock                1,400   15.8    1,350   14.7    1,250    22.3
                          -----  -----    -----   -----    -----  -----
     Total investment
      securities and
      FHLB stock         $8,840  100.0%  $9,172  100.0%  $6,043   100.0%
                         ======  =====   ======  =====   ======   =====
Average remaining life 
  or term to repricing,
  excluding FHLMC common
  stock, FHLB stock and
  other marketable
  equity securities     2 years         2 years          1 year


</TABLE>

     During  fiscal 1997 the market  rates paid on  investment  securities  were
relatively stable. During fiscal 1997 the Company invested primarily in

                                       24

<PAGE>



federal agency securities with maturities of one to five years some of which are
callable within three months to two years from date of purchase.

Sources of Funds
----------------

     General.  Deposit accounts have  traditionally been the principal source of
the Company's funds for use in lending and for other general business  purposes.
In addition to deposits,  the Company derives funds from loan  repayments,  cash
flows generated from  operations,  which includes  interest  credited to deposit
accounts,  repurchase  agreements entered into with commercial banks and FHLB of
Atlanta advances.

     Contractual  loan payments are a relatively  stable source of funds,  while
deposit  inflows and  outflows  and the  related  cost of such funds have varied
widely.  Borrowings  may  be  used  on a  short-term  basis  to  compensate  for
reductions in deposits or deposit inflows at less than projected  levels and may
be used on a longer-term basis to support expanded lending activities.

     Deposits.  The Company attracts both short-term and long-term deposits from
the general  public by offering a wide  assortment  of accounts  and rates.  The
Company has been required by market  conditions  to rely on short-term  accounts
and other deposit alternatives that are more responsive to market interest rates
than the passbook accounts and fixed interest rate, fixed-term certificates that
were the Company's  primary  source of deposits in the past.  The Company offers
regular passbook  accounts,  checking  accounts,  various money market accounts,
fixed-rate  certificates  with  varying  maturities,  $100,000  or  above  jumbo
certificates  of deposit  and  individual  retirement  accounts.  Certain of the
Company's  jumbo  certificates  which have matured revert to a passbook rate and
are reflected in the tables as passbook  accounts.  The Company does not solicit
brokered deposits.

                                       25

<PAGE>



     The following table sets forth the dollar amount of savings deposits in the
various  types  of  deposit  programs  offered  by the  Company  at the  periods
indicated.

<TABLE>
OPTION>                                             At March 31,
                                          ----------------------------
                                            1997      1996      1995
                                          --------  --------  --------
                                                  (In Thousands)
<S>                                      <C>       <C>       <C>
Passbook and statement accounts           $12,578   $ 12,179  $ 12,170
NOW and Super NOW accounts                 15,576     13,583    12,380
Money market accounts                       9,935     10,232    11,620
One- to five-year fixed-rate
 certificates                              73,817     66,649    62,019
Six-month money market certificates         4,059      6,403     6,295
Jumbo certificates                            614        435       500
91-day certificates                            16         21        30
                                          --------  --------  --------
     Total                               $116,595   $109,502  $105,014
                                          ========  ========  ========
</TABLE>

     The  following  table sets forth the change in the dollar amount of savings
deposits in the various types of deposit programs offered by the Company for the
periods indicated.

<TABLE>
<CAPTION>

                                               Year Ended March 31,
                                          ----------------------------
                                            1997      1996      1995
                                          --------- --------- --------
                                                  (In Thousands)
<S>                                      <C>       <C>       <C>

Passbook and statement accounts           $   399   $      9   $(1,805)
NOW and Super NOW accounts                  1,993      1,203       978
Money market accounts                        (297)    (1,388)   (7,331)
One-to five-year fixed-rate
 certificates                               7,168      4,630    12,886
Six-month money market certificates        (2,344)       108    (2,165)
Jumbo certificates                            179        (65)      230
91-day certificates                            (5)        (9)      (62)
                                          --------    -------   -------
     Total increase                       $ 7,093   $  4,488   $ 2,731
                                          ========    =======   =======

</TABLE>

                                       26


<PAGE>



     The following table contains  information  pertaining to the average amount
of and the average rate paid on each of the following deposit categories for the
periods indicated.

<TABLE>
<CAPTION>

                                       Year Ended March 31,
                      -------------------------------------------------------
                            1997               1996               1995
                      -----------------   ----------------  -----------------
                                Average            Average            Average
                      Average    Rate     Average   Rate    Average     Rate
                      Balance    Paid     Balance   Paid    Balance     Paid
                      -------   -------   -------  -------  -------   -------
                                      (Dollars in Thousands)
<S>                  <C>        <C>      <C>       <C>     <C>          <C>

Deposit Category
----------------
Noninterest bearing
 demand deposits       $ 2,145    ---%    $  2,653     ---% $  1,754     ---%
Interest bearing
 demand deposits        21,412   3.03       20,486    3.05    28,877     3.08
Savings deposits        12,063   2.98       11,808    3.00    13,230     2.99
Time deposits           75,687   5.34       72,934    5.48    61,434     4.52
                      --------            --------           -------
Total deposits        $111,307   4.54%    $107,881    4.61% $105,295     3.84%
                      ========            ========           ========


</TABLE>

     The variety of deposit accounts offered by the Company has allowed it to be
competitive  in obtaining  funds and has allowed it to respond with  flexibility
(by  paying  rates  of  interest  more  closely  approximating  market  rates of
interest) to, although not eliminate the threat of,  disintermediation (the flow
of funds  away from  depository  institution  such as thrift  institutions  into
direct  investment  vehicles such as government  and corporate  securities).  In
addition, the Company has become much more subject to short-term fluctuations in
deposit  flows,  as customers  have become more  interest  rate  conscious.  The
ability of the Company to attract and maintain deposits,  and its cost of funds,
has been,  and will  continue  to be,  significantly  affected  by money  market
conditions.

                                       27

<PAGE>



     The following  table sets forth the deposit flows of the Company during the
periods indicated.

<TABLE>
<CAPTION>

                                            Year Ended March 31,
                                     ---------------------------------
                                       1997        1996        1995
                                     ---------    --------    --------
                                           (Dollars in Thousands)
<S>                                 <C>          <C>         <C>

Opening balance                     $109,502     $105,014    $102,283
Net deposits (withdrawals)             2,983         (248)       (856)
Interest credited                      4,110        4,736       3,587
                                    --------     --------    --------
Ending balance                      $116,595     $109,502    $105,014
                                    --------     --------    --------
Net increase                        $  7,411     $  4,488    $  2,731
                                    --------     --------    --------
Percent increase                        6.77%        4.27%       2.67%
                                        ====         ====        ====

</TABLE>

  In prior years,  the Company has had a savings deposit outflow before interest
credited due to a pricing  policy  attributable  to  management's  decision that
additional  savings deposits were not needed during those periods and borrowings
were  available at a lower  overall cost to the Company.  During the fiscal year
ended  March 31,  1997 the  Company  increased  marketing  efforts  and was more
competitive  in regard to rates which  contributed  to the increase in deposits.
The Company  experienced  an increase  in both demand and time  deposits  during
fiscal  March 31,  1997.  To the extent  that the Company may rely on sources of
funds other than deposits, the Company's earnings may be adversely affected. The
Company  may  use  borrowings  as  an  alternative   source  of  funds.  See  "-
Borrowings."

                                       28

<PAGE>



     The following table shows rate  information for the Company's  certificates
of deposit as indicated.

<TABLE>
<CAPTION>
                 2.00-      3.00-     5.00-      6.01-      7.01-     8.01-
                 3.00%      5.00%     6.00%      7.00%      8.00%     9.00%    Total
------------------------------------------------------------------------------------
                                      (Dollars in Thousands)
<S>             <C>       <C>       <C>       <C>       <C>       <C>       <C>

March 31, 1997   $ 68      $17,980   $52,466   $ 7,992   $   ---   $   ---   $78,506
March 31, 1996    159       15,948    40,512    16,572       317       ---    73,508
March 31, 1995    166       31,241    27,050     8,351     1,615       419    68,842

</TABLE>

     The following table  indicates the amount of the Company's  certificates of
deposit by time remaining until maturity as of March 31, 1997.

<TABLE>
<CAPTION>
                                               Maturity
                           3 Months    Over     Over       Over
                              or      3 to 6   6 to 12      12
                             less     Months    Months    Months     Total
                           --------  --------  ---------  ------   ---------
                                          (Dollars in Thousands)
<S>                       <C>       <C>       <C>       <C>       <C>
Certificates of deposit
 less than $100,000        $11,701  $16,655    $25,706   $17,850   $71,912

Certificates of deposit
 of $100,000 or more.          627    1,838      2,245     1,884     6,594
                           -------   ------    -------   -------   -------
    Total certificates
      of deposit           $12,328  $18,493    $27,951   $19,734   $78,506
                           =======   ======    =======   =======   =======
</TABLE>

Borrowings
----------

     As a member of the FHLB of Atlanta,  the Company is required to own capital
stock in the FHLB of Atlanta and is  authorized  to apply for advances  from the
FHLB of Atlanta.  Each FHLB credit program has its own interest rate,  which may
be fixed or variable, and range of maturities. The FHLB of Atlanta may prescribe
the  acceptable  uses to which these advances may be put, as well as limitations
on the size of the advances and repayment provisions. See Note 6 of the Notes to
Consolidated  Financial  Statements  contained in Part II, Item 7 of this report
for  information  regarding the  maturities  and rate structure of the Company's
FHLB advances.


                                       29

<PAGE>



     The Company's  borrowings,  from time to time, also include securities sold
under  agreements  to  repurchase,  with  mortgage-backed  securities  or  other
securities  pledged as collateral.  The proceeds are utilized by the Company for
general  corporate  purposes.  At March 31, 1997,  the Company had no securities
sold under agreements to repurchase.

     The Company generally utilizes  borrowings to supplement deposits when they
are  available at a lower overall cost to the Company or they can be invested at
a positive rate of return.

     The following table sets forth the maximum month-end  balance,  and average
balance and weighted average rate, of FHLB advances for the periods indicated.

<TABLE>
<CAPTION>

                                       Year Ended March 31,
                           ---------------------------------------------
                                1997            1996           1995
                           --------------  -------------  --------------
                                          (In Thousands)
<S>                        <C>             <C>            <C>

Maximum Balance:
FHLB                       $28,000         $27,000        $25,000

                           Amount    Rate  Amount   Rate  Amount   Rate
                           ------    ----  ------   ----  ------   ----
Average Balance:
FHLB advances              $26,542    5.6% $25,347   6.1%  $20,121  4.8%

</TABLE>

     The following table sets forth  information as to the Company's  borrowings
and the weighted  average  interest  rate paid on such  borrowings  at the dates
indicated.

<TABLE>
<CAPTION>
                                              At March 31,
                                       -------------------------
                                        1997     1996      1995
                                       ------   ------    ------
                                        (Dollars in Thousands)
<S>                                   <C>      <C>      <C>

FHLB advances                          $26,000  $27,000  $25,000
                                       -------  -------  -------
     Total borrowings                  $26,000  $27,000  $25,000
                                       =======  =======  =======

Weighted average interest
 rate of FHLB advances                   6.85%    5.88%    6.31%

</TABLE>

                                       30

<PAGE>



Competition
-----------

     Community faces strong  competition  both in originating  real estate loans
and in attracting  deposits.  Competition in originating real estate loans comes
primarily from other thrift institutions,  commercial banks and mortgage bankers
who also make loans secured by real estate located in the Company's market area.
The Company  competes  for real  estate  loans  principally  on the basis of the
interest  rates and loan fees it charges,  the types of loans it originates  and
the quality of services it provides to borrowers.

     The Company faces substantial competition in attracting deposits from other
thrift  institutions,  commercial banks,  money market and mutual funds,  credit
unions and other investment vehicles.  The ability of the Company to attract and
retain deposits depends on its ability to provide an investment opportunity that
satisfies the  requirements of investors as to rate of return,  liquidity,  risk
and other factors. The Company competes for these deposits by offering a variety
of deposit accounts at competitive rates and convenient business hours.

     The  authority to offer money  market  deposits,  and expanded  lending and
other powers  authorized for thrift  institutions by federal  legislation,  have
resulted in increased  competition  for both deposits and loans  between  thrift
institutions and other financial institutions such as commercial banks.

     The Company  considers its primary  market for savings to be Augusta County
and for mortgage loans to be Augusta and Rockingham Counties. At March 31, 1997,
there was one thrift institution and twelve commercial banks with offices in the
Company's  two-county primary market area. The Company estimates that its market
share of savings deposits in Augusta County is  approximately  10% and its share
of mortgage  loans in Augusta  and  Rockingham  Counties  is less than 10%.  The
opening of an office by the Bank in April, 1997 in Virginia Beach, Virginia will
expand the Bank's  market  area to the  Hampton  Roads area of  Virginia  in the
fiscal year March 31, 1998.


Regulation
----------

     General. Community Bank is a federally chartered financial institution, the
deposits of which are federally  insured and backed by the full faith and credit
of the United States Government. Accordingly, Community Bank is subject to broad
federal regulation and oversight extending to all its operations.  The Bank is a
member of the FHLB of Atlanta and is subject to certain  limited  regulation  by
the Board of Governors of the Federal Reserve System ("Federal  Reserve Board").
As the savings and loan holding  company of Community  Bank, the Company also is
subject to federal  regulation and  oversight.  The purpose of the regulation of
the  Company  and other  holding  companies  is to  protect  subsidiary  savings
associations.  Community Bank is a member of the Savings  Association  Insurance
Fund ("SAIF")  which  together with the Bank  Insurance Fund (the "BIF") are the
two  deposit  insurance  funds  administered  by the FDIC,  and the  deposits of
Community  Bank are  insured  by the  FDIC.  As a result,  the FDIC has  certain
regulatory and examination authority over the Bank.


                                       31

<PAGE>



     Certain of these  regulatory  requirements  and  restrictions are discussed
below or elsewhere in this document.

     Federal Regulation of Savings Associations. The OTS has extensive authority
over  the  operations  of  savings  associations.  As part  of  this  authority,
Community  is required to file  periodic  reports with the OTS and is subject to
periodic  examinations  by the OTS and the FDIC.  When  these  examinations  are
conducted  by the OTS and the FDIC,  the  examiners  may  require the Company to
provide for higher general or specific loan loss reserves.  The last regular OTS
examination  of Community  was in April,  1996 and the examiners did not require
the Company to provide for higher general or specific loan loss reserves.

     All savings  associations  are subject to a semi-annual  assessment,  based
upon the savings  association's total assets, to fund the operations of the OTS.
The  Company's  OTS  assessment  for the fiscal year ended March 31,  1997,  was
$51,197.

     The  OTS  also  has  extensive   enforcement  authority  over  all  savings
institutions  and their  holding  companies,  including  Community  Bank and the
Company. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders and to
initiate  injunctive  actions.  In  general,  these  enforcement  actions may be
initiated  for  violations  of  laws  and  regulations  and  unsafe  or  unsound
practices.  Other  actions or  inactions  may provide the basis for  enforcement
action,  including  misleading or untimely  reports  filed with the OTS.  Except
under certain  circumstances,  public disclosure of final enforcement actions by
the OTS is required.

     In addition, the investment, lending and branching authority of the Bank is
prescribed by federal laws, and it is prohibited from engaging in any activities
not permitted by such laws. For instance,  no savings  institution may invest in
non-investment  grade corporate debt  securities.  In addition,  the permissible
level of investment by federal  associations in loans secured by non-residential
real property may not exceed 400% of total capital,  except with approval of the
OTS.  Federal  savings  associations  are also  generally  authorized  to branch
nationwide. Community is in compliance with the noted restrictions.

     The Company's general permissible  lending limit for  loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired  capital and surplus of
the  Bank  (except  for  loans  fully  secured  by  certain  readily  marketable
collateral,  in which case this limit is increased to 25% of unimpaired  capital
and  surplus).  At March 31,  1997,  the  Company's  lending  limit  under  this
restriction was $3.0 million.

     The  OTS,  as well as the  other  federal  banking  agencies,  has  adopted
guidelines  establishing  safety and soundness standards on such matters as loan
underwriting and  documentation,  asset quality,  earnings  standards,  internal
controls and audit  systems,  interest rate risk exposure and  compensation  and
other  employee  benefits.  Any  institution  which  fails to comply  with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an  approved  plan will  subject  the  institution  to further  enforcement
action. The OTS and other federal banking agencies have also proposed additional
guidelines on asset quality and earnings standards. No

                                       32

<PAGE>



assurance can be given as to whether or in what form  the  proposed  regulations
will be adopted.

     Insurance  of Accounts  and  Regulation  by the FDIC.  Community  Bank is a
member of the SAIF,  which is administered by the FDIC.  Deposits are insured up
to applicable  limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance  premiums and is authorized to conduct  examinations of and to require
reporting by FDIC-insured institutions.  Deposit insurance premiums are assessed
based upon the  institution's  risk  classification,  which is a function of its
capital  level and  supervisory  rating.  It also may prohibit any  FDIC-insured
institution  from engaging in any activity the FDIC  determines by regulation or
order  to pose a  serious  risk to the SAIF or the  BIF.  The FDIC  also has the
authority to initiate  enforcement actions against savings  associations,  after
giving the OTS an opportunity to take such action, and may terminate the deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices, or is in an unsafe or unsound condition.

     The FDIC's  deposit  insurance  premiums are assessed  through a risk-based
system,  under which all insured depository  institutions are placed into one of
nine  categories  and  assessed  insurance  premiums,  based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to  risk-weighted  assets  ("Tier 1  risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based  capital  ratio  of less  than  8%)  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.

     The FDIC is authorized to increase assessment rates, on a semiannual basis,
if it  determines  that the  reserve  ratio of the  SAIF  will be less  than the
designated  reserve  ratio of 1.25% of SAIF insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC.  The FDIC may also impose  special  assessments  on SAIF  members to repay
amounts  borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

     As is the case  with  the  SAIF,  the  FDIC is  authorized  to  adjust  the
insurance  premium  rates for banks  that are  insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory reserve ratio the FDIC revised the
premium schedule for BIF insured institutions. The SAIF rates, however, were not
adjusted.  At the time the FDIC revised the BIF premium schedule, it noted that,
absent  legislative  action (as discussed  below),the  SAIF would not attain its
designated reserve ratio until the year 2002. As a result,  SAIF insured members
would continue to be generally subject to higher deposit insurance premiums than
BIF insured  institutions  until,  all things being equal, the SAIF attained its
required reserve ratio.


                                       33

<PAGE>



     In order to  eliminate  this  disparity  and any  competitive  disadvantage
between  BIF and SAIF  member  institutions  with  respect to deposit  insurance
premiums,  legislation to  recapitalize  the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates as of March 31, 1995,  in order to  recapitalize  the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if  no  savings  associations  then  exist.  The  special  assessment  rate  was
established  at .657% of deposits  (as of March 31,  1995)  insured by the FDIC,
which  resulted in an assessment of $670,765  being paid by the Bank in November
1996. This special assessment  significantly  increased  noninterest expense and
adversely  affected Bank's and the Company's  results of operations for the year
ended March 31, 1997. As a result of the special assessment,  the Bank's deposit
insurance   premiums   was  reduced  to  zero  based  upon  its   current   risk
classification  and the new assessment  schedule for SAIF insured  institutions.
These premiums are subject to change in future periods.

     Prior to the enactment of the legislation, a portion of the SAIF assessment
imposed  on  savings  associations  was used to repay  obligations  issued  by a
federally chartered  corporation to provide financing ("FICO") for resolving the
thrift  crisis  in the  1980s.  Although  the  FDIC has  proposed  that the SAIF
assessment be equalized with the BIF assessment  schedule,  effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing  obligation.  Although the  legislation  also now
requires  assessments  to be made on  BIF-assessable  deposits for this purpose,
effective  January 1, 1997,  that  assessment will be limited to 20% of the rate
imposed on SAIF  assessable  deposits  until the earlier of December 31, 1999 or
when no  savings  association  continues  to exist,  thereby  imposing a greater
burden  on SAIF  member  institutions  such as the  Bank.  Thereafter,  however,
assessments  on  BIF-member  institutions  will  be made on the  same  basis  as
SAIF-member  institutions.  The rates  established by the FDIC to implement this
requirement for all FDIC-insured institutions are a 6.48 basis points assessment
on SAIF  deposits  and 1.3  basis  points  on BIF  deposits  until  BIF  insured
institutions participate fully in the assessment.

     Regulatory Capital  Requirements.  Federally insured savings  associations,
such as the  Bank,  are  required  to  maintain  a minimum  level of  regulatory
capital. The OTS has established capital standards, including a tangible capital
requirement,  a leverage  ratio (or core capital)  requirement  and a risk-based
capital  requirement  applicable  to such savings  associations.  These  capital
requirements   must  be  generally  as  stringent  as  the  comparable   capital
requirements  for national  banks.  The OTS is also authorized to impose capital
requirements  in excess  of these  standards  on  individual  associations  on a
case-by-case basis. See Note 8 of the Notes to Consolidated Financial Statements
contained  in Part II,  Item 7 of this  report  for  information  on the  Bank's
regulatory capital levels and applicable OTS requirements.

     The OTS and the  FDIC  are  authorized  and,  under  certain  circumstances
required, to take certain actions against savings associations that fail to meet
their  capital  requirements.  The OTS is  generally  required to take action to
restrict the activities of an "undercapitalized  association" (generally defined
to be  one  with  less  than  either  a 4%  core  capital  ratio,  a 4%  Tier  1
risked-based  capital  ratio  or an  8%  risk-based  capital  ratio).  Any  such
association  must  submit a  capital  restoration  plan and  until  such plan is
approved by the OTS may not increase its assets,  acquire  another  institution,
establish a branch or engage in any new activities,  and  generally may not make

                                       34

<PAGE>



capital   distributions.   The  OTS  is  authorized  to  impose  the  additional
restrictions that are applicable to significantly undercapitalized associations.

     As a condition to the approval of the capital restoration plan, any company
controlling an undercapitalized association must agree that it will enter into a
limited  capital  maintenance   guarantee  with  respect  to  the  institution's
achievement of its capital requirements.

     Any savings  association  that fails to comply with its capital  plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less  than 3% or a  risk-based  capital  ratio of less  than 6%) must be made
subject  to  one  or  more  of  additional   specified   actions  and  operating
restrictions  which may cover all aspects of its operations and include a forced
merger or acquisition of the association.

     An association that becomes "critically undercapitalized" (i.e., a tangible
capital ratio of 2% or less) is subject to further mandatory restrictions on its
activities  in addition to those  applicable to  significantly  undercapitalized
associations.  In addition, the OTS must appoint a receiver (or conservator with
the  concurrence of the FDIC) for a savings  association,  with certain  limited
exceptions, within 90 days after it becomes critically undercapitalized.

     Any undercapitalized association is also subject to the general enforcement
authority of the OTS and the FDIC, including the appointment of a conservator or
a receiver.

     The OTS is also generally  authorized to reclassify an  association  into a
lower capital category and impose the  restrictions  applicable to such category
if the institution is engaged in unsafe or unsound  practices or is in an unsafe
or unsound condition.

     The  imposition  by the OTS or the  FDIC of any of  these  measures  on the
Company may have a substantial  adverse  effect on the Company's  operations and
profitability  and the value of its Common Stock.  Company  shareholders  do not
have preemptive rights, and therefore,  if the Company is directed by the OTS or
the FDIC to issue additional shares of Common Stock, such issuance may result in
the dilution in the percentage of ownership of the Company by stockholders.

     Limitations on Dividends and Other Capital  Distributions.  OTS regulations
impose  various  restrictions  on  savings  associations  with  respect to their
ability  to make  distributions  of  capital,  which  include  dividends,  stock
redemptions or repurchases,  cash-out mergers and other transactions  charged to
the capital account.  OTS regulations  also prohibit a savings  association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result,  the regulatory  capital of the  association  would be reduced below the
amount  required to be maintained  for the  liquidation  account  established in
connection with its mutual to stock conversion.

     Generally,  savings  associations,  such as Community that before and after
the proposed  distribution  meet their  capital  requirements,  may make capital
distributions  during  any  calendar  year  equal to the  greater of 100% of net
income for the year-to-date plus 50% of the amount by which the lesser of the

                                       35

<PAGE>



association's   tangible,   core  or  risk-based  capital  exceeds  its  capital
requirement  for such  capital  component,  as measured at the  beginning of the
calendar  year,  or 75% of their net income  for the most  recent  four  quarter
period.  However,  an  association  deemed  to be in need of  more  than  normal
supervision  by the OTS may have its dividend  authority  restricted by the OTS.
Community may pay dividends in accordance with this general authority.

     Savings  associations  proposing to make any capital distribution need only
submit  written  notice to the OTS 30 days prior to such  distribution.  Savings
associations  that do not,  or would  not meet  their  current  minimum  capital
requirements following a proposed capital distribution, however, must obtain OTS
approval  prior  to  making  such  distribution.  The  OTS  may  object  to  the
distribution  during that 30-day  period  notice  based on safety and  soundness
concerns.

     The OTS has  proposed  regulations  that would  revise the current  capital
distribution  restrictions.  Under the proposal a savings association may make a
capital  distribution  without notice to the OTS (unless it is a subsidiary of a
holding  company)  provided  that  it  has a  CAMEL  1 or 2  rating,  is  not of
supervisory  concern and would remain adequately  capitalized (as defined in the
OTS prompt corrective action regulations)  following the proposed  distribution.
Savings  associations  that would remain  adequately  capitalized  following the
proposed  distribution but do not meet the other noted  requirements must notify
the OTS 30 days prior to  declaring  a capital  distribution.  The OTS stated it
will generally regard as permissible that amount of capital  distributions  that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings  association  may not make a capital
distribution  without  prior  approval  of  the  OTS  and  the  FDIC  if  it  is
undercapitalized  before,  or as a result of, such a distribution.  As under the
current  rule,  the  OTS  may  object  to a  capital  distribution  if it  would
constitute  an unsafe  or  unsound  practice.  No  assurance  may be given as to
whether or in what form the regulations may be adopted.

     Liquidity.  All savings associations,  including Community, are required to
maintain an average daily balance of liquid assets equal to a certain percentage
of the sum of its average daily balance of net withdrawable deposit accounts and
borrowings  payable in one year or less.  For a  discussion  of what the Company
includes  in  liquid  assets,  see  "Management's  Discussion  and  Analysis  of
Financial Condition and Results of  Operations-Liquidity  and Capital Resources"
contained in Part II, Item 6 of this report.

     Qualified Thrift Lender Test. All savings associations, including Community
Bank,  are  required to meet a qualified  thrift  lender  ("QTL")  test to avoid
certain  restrictions  on  their  operations.   This  test  requires  a  savings
association  to have  at  least  65% of its  portfolio  assets  (as  defined  by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative,  the savings  association
may maintain 60% of its assets in those assets specified in Section  7701(a)(19)
of the Internal Revenue Code.  Under either test, such assets primarily  consist
of  residential  housing  related  loans and  investments.  At March  31,  1997,
Community Bank met the test and has always met the test since its effectiveness.

     Any savings  association  that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a

                                       36

<PAGE>



QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  If such an  association  has not yet  requalified  or  converted  to a
national  bank,  its  new  investments  and  activities  are  limited  to  those
permissible  for both a  savings  association  and a  national  bank,  and it is
limited to national bank branching  rights in its home state.  In addition,  the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. At March 31, 1997, Community Bank met the test and has always met the
test since its effectiveness. See "- Holding Company Regulation."

     Community  Reinvestment Act. Under the Community  Reinvestment Act ("CRA"),
every FDIC insured  institution  has a  continuing  and  affirmative  obligation
consistent  with safe and sound banking  practices to help meet the credit needs
of its entire community,  including low and moderate income  neighborhoods.  The
CRA does not establish  specific lending  requirements or programs for financial
institutions nor does it limit an institution's  discretion to develop the types
of products  and  services  that it believes  are best suited to its  particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of the Bank, to assess the  institution's  record of meeting the
credit  needs of its  community  and to take such  record  into  account  in its
evaluation of certain  applications,  such as a merger or the establishment of a
branch, by the Bank. An  unsatisfactory  rating may be used as the basis for the
denial of an application by the OTS.

     The federal banking agencies,  including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's  compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years,  the Bank may be required to devote  additional  funds for investment
and lending in its local community.  The Bank was examined for CRA compliance in
October, 1996 and received a rating of "Satisfactory".

     Transactions  with Affiliates.  Generally,  transactions  between a savings
association or its  subsidiaries  and its affiliates are required to be on terms
as  favorable  to  the  association  as  transactions  with  non-affiliates.  In
addition,  certain of these  transactions,  such as loans to an  affiliate,  are
restricted to a percentage of the association's capital. Affiliates of Community
Bank include the Company and any company which is under common  control with the
Bank. In addition,  a savings  association may not lend to any affiliate engaged
in  activities  not  permissible  for a bank  holding  company  or  acquire  the
securities  of  most  affiliates.   The  Bank's   subsidiaries  are  not  deemed
affiliates, however; the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.

     Certain  transactions with directors,  officers or controlling  persons are
also  subject to  conflict of interest  regulations  enforced by the OTS.  These
conflict of interest regulations and other statutes also impose restrictions

                                       37

<PAGE>



on loans to such persons and their related interests.  Among other things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.

     Holding  Company  Regulation.  The  Company is a unitary  savings  and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is  required  to  register  and  file  reports  with the OTS and is  subject  to
regulation  and  examination  by the OTS. In addition,  the OTS has  enforcement
authority over the Company and its non-savings  association  subsidiaries  which
also permits the OTS to restrict or prohibit  activities  that are determined to
be a serious risk to the subsidiary savings association.

     As a unitary savings and loan holding company, the Company generally is not
subject to activity  restrictions.  If the Company  acquires  control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan  holding  company,  and the  activities  of the  Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such  restrictions  unless such other  associations each
qualify as a QTL and were acquired in a supervisory acquisition.

     If the Bank fails the QTL test, the Company must obtain the approval of the
OTS prior to  continuing  after such  failure,  directly  or  through  its other
subsidiaries,  any  business  activity  other than those  approved  for multiple
savings and loan holding companies or their  subsidiaries.  In addition,  within
one year of such failure the Company must  register as, and will become  subject
to, the  restrictions  applicable  to bank  holding  companies.  The  activities
authorized  for a bank holding  company are more limited than are the activities
authorized  for a unitary or multiple  savings  and loan  holding  company.  See
"--Qualified Thrift Lender Test."

     The Company must obtain approval from the OTS before  acquiring  control of
any other SAIF-insured  association.  Such acquisitions are generally prohibited
if they  result in a  multiple  savings  and loan  holding  company  controlling
savings  associations  in  more  than  one  state.   However,   such  interstate
acquisitions  are  permitted  based  on  specific  state  authorization  or in a
supervisory acquisition of a failing savings association.

         Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities  Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information,  proxy solicitation,  insider trading
restrictions and other requirements of the SEC under the Exchange Act.

     Company  stock  held by persons  who are  affiliates  (generally  officers,
directors and principal  stockholders)  of the Company may not be resold without
registration or unless sold in accordance with certain resale  restrictions.  If
the Company  meets  specified  current  public  information  requirements,  each
affiliate  of the  Company  is  able  to  sell  in the  public  market,  without
registration, a limited number of shares in any three-month period.


                                       38

<PAGE>



Federal and State Taxation
--------------------------

     Federal Taxation.  Savings  associations such as the Bank that meet certain
definitional  tests relating to the  composition of assets and other  conditions
prescribed by the Internal  Revenue Code of 1986,  as amended (the "Code"),  had
been permitted to establish  reserves for bad debts and to make annual additions
thereto which could, within specified formula limits, be taken as a deduction in
computing taxable income for federal income tax purposes.  The amount of the bad
debt  reserve  deduction  for  "non-qualifying  loans"  was  computed  under the
experience  method. The amount of the bad debt reserve deduction for "qualifying
real property loans"  (generally loans secured by improved real estate) could be
computed under either the experience  method or the percentage of taxable income
method (based on an annual election).

     Under the experience  method,  the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.

     The  percentage  of  specially  computed  taxable  income  that was used to
compute a savings  association's bad debt reserve deduction under the percentage
of taxable  income  method (the  "percentage  bad debt  deduction")  was 8%. The
percentage bad debt deduction thus computed was reduced by the amount  permitted
as a  deduction  for  non-qualifying  loans  under the  experience  method.  The
availability  of the  percentage of taxable income method  permitted  qualifying
savings  associations to be taxed at a lower  effective  federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction).

     Under the  percentage of taxable  income  method,  the  percentage bad debt
deduction  cannot  exceed the amount  necessary  to increase  the balance in the
reserve for  "qualifying  real property  loans" to an amount equal to 6% of such
loans  outstanding  at the end of the  taxable  year or the  greater  of (i) the
amount  deductible  under the  experience  method or (ii) the amount  which when
added to the bad debt deduction for "non-qualifying  loans" equals the amount by
which 12% of the amount comprising  savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year.

     In August 1996,  legislation  was enacted that repeals the  above-described
reserve method of accounting (including the percentage of taxable income method)
used by many thrift institutions to calculate their bad debt reserve for federal
income tax  purposes.  Thrift  institutions  with $500 million or less in assets
may, however,  continue to use the experience method. As a result, the Bank must
recapture  that  portion of the reserve  that exceeds the amount that could have
been taken under the  experience  method for post-1987  tax years.  At March 31,
1997, the Bank's post-1987 excess reserves amounted to approximately $1,248,000.
The recapture will occur over a six-year period,  the commencement of which will
be delayed  until the first  taxable  year  beginning  after  December 31, 1997,
provided the institution meets certain  residential  lending  requirements.  The
legislation  also  requires  thrift  institutions  to account  for bad debts for
federal income tax purposes on the same basis as commercial  banks for tax years
beginning after December 31, 1995.


                                       39

<PAGE>



     In addition to the regular  income  tax,  corporations,  including  savings
associations  such as the Bank,  generally  are  subject  to a minimum  tax.  An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative  minimum  taxable  income.  For taxable years  beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental  tax equal to 0.12% of the excess
of alternative  minimum taxable income for the taxable year (determined  without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.

     To the extent earnings appropriated to a savings association's bad debt
reserves for "qualifying real property loans" and deducted for federal income
tax purposes exceed the allowable amount of such reserves computed under the
experience method and to the extent of the association's supplemental reserves
for losses on loans ("Excess"), such Excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad
debt losses).  As of March 31, 1997, the Bank's Excess for tax purposes
totaled approximately $3.5 million.

     The Company and the Bank file consolidated  federal income tax returns on a
calendar year basis. Savings  associations,  such as the Bank, that file federal
income tax returns as part of a  consolidated  group are required by  applicable
Treasury  regulations  to reduce their taxable  income for purposes of computing
the percentage bad debt deduction for losses  attributable  to activities of the
non-savings  association members of the consolidated group that are functionally
related to the activities of the savings association member.

     The  federal  income  tax  returns  of the  Company  and  its  consolidated
subsidiary  for the last three years are open to possible  audit by the Internal
Revenue  Service  (the  "IRS").  No returns are being  audited by the IRS at the
current  time.  In the  opinion of  management,  any  examination  of still open
returns  (including  returns of subsidiaries  and  predecessors  of, or entities
merged into, Community Bank) would not result in a deficiency which could have a
material adverse effect on the financial  condition of Community Federal and its
consolidated subsidiaries.

     Virginia  Taxation.   Community  conducts  its  business  in  Virginia  and
consequently is subject to the Virginia  corporate  income tax. The Commonwealth
of Virginia  imposes a corporate income tax on a basis similar to federal income
tax as adjusted by deducting  the federal bad debt  deduction  but adding back a
state bad debt deduction. The tax rate is 6% of Virginia taxable income.


                                       40

<PAGE>



Executive Officers
------------------

         The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company. Except
as otherwise  indicated,  the persons named have served as officers of Community
since it became the holding  company of the Bank,  and all offices and positions
described  below  are  also  with  the  Bank.   There  are  no  arrangements  or
understandings  between the persons named and any other person pursuant to which
such officers were selected.

         Thomas W. Winfree.  Mr. Winfree, age 52, is the Company's President and
Chief Executive  Officer.  He was elected in October 1995.  Prior to joining the
Company,  Mr.  Winfree was  President and Chief  Executive  Officer of Jefferson
Savings and Loan in Warrenton, Virginia.

         R. Jerry Giles.  Mr. Giles,  age 48, is the Company's  Chief  Financial
Officer.  He was elected in April 1994. Prior to joining the Company,  Mr. Giles
was a Certified Public  Accountant in public  accounting and the Chief Financial
Officer with a savings bank for eleven years.

         Shirley V.  Lovegrove.  Ms.  Lovegrove,  age 58, is the Company's  Vice
President,  Operations  and  Savings,  a position  she has held since 1985.  Ms.
Lovegrove  has been  employed by the Company  since 1974 and was  previously  an
Assistant Vice President of the Company.

         Angel Negron,  Jr.. Mr. Negron, age 50, is the Company's Vice President
and Chief Lending Officer, a position he has held since February, 1996. Prior to
his employment by the Company,  Mr. Negron was a commercial  loan officer with a
commercial bank for 21 years.

         Paul K. Martin.  Mr. Martin, age 33, is the Company's Vice President of
Administration,  a position he has held since March 31, 1997,  and was Assistant
Vice-President  and Branch  Manager of the Company and of the Bank from  October
1991 to March, 1996.

         Sarah A. Ralston. Ms. Ralston, age 63, has been the Company's Secretary
and  Treasurer  for the past 17 years.  Ms.  Ralston  has been  employed  by the
Company in various capacities since 1956.

         Patsy Clem. Ms. Clem, age 57, is the Company's  Controller,  a position
she has held since July,  1986.  Ms. Clem has been employed by the Company since
1983 in the Accounting Department.

         P.  Douglas  Richard.  Mr.  Richard,  age  52,  is the  Company's  Vice
President and Regional  President,  a position he has held since January,  1997.
Prior to joining the Company Mr. Richard was Chief Executive Officer of Seaboard
Savings Bank in Virginia Beach, Virginia.

         Chris P.  Kyriakides.  Mr.  Kyriakides,  age 34, is the Company's  Vice
President and Regional  Executive Vice  President,  a position he has held since
January,  1997. Prior to joining the Company Mr. Kyriakides was Chief Operations
Officer of Seaboard Savings Bank in Virginia Beach, Virginia.


                                       41

<PAGE>



Employees
---------

     At March 31, 1997, the Company had a total of 46 employees, including eight
hourly  employees.  None  of the  Company's  employees  are  represented  by any
collective  bargaining group.  Management considers its employee relations to be
good.

Item  2.  Description of Property
---------------------------------

     The following table sets forth  information at March 31, 1997, with respect
to the Company's offices, furniture and equipment.

                                       Owned
                                         or         Gross       Net Book
                                       Leased       Square      Value at
        Location           Opened    Expiration     Footage  March 31, 1997
----------------------------------------------------------------------------

38 North Central Avenue    1956        Owned         17,000      $2,136,000
Staunton, Virginia

Rte. 250 West              1989        Owned          5,300       1,006,000
Waynesboro, Virginia

Routes 340 and 608         1993        Owned          2,074         334,000
Stuart's Draft, Virginia

5300 Kemps River Drive(1)  1997         2002(2)       2,400          66,000
Virginia Beach, Virginia
------------------------
(1) Opened April 1997
(2) Contains one five-year option.


     The Company's accounting and record-keeping activities are maintained on an
on-line  basis with an  independent  service  bureau.  The net book value of the
Company's computer equipment at March 31, 1997 was $66,790.

Item  3.  Legal Proceedings
---------------------------

     There are no material pending legal proceedings to which the Company or its
subsidiary is a party or to which any of its property is subject.


Item  4.  Submission of Matters to a Vote of Security Holders
-------------------------------------------------------------

     No  matter  was  submitted  to a vote  of  security  holders,  through  the
solicitation of proxies or otherwise, during the quarter ended March 31, 1997.

                                       42

<PAGE>




                                     PART II

Item  5.  Market for Common Equity and Related Security Holder Matters
----------------------------------------------------------------------

     As of May 31,  1997,  there  were  approximately  585  holders of record of
Community Common Stock.  Community's  stock is quoted on the Nasdaq Stock Market
under the symbol  "CFFC." As of May 31,  1997,  the bid and asked prices for the
Company's  Common  Stock as reported on the Nasdaq  Stock Market were $21.50 and
$23.50, respectively.

     The following  tables present the  Corporation's  high and low, bid and ask
prices as reported by the Nasdaq Stock  Market  during the last two fiscal years
and the dividends declared by the Corporation for the stated periods.

<TABLE>
<CAPTION>

                        Bid               Ask
                 ----------------    ----------------
     1997         High      Low       High      Low      Dividend Declared
--------------   ------   ------    ------    ------    -----------------
<S>             <C>       <C>       <C>       <C>             <C>

June 1996        $19.13   $19.00    $21.00    $21.00          $.13
September 1996    20.50    19.00     22.50     21.00           .13
December 1996     20.50    20.50     22.50     22.50           .13
March 1997        22.50    20.50     23.50     22.50           .14

</TABLE>

<TABLE>
<CAPTION>
                        Bid               Ask
                 ----------------    ----------------
     1996         High      Low       High      Low      Dividend Declared
--------------    ------   ------    ------    ------    -----------------
<S>             <C>       <C>       <C>       <C>             <C>

June 1995        $13.50    $12.00    $16.00    $14.00         $.10
September 1995    15.13     13.50     18.00     16.00          .10
December 1995     15.00     14.00     18.00     18.00          .11
March 1996        21.00     15.00     20.00     18.00          .11
</TABLE>

     Dividend  payment  decisions  are made with  consideration  of a variety of
factors,  including earnings,  financial  condition,  market  considerations and
regulatory  restrictions.  The ability of the  Corporation  to pay  dividends is
limited by  restrictions  imposed by the  Virginia  Stock  Corporation  Act, and
indirectly, by the Office of Thrift Supervision.  In general,  dividends paid by
Virginia  corporations  may  be  paid  only  if,  after  giving  effect  to  the
distribution  the  corporation is still able to pay its debts as they become due
in the usual course of business, or the corporation's total assets are

                                       43

<PAGE>

greater than or equal to the sum of its total  liabilities  plus the amount that
would be needed  (if the  corporation  were to be  dissolved  at the time of the
distribution)  to satisfy the  preferential  rights,  upon the  dissolution,  of
stockholders  whose  preferential  rights are  superior to those  receiving  the
distribution. Restrictions on dividend payments from the Bank to the Corporation
(the  Corporation's  primary source of funds for the payment of dividends to its
stockholders)  are  described in Note 8 of the Notes to  Consolidated  Financial
Statements contained in this Annual Report.

Item 6. Management's Discussion and Analysis or Plan of Operation
-----------------------------------------------------------------

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                              OR PLAN OF OPERATION

Introduction

         Community Financial Corporation ("Community" or the "Corporation") is a
Virginia  corporation.  Certain of the information  presented  herein relates to
Community Bank (the "Bank"), a wholly owned subsidiary of the Corporation.

         The Corporation and the Bank,  like all thrift  institutions  and their
holding  companies,  are subject to  comprehensive  regulation,  examination and
supervision  by the Office of Thrift  Supervision,  Department  of the  Treasury
("OTS") and the Federal Deposit Insurance Corporation ("FDIC").

         The Corporation's  net income is primarily  dependent on the difference
or spread  between the average  yield  earned on loans and  investments  and the
average rate paid on deposits and borrowings, as well as the relative amounts of
such assets and liabilities. The interest rate spread is affected by regulatory,
economic, and competitive factors that influence interest rates, loan demand and
deposit flows. The Corporation, like other financial institutions, is subject to
interest  rate  risk  to  the  degree  that  its  interest-bearing  liabilities,
primarily deposits and borrowings with short- and medium-term maturities, mature
or reprice more  rapidly,  or on a different  basis,  than its  interest-earning
assets.  While  having  liabilities  that mature or reprice more  frequently  on
average than assets may be beneficial in times of declining interest rates, such
an asset/liability structure may result in lower net income or net losses during
periods of rising interest rates, unless offset by other noninterest income. The
Corporation's net income is also affected by, among other things,  gains on sale
of loans,  mortgage-backed  securities  and investment  securities,  fee income,
provision for loan and real estate losses, operating expenses and income taxes.

Asset/Liability Management

         Management  of  Community   believes  it  is  critical  to  manage  the
relationship  between  interest  rates and the effect on the  Corporation's  net
portfolio  value ("NPV").  This approach  calculates the difference  between the
present  value of  expected  cash flows from  assets  and the  present  value of
expected  cash flows from  liabilities,  as well as cash flows from  off-balance
sheet contracts.  Management of the Corporation's assets and liabilities is done
within the context of the marketplace, but also within limits established by the
Board of  Directors  on the  amount of change in NPV which is  acceptable  given
certain interest rate changes.

         OTS issued a regulation,  effective  January 1, 1994,  which uses a net
market value methodology to measure the interest rate risk exposure of financial
institutions. Under OTS regulations, an institution's "normal" level of interest
rate risk in the event of an assumed  change in interest  rates is a decrease in
the  institution's NPV in an amount not exceeding 2% of the present value of its
assets. Financial institutions with greater than "normal" interest rate exposure
must take a deduction  from their  total  capital  available  to meet their risk
based  capital  requirement.  The amount of that  deduction  is  one-half of the
difference  between (a) the institution's  actual  calculated  exposure to a 200
basis point interest rate increase or decrease (whichever results in the greater
pro forma decrease in NPV) and (b) its "normal" level of exposure which is 2% of
the  present  value of its  assets.  The  regulation,  however,  will not become
effective   until  the  OTS   evaluates  the  process  by  which  its  financial
institutions may appeal an interest rate deduction determination.  Nevertheless,
utilizing this measurement concept, at March 31, 1997, Community's interest rate
risk  was  consistent  with  the  amount  treated  as  "normal"  under  the  OTS
regulations.

         Presented in the following  table, as of March 31, 1997 and 1996, is an
analysis  of the Bank's  interest  rate risk as  measured  by changes in NPV for
instantaneous  and sustained  parallel  shifts in the yield curve,  in 100 basis
point  increments,  up and down 300 basis  points and  compared to Board  policy
limits  and in  accordance  with  OTS  regulations,  based  on  the  assumptions
described below.  The Board limits have been  established with  consideration of
the dollar impact of various rate changes and the  Corporation's  strong capital
position.  As  illustrated  in the table,  NPV is more sensitive to rising rates
than declining rates. This occurs principally because, as rates rise, the market
value of  fixed-rate  loans  decline due to both the rate  increase  and slowing
prepayments.   When  rates  decline,  the  Corporation  does  not  experience  a
significant  rise in market value for these loans  because  borrowers  prepay at
relatively high rates.  The value of the  Corporation's  deposits and borrowings
change in approximately the same proportion in rising or falling rate scenarios.

                                        44
<PAGE>


                                   March 31, 1997           March 31, 1996
    Change in                   --------------------      -------------------
  Interest Rate   Board Limit   $ Change    % Change      $ Change   % Change
 (Basis Points)     % Change     in NPV      in NPV        in NPV     in NPV
 --------------     --------     ------      ------        ------     ------
                               (Dollars in Thousands)

    +300              -25%      $-4,294        -15%        $-2,324     -10%
    +200              -15        -2,301         -8          -1,025      -4
    +100              -10          -833         -3            -240      -1
     -0-              ---           ---        ---             ---     ---
    -100              -10           198         +1            -130      -1
    -200              -15            74          0            -155      -1
    -300              -25           280         +1             154      +1



         Management  continually works to maintain a neutral position  regarding
interest  rate  risk.  In  the  current  interest  rate  environment,  Community
customers are interested in obtaining  long term credit  products and short term
savings  products.  Management  has  taken  action  to  counter  this  trend.  A
significant  effort has been made to reduce the duration and average life of the
Corporation's  interest earning assets. As of March 31, 1997,  approximately 82%
of the  Corporation's  gross loan  portfolio  consisted  of loans which  reprice
during the life of the loan. The Corporation emphasizes adjustable rate mortgage
loans and has increased its portfolio of short term consumer loans.  Longer term
fixed-rate  mortgage loans, 20 to 30 years,  are generally sold in the secondary
market. The Corporation is currently originating  fixed-rate loans for immediate
sale only.

         On the  deposit  side,  management  has  worked to reduce the impact of
interest  rate  changes by  emphasizing  non-interest  bearing  or low  interest
deposit products and maintaining competitive pricing on longer term certificates
of deposit.  The  Corporation  has also used Federal Home Loan Bank  advances to
provide funding for loan originations and provide liquidity.

         As  with  any  method  of  measuring   interest   rate  risk,   certain
shortcomings  are inherent in the method of analysis  presented in the foregoing
table.  For example,  although  certain assets and  liabilities may have similar
maturities  or  periods to  repricing,  they may react in  different  degrees to
changes in market interest  rates.  Also, 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 may lag behind  changes in market
rates.  Additionally,  certain  assets,  such as ARM loans,  have features which
restrict  changes in interest  rates on a short-term  basis and over the life of
the asset.  Further, in the event of a change in interest rates,  expected rates
of prepayments on loans and early  withdrawals  from  certificates  could likely
deviate significantly from those assumed in calculating the table.


                                       45

<PAGE>



Average Balances, Interest Rates and Yields

         The  following  table  sets  forth  certain  information   relating  to
categories of the Corporation's interest-earning assets and its interest-bearing
liabilities  for the periods  indicated.  All average  balances  are computed on
monthly  basis.  Non-accruing  loans  have been  included  in the table as loans
carrying a zero yield.

<TABLE>
<CAPTION>

                                                                           Year Ended March 31,
                                            -------------------------------------------------------------------------------------
                                                      1997                          1996                         1995
                                            ---------------------------   --------------------------    -------------------------
                                            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 ..................................   $144,409    $12,189   8.44%    $138,127  $11,816   8.55%     $128,830  $ 9,711   7.54%
Investment securities and
other investments ......................     10,700        589   5.51        9,254      571   6.17         8,800      457   5.18
                                           --------    -------            --------  -------             --------  -------
  Total interest-earning assets ........    155,109     12,778   8.24      147,381   12,387   8.41       137,630   10,168   7.39
                                           --------    -------            --------  -------             --------  -------

Interest-Bearing Liabilities
----------------------------
Deposits ...............................    111,307      5,055   4.54      105,093    4,977   4.74       101,575    3,995   3.93
FHLB advances and other borrowings .....     26,321      1,481   5.63       25,349    1,538   6.07        22,250      968   4.35
                                           --------    -------            --------   ------              -------   ------
Total interest-bearing liabilities .....    137,628      6,536   4.75      130,442    6,515   4.99       123,825    4,963   4.01
                                           --------    -------            --------   ------              -------   ------

Net interest income/interest
 rate spread ...........................               $ 6,242   3.49               $ 5,872   3.42                $ 5,205   3.38
                                                       =======                      =======                       =======

Net interest-earning assets/net yield on
 interest-earning assets ...............   $ 17,481              3.57     $ 16,939            3.47       $13,805            3.77
                                           ========                       ========                       =======

Percentage of interest-earning assets
 to interest-bearing liabilities .......                       112.70%                      112.99%                       111.15%
</TABLE>




                                       46

<PAGE>



         The following table sets forth the  Corporation's  interest rate spread
at the dates indicated.


                                                           March 31,
                                                  ---------------------------
                                                   1997       1996      1995
                                                  ------     ------    ------
Yield On
--------
Loans .........................................    8.15%      8.32%     7.95%
Investment securities and
 other investments ............................    6.08%      5.60%     6.26%
  Total interest-earning assets ...............    8.03%      8.14%     7.87%


Cost Of
-------
Deposits ......................................    4.54%      4.62%     4.39%
FHLB of Atlanta advances and
 other borrowings .............................    6.85%      5.88%     6.31%
  Total interest-bearing liabilities ..........    4.96%      4.87%     4.77%

Interest rate spread ..........................    3.07%      3.27%     3.10%

Rate/Volume Analysis

         The following  table  describes the extent to which changes in interest
rates and  changes in volume of  interest-related  assets and  liabilities  have
affected  Community's  interest income and expense during the periods indicated.
For each category of interest-earning  assets and interest-bearing  liabilities,
information is provided on changes attributable to (i) changes in volume (change
in volume  multiplied by prior year rate),  (ii) changes in rate (change in rate
multiplied  by prior year  volume),  and (iii) total changes in rate and volume.
The  combined  effect  of  changes  in both  volume  and rate,  which  cannot be
separately identified,  has been allocated  proportionately to the change due to
volume and the change due to rate.

<TABLE>
<CAPTION>

                                                                                       Year Ended March 31,
                                                           -------------------------------------------------------------------------
                                                                          1997 v. 1996                         1996 v. 1995
                                                           -----------------------------------     ---------------------------------
                                                                Increase                                Increase
                                                               (Decrease)                              (Decrease)
                                                                 Due to               Total              Due to             Total
                                                           ------------------        Increase      ------------------      Increase
                                                           Volume        Rate       (Decrease)     Volume        Rate     (Decrease)
                                                           ------        ----       ----------     ------        ----     ----------
                                                                        (Dollars in Thousands)
<S>                                                         <C>         <C>           <C>           <C>         <C>           <C>   
Interest-Earning Assets
-----------------------
Loans ..............................................        $532        $(159)        $ 373         $737        $1,368        $2,105
Investments securities and other
 investments .......................................          83          (65)           18           25            90           115
                                                              --          ---            --           --            --           ---
  Total interest-earnings assets ...................       $ 615       $ (224)          391         $762        $1,458         2,220
                                                           =====       -------        -----         ====        ------         -----
Interest-Bearing Liabilities
----------------------------
Deposits ...........................................        $298         (220)           78         $141        $  841        $  982
FHLB advances and other borrowings .................          59         (116)          (57)         149           421           570
                                                              --         ----           ---          ---           ---           ---
   Total interest-bearing liabilities ..............        $357        $(336)           21         $290        $1,262         1,552
                                                           =====       =======        -----         ====        ======         -----

Net interest income ................................                                   $370                                    $ 668
                                                                                      =====                                    =====
</TABLE>



                                       47

<PAGE>

Asset Quality

         Asset quality is an important  factor in the successful  operation of a
financial institution. The loss of interest income and principal that may result
from  non-performing  assets  has an  adverse  effect  on  earnings,  while  the
resolution of those assets requires the use of capital and managerial resources.
The  Corporation   maintains  strict  underwriting   guidelines,   loan  quality
monitoring  policies  and systems that require  detailed  monthly and  quarterly
analyses of delinquencies and non-performing assets.

         At March 31, 1997, the Corporation's total  non-performing  assets were
$676,000 or .40% of total assets compared to $741,000 or .46% at March 31, 1996.
Non-performing  assets at March 31,  1997 were  comprised  of two single  family
residential  properties  which were more than  ninety-days past due, real estate
acquired through foreclosure of a single family dwelling,  two automobiles which
were repossessed and various consumer loans which includes one loan relationship
of  approximately   $388,000  for  which  an  allowance  of  $195,000  has  been
established.  Based on current  market values of the  collateral  securing these
loans,  management  anticipates no significant  losses in excess of the reserves
for losses previously  recorded.  Due to an uncertain real estate market and the
economy in general no assurances  can be given that the  Corporation's  level of
non-performing assets may not increase in the future.

         The  Corporation  maintains an allowance for loan losses to provide for
estimated  potential  losses in its loan  portfolio.  Management  determines the
level  of  reserves  based on loan  performance,  the  value of the  collateral,
economic and market conditions, and previous experience.  Management reviews the
adequacy of the  allowance  at least  quarterly,  utilizing  its  internal  loan
classifications  system.  During  fiscal 1997,  the  Corporation  increased  its
allowance for losses on loans $39,000 to $1,039,000 due to the  delinquency of a
consumer loan  described  above,  and the  Corporation's  increased loan volume,
especially in  commercial  real estate,  multi-family  and consumer  loans.  See
"Asset/Liability  Management." Management believes that the loan loss reserve is
adequate.  The  Corporation  has had net charge-offs to its loan loss reserve of
$142,000,  $70,000,  and $7,000,  for the years ended March 31,  1997,  1996 and
1995, respectively.  The increase in net charge-offs is related primarily to the
Corporation's  increased activity in consumer loan lending. While consumer loans
provide a greater yield they generally  have a higher rate of  charge-offs  than
mortgage  loans.  Although  management  believes  it uses the  best  information
available,  future  adjustments  to reserves may be  necessary.  See "Results of
Operations  Comparison  of Years Ended  March 31, 1997 and 1996 - Provision  for
Loan Losses."

Financial Condition

         The Corporation's total assets increased $7.9 million to $167.7 million
at March 31, 1997 primarily as a result of loans receivable which increased $7.2
million.  The increase in loans receivable was funded by an increase in deposits
of $7.1 million.  The increase in deposits can be attributed to both an increase
in time  deposits of $5.0  million and an increase in checking  accounts of $2.1
million.  Management  believes  the  increase  in  time  deposits  is  primarily
attributable  to a special time deposit  promotion  and the increase in checking
accounts is related to an  increased  marketing  effort.  The  increase in loans
receivable  was due to the  origination  of  primarily  variable-rate  loans  of
residential  real estate and more  competitive  pricing on consumer  loans.

         The  Corporation's  principal use of funds is to originate  loans.  The
principal source of funds for loan  disbursements is loan principal  repayments,
net growth in deposits  and  borrowings.  In fiscal 1997 net loans  increased by
$7.2 million.  While  borrowings for fiscal 1997 decreased by $1.0 million,  the
increase in the loan  portfolio was funded  through  increased  deposits of $7.1
million.

         Stockholders'  equity  increased $1.4 million to $23.3 million at March
31, 1997 compared to March 31, 1996. The increase was the result of $1.7 million
of net income in fiscal 1997 and net  unrealized  gains of $311,000 on available
for sale  securities,  partially  offset by dividends  paid to  stockholders  of
$674,000.

Results of Operations

         The  Corporation's  results of operations depend primarily on the level
of its net interest income and noninterest income and the level of its operating
expenses. Net interest income depends upon the value of interest-earning  assets
and interest-bearing liabilities and the interest rate earned or paid on them.


         Comparison of Years ended March 31, 1997 and 1996

         General. Net income for the year ended March 31, 1997 was $1,734,735 or
$1.36 per share  compared  to  $2,011,538  or $1.60 per share for the year ended
March 31, 1996. Net income decreased due to a special one-time

                                        48

<PAGE>


assessment  by  the  FDIC  of  $670,765  which  had a  tax  affected  effect  of
approximately  $416,000. Net income for the year ended March 31, 1997, excluding
the special assessment, would  have been  approximately  $2,150,000 or $1.69 per
share.

         Interest Income. Total interest income increased to $12,777,987 for the
year ended March 31, 1997 as  compared to  $12,387,722  for the year ended March
31, 1996. The increase in total interest income can be attributed to an increase
in the dollar  volume of  interest-earning  assets,  primarily  $7.2  million in
mortgage  and  consumer  loans  which was offset by a  decrease  in the yield on
interest  earning  assets.  Average  yields  on  total  interest-earning  assets
decreased  from 8.41% in fiscal  1996 to 8.24% for the  current  fiscal year due
primarily to a more competitive and lower rate environment.

         Interest  Expense.  Total interest expense  increased to $6,535,631 for
the year ended March 31, 1997 from $6,515,234 for the year ended March 31, 1996.
The increase in total  interest  expense is  attributable  to an increase in the
average  balances of  interest-bearing  liabilities,  primarily  $7.1 million in
deposits, which was offset by a decrease in the cost of funds. The cost of funds
for the current fiscal year decreased to 4.75% as compared to 4.99% for the year
ended March 31,  1996 due a lower  interest  rate  environment  and  maintaining
shorter maturities on borrowings.

         Provision for Loan Losses. The provision  decreased to $180,561 for the
fiscal  ended March 31, 1997 from  $307,361  for the fiscal year ended March 31,
1996. The  Corporation  monitors its loan loss reserve on a quarterly  basis and
makes allocations as necessary.  Management  believes that the level of its loan
loss reserve is adequate.  As of March 31, 1997,  the total  allowance  for loan
losses amounted to $1,039,013 of which $783,700 was not  specifically  allocated
to  identified  problem  loans.  At March  31,  1997,  the  Corporation's  total
allowance as a percentage of total loans receivable was .69% and as a percentage
of total non-performing loans was 154%. See "Asset Quality."

         Noninterest Income.  Noninterest income increased to $518,742 in fiscal
1997 as compared to $455,706 for the year ended March 31, 1996, primarily due to
an increase  in the number of checking  accounts  and the related  charges.  The
Corporation  increased  marketing  in regard to a package  of  checking  account
products  which was initiated in fiscal 1993 and increased its checking  account
base by approximately 1,000 accounts during the year ended March 31, 1997.

         Noninterest Expense.  Total noninterest expense increased to $3,805,739
during the year ended March 31, 1997 from $2,808,924 for the year March 31, 1996
due primarily to the special  one-time  assessment by the FDIC.  The increase in
noninterest  expenses  other than the  special  one-time  assessment  relates to
preparation  for the opening of a branch in Virginia  Beach , Virginia in April,
1997 and the general growth of the Corporation.

         Taxes.  Total taxes decreased to $1,040,064 during the year ended March
31, 1997 from $1,200,371 during fiscal 1996. The effective tax rate for the year
ended March 31, 1997 was 37.5% as compared to 37.4% for the year ended March 31,
1996.  The  decrease in taxes is  attributable  to a decrease  in income  before
income taxes.

         Comparison of Years Ended March 31, 1996 and 1995

         General. Net income for the year ended March 31, 1996 was $2,011,538 or
$1.60 per share compared to $1,771,481 or $1.44 per share for the year March 31,
1995. Net income increased  primarily due to the increase in net interest income
of $667,703 during the year ended March 31, 1996.

         Interest Income. Total interest income increased to $12,387,722 for the
year ended March 31, 1996 as  compared to  $10,167,615  for the year ended March
31, 1995. The increase in total  interest  income can be attributed to increases
in both dollar volume of interest  earning assets and yields on interest earning
assets. Average yields on total interest-earning  assets increased form 7.39% in
fiscal 1995 to 8.41% for the current  fiscal year due  primarily  to  adjustable
rate  loans  repricing  at higher  rates  and an  increase  in  market  rates on
investments.

         Interest  Expense.  Total interest expense  increased to $6,515,234 for
the year ended March 31, 1996 from $4,962,830 for the year ended March 31, 1995.
While average  balances for both deposits and  borrowings  increased  during the
fiscal year, the increase in interest  expense is  attributable  primarily to an
increase  in the cost of funds from 4.01% for the year ended  March 31,  1995 to
4.99% for the current fiscal year. The increase in the average cost of funds was
attributable to improving economic conditions locally and nationally for most of
fiscal 1996.

                                       49

<PAGE>

         Provision for Loan Losses. The provision  increased to $307,361 for the
fiscal  ended March 31, 1996 from  $108,946  for the fiscal year ended March 31,
1995.  The  increase in the  provision  was  attributable  primarily to one loan
relationship for which an $145,000  allowance was  established.  As of March 31,
1996,  the total  allowance  for loan  losses  amounted to  $1,000,278  of which
$791,378 was not specifically  allocated to identified problem loans. See "Asset
Quality."


         Noninterest Income.  Noninterest income increased to $455,706 in fiscal
1996 as compared to $398,815 for the year ended March 31, 1995, primarily due to
an increase  in the number of checking  accounts  and the related  charges.  The
Corporation  continued offering a package of checking account products which was
initiated  in  fiscal  1993  and   increased   its  checking   account  base  by
approximately 800 accounts during the year ended March 31, 1996.

         Noninterest Expense.  Total noninterest expense increased to $2,808,924
during  the year ended  March 31,  1996 from  $2,639,385  for the year March 31,
1995.  The increase in  noninterest  expenses is generally in  proportion to the
asset growth of the Corporation.

         Taxes.  Total taxes increased to $1,200,371 during the year ended March
31, 1996 from $1,083,788 during fiscal 1995. The effective tax rate for the year
ended March 31, 1996 was 37.4% as compared to 38.0% for the year ended March 31,
1995.  The  increase in taxes is  attributable  to an increase in income  before
income taxes.

Liquidity and Capital Resources

         The  Corporation's  principal  sources of funds are customer  deposits,
advances  from  the FHLB of  Atlanta,  amortization  and  prepayment  of  loans,
proceeds from the sale of loans and funds provided from  operations.  Management
of the  Corporation  maintains  investments  in  liquid  assets  based  upon its
assessment of (i) the Corporation's need for funds, (ii) expected deposit flows,
(iii) the yields  available on short-term  liquid assets,  (iv) the liquidity of
the  Corporation's  loan portfolio and (v) the  objectives of the  Corporation's
asset/liability management program.

         Liquidity  represents  the  ability  of the  Corporation  to  meet  its
on-going funding requirements for contractual  obligations,  the credit needs of
customers,  withdrawal of customers'  deposits and operating  expenses.  Savings
associations  are  required to maintain  minimum  levels of liquid  assets.  OTS
regulations  currently  require the Bank to maintain an average daily balance of
liquid  assets equal to at least 5% of the sum of its average  daily  balance of
net withdrawable deposit accounts and borrowings payable in one year or less. At
March 31, 1997, the Bank's liquid asset ratio was 7.2%.

         The Corporation's  dominant source of funds during the year ended March
31, 1997 was from deposits  which  increased by $7.1 million due primarily to an
increase in time deposits of $5.0 million and a $2.2 million  increase in demand
deposits.  FHLB  advances  decreased  for the year ended  March 31, 1997 by $1.0
million.  Management  believes this shift in deposit  categories is attributable
primarily to a time deposit promotion during the fiscal year which permitted the
customer  to  adjust  the  rate  on  the  certificate  during  the  term  of the
certificate and the increase in demand  deposits was due to increased  marketing
of the Corporation's free checking account.

         The  Corporation's  cash  increased  $1.2  million from $3.7 million at
March 31,  1996 to $4.9  million at March 31,  1997.  The  increase  in cash was
related to the  increase  in  deposits  and a  decrease  in  securities  held to
maturity of $900,000.

         At March 31,  1997,  the  Corporation  had  commitments  to purchase or
originate $1.6 million of loans.  Certificates of deposit scheduled to mature in
one  year or less  at  March  31,  1997  totaled  $58.8  million.  Based  on its
historical  experience,  management  believes that a significant portion of such
deposits will remain with the Corporation. Management further believes that loan
repayments and other sources of funds will be adequate to meet the Corporation's
foreseeable short- and long-term liquidity needs.

         At March 31,  1997,  the Bank had tangible and core capital of 11.9% of
adjusted total assets, which were in excess of their respective  requirements of
1.5% and 3.0%.  The Bank also had  risk-based  capital of 18.5% of risk weighted
assets,  which also exceeded its requirement of 8.0%. See Note 8 of the Notes to
Consolidated Financial Statements.

                                       50

<PAGE>

Impact of Inflation and Changing Prices

         The consolidated financial statements and related data presented herein
have been prepared in accordance with generally accepted  accounting  principles
which require the measurement of financial position and results of operations in
terms  of  historical  dollars  without  considering  changes  in  the  relative
purchasing power of money over time because of inflation. Unlike most industrial
companies,   virtually  all  of  the  assets  and  liabilities  of  a  financial
institution  are  monetary in nature.  As a result,  interest  rates have a more
significant impact on a financial institution's  performance than the effects of
general levels of inflation.  Interest rates do not necessarily move in the same
direction  or the same  magnitude  as the  price of goods and  services.  In the
current interest-rate environment, equity, maturity structure and quality of the
Corporation's  assets  and  liabilities  are  critical  to  the  maintenance  of
acceptable performance levels.


Accounting Pronouncements

         For a discussion of certain  accounting  pronouncements  implemented by
the  Corporation  during  fiscal  1997  and  new  pronouncements  which  will be
implemented in the future,  see Summary of Accounting  Policies to  Consolidated
Financial Statements.


                                       51
<PAGE>




Report of Independent Certified Public Accountants


To the Board of Directors of
Community Financial Corporation
Staunton, Virginia

We have  audited  the  accompanying  consolidated  balance  sheets of  Community
Financial  Corporation  and  subsidiary  as of March 31, 1997 and 1996,  and the
related consolidated  statements of income,  stockholders' equity and cash flows
for each of the three years in the period ended March 31, 1997.  These financial
statements  are  the  responsibility  of  the  Corporation's   management.   Our
responsibility  is to express an opinion on these 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 audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Community Financial
Corporation  and subsidiary at March 31, 1997 and 1996, and the results of their
operations  and their cash flows for each of the three years in the period ended
March 31, 1997 in conformity with generally accepted accounting principles.


/s/ BDO Seidman, L.L.P.

April 24, 1997

Richmond, Virginia




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                                     Consolidated Balance Sheets
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
March 31,                                                             1997           1996
---------                                                             ----           ----
<S>                                                               <C>            <C>         
   Assets

Cash (including interest bearing deposits of
  approximately ($1,015,000 and $1,147,000)                       $  4,922,213   $  3,673,085
Securities (Note 1)
  Held to maturity                                                   5,197,437      6,067,778
  Available for sale                                                 2,243,220      1,754,445
Investment in Federal Home Loan Bank stock, at cost (Note 6)         1,400,000      1,350,000
Loans receivable, net (Notes 2 and 6)                              148,905,485    141,738,895
Real estate owned, net                                                 173,245        123,322
Property and equipment, net (Note 3)                                 3,542,108      3,692,043
Accrued interest receivable                                            989,438      1,020,417
Prepaid expenses and other assets                                      334,036        372,636
                                                                  ------------   ------------
                                                                  $167,707,182   $159,792,621
                                                                  ============   ============

   Liabilities and Stockholders' Equity

Liabilities
  Deposits (Note 4)                                               $116,594,885   $109,501,461
  Advances from Federal Home Loan Bank (Note 6)                     26,000,000     27,000,000
  Advance payments by borrowers for taxes and insurance                135,561        142,737
  Other liabilities (Notes 7 and 9)                                  1,639,740      1,248,443
                                                                  ------------   ------------
Total liabilities                                                  144,370,186    137,892,641
                                                                  ------------   ------------
Commitments and Contingencies (Notes 9, 10 and 11)
--------------------------------------------------

Stockholders' Equity (Notes 8 and 10)
  Preferred stock, $.01 par value, authorized
    3,000,000 shares, none outstanding                                      --             --
  Common stock, $.01 par value, 10,000,000 authorized
    shares, 1,275,348 and 1,269,698 shares outstanding                  12,753         12,697
  Additional paid-in capital                                         4,716,677      4,651,634
  Retained earnings                                                 17,266,745     16,206,237
  Net unrealized gain on securities available for sale (Note 1)      1,340,821      1,029,412
                                                                  ------------   ------------
Total stockholders' equity                                          23,336,996     21,899,980
                                                                  ------------   ------------
                                                                  $167,707,182   $159,792,621
                                                                  ============   ============
</TABLE>

          See accompanying summary of accounting policies and notes to
                       consolidated financial statements.



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                               Consolidated Statements of Income
--------------------------------------------------------------------------------


Year Ended March 31,                        1997          1996          1995
--------------------                        ----          ----          ----

Interest income
  Loans                                  $12,188,714   $11,816,368   $ 9,711,238
  Investment securities                      471,864       447,619       238,272
  Other investments                          117,409       123,735       218,105
                                         -----------   -----------   -----------
Total interest income                     12,777,987    12,387,722    10,167,615
                                         -----------   -----------   -----------
Interest expense
  Deposits (Note 4)                        5,054,884     4,977,188     3,994,663
  Borrowed money                           1,480,747     1,538,046       968,167
                                         -----------   -----------   -----------
Total interest expense                     6,535,631     6,515,234     4,962,830
                                         -----------   -----------   -----------
Net interest income                        6,242,356     5,872,488     5,204,785

Provision for loan losses (Note 2)           180,561       307,361       108,946
                                         -----------   -----------   -----------
Net interest income after provision for
  loan losses                              6,061,795     5,565,127     5,095,839
                                         -----------   -----------   -----------
Noninterest income
  Service charges, fees and commissions      509,748       430,945       364,738
  Other                                        8,994        24,761        34,077
                                         -----------   -----------   -----------
Total noninterest income                     518,742       455,706       398,815
                                         -----------   -----------   -----------
Noninterest expense
  Compensation and employee benefits
    (Notes 9 and 10)                       1,333,550     1,183,016     1,110,412
  Occupancy                                  399,290       372,560       352,472
  Data processing (Note 11)                  349,150       308,814       273,057
  BIF/SAIF premium disparity
    assessment (Note 8)                      670,765            --            --

  Insurance                                  189,143       242,076       237,037
  Other                                      863,841       702,458       666,407
                                         -----------   -----------   -----------
Total noninterest expense                  3,805,739     2,808,924     2,639,385
                                         -----------   -----------   -----------
Income before income taxes                 2,774,798     3,211,909     2,855,269
                                         -----------   -----------   -----------
Income taxes (Note 7)
  Current                                    971,179     1,139,733       968,721
  Deferred                                    68,885        60,638       115,067
                                         -----------   -----------   -----------
Total income taxes                         1,040,064     1,200,371     1,083,788
                                         -----------   -----------   -----------
Net income                               $ 1,734,734   $ 2,011,538   $ 1,771,481
                                         ===========   ===========   ===========
Earnings per share                       $      1.36   $      1.60   $      1.44
                                         ===========   ===========   ===========

          See accompanying summary of accounting policies and notes to
                       consolidated financial statements.



<PAGE>


                                                 Community Financial Corporation
                                                                  and Subsidiary

                                 Consolidated Statements of Stockholders' Equity
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                       Net Unrealized
                                                                          Gain on
                                            Additional                   Securities       Total
                                   Common     Paid-in      Retained      Available    Stockholders'
                                    Stock     Capital      Earnings       For Sale       Equity
                                   ------   ----------   ------------    ----------   ------------
<S>                               <C>       <C>          <C>             <C>          <C>         
Balance, March 31, 1994           $ 6,041   $4,406,478   $ 13,395,086    $       --   $ 17,807,605

Net income                             --           --      1,771,481            --      1,771,481
Cash dividends, $.35 per share         --           --       (436,612)           --       (436,612)
Stock dividend                      6,156           --         (6,156)           --             --
Exercise of stock options
  (Note 10)                           222      134,154             --            --        134,376
Net unrealized gain on
  securities available for sale
  (Note 1)                             --           --             --       275,584        275,584
                                  -------   ----------   ------------    ----------   ------------
Balance, March 31, 1995            12,419    4,540,632     14,723,799       275,584     19,552,434

Net income                             --           --      2,011,538            --      2,011,538
Cash dividends, $.43 per share         --           --       (529,100)           --       (529,100)
Exercise of stock options
  (Note 10)                           278      111,002             --            --        111,280
Net unrealized gain on
  securities available for sale
  (Note 1)                             --           --             --       753,828        753,828
                                  -------   ----------   ------------    ----------   ------------
Balance, March 31, 1996            12,697    4,651,634     16,206,237     1,029,412     21,899,980

Net income                             --           --      1,734,734            --      1,734,734
Cash dividends, $.53 per share         --           --       (674,226)           --       (674,226)
Exercise of stock options
  (Note 10)                            56       65,043             --            --         65,099
Net unrealized gain on
  securities available for sale
  (Note 1)                             --           --             --       311,409        311,409
                                  -------   ----------   ------------    ----------   ------------
Balance, March 31, 1997           $12,753   $4,716,677   $ 17,266,745    $1,340,821   $ 23,336,996
                                  =======   ==========   ============    ==========   ============
</TABLE>

          See accompanying summary of accounting policies and notes to
                       consolidated financial statements.



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Cash Flows
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended March 31,                                 1997            1996            1995
--------------------                                 ----            ----            ----
<S>                                              <C>             <C>             <C>         
Operating activities
  Net income                                     $  1,734,734    $  2,011,538    $  1,771,481
  Adjustments to reconcile net income to
    net cash provided by operating activities
      Provision for loan losses                       180,561         307,361         108,946
      Provision for real estate losses                     --          25,000          30,000
      Depreciation                                    216,462         212,750         207,452
      Amortization of premium and accretion
        of discount on securities, net                 (3,683)           (351)        (13,903)
      Decrease in net deferred loan
        origination fees                              (33,289)       (110,561)       (118,420)
      Loans originated for resale                  (1,587,470)     (1,422,000)     (1,008,000)
      Proceeds from loan sales                      1,568,470       1,299,000       1,008,000
      Increase in deferred income taxes                66,316          62,327         115,067
      Loss on sale of real estate                       4,274              --              --
      Increase (decrease) in other assets              69,579        (298,374)        (98,465)
      Increase (decrease) in other liabilities        317,805         (13,929)         74,957
                                                 ------------    ------------    ------------
Net cash provided by operating activities           2,533,759       2,072,761       2,077,115
                                                 ------------    ------------    ------------
Investing activities
  Proceeds from maturities of held to maturity
    securities                                      2,071,892       2,979,871       3,432,760
  Purchase of held to maturity securities          (1,375,234)     (4,791,147)     (6,204,980)
  Net increase in loans                            (7,494,061)     (7,068,723)    (11,320,566)
  Purchases of property and equipment                 (66,527)        (72,735)       (463,564)
  Proceeds from sale of real estate owned             145,002              --              --
  Redemption of FHLB stock                            150,000              --         180,000
  Purchase of FHLB stock                             (200,000)       (100,000)       (435,000)
                                                 ------------    ------------    ------------
Net cash absorbed by investing activities          (6,768,928)     (9,052,734)    (14,811,350)
                                                 ============    ============    ============
</TABLE>



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Cash Flows
                                                                     (continued)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
Year Ended March 31,                                 1997            1996            1995
--------------------                                 ----            ----            ----
<S>                                              <C>             <C>             <C>         
Financing activities
  Net increase in certificates of
    deposit                                      $  4,998,000    $  4,665,694    $ 10,887,840
  Net increase (decrease) in savings and
    checking deposits                               2,095,424        (177,799)     (8,156,816)
  Proceeds from issuance of common stock               65,099         111,280         134,376
  Dividends paid                                     (674,226)       (529,100)       (436,612)
  Proceeds from advances                           33,000,000      78,000,000      69,500,000
  Repayments of advances                          (34,000,000)    (76,000,000)    (64,000,000)
                                                 ------------    ------------    ------------
Net cash provided by financing activities           5,484,297       6,070,075       7,928,788
                                                 ------------    ------------    ------------
Increase (decrease) in cash and cash
  equivalents                                       1,249,128        (909,898)     (4,805,447)

Cash and cash equivalents - beginning of year       3,673,085       4,582,983       9,388,430
                                                 ------------    ------------    ------------
Cash and cash equivalents - end of year          $  4,922,213    $  3,673,085    $  4,582,983
                                                 ============    ============    ============
Supplemental Disclosures of Cash
  Flow Information
 
Cash payments of interest expense                $  6,553,835    $  6,482,210    $  4,917,080
                                                 ------------    ------------    ------------
Cash payments of income taxes                    $    852,296    $  1,151,092    $    892,829
                                                 ============    ============    ============
Supplemental Schedule of Non-Cash
  Investing and Financing Activities
------------------------------------
Transfers from loans to real estate
  acquired through foreclosure                   $    131,718    $    298,334    $         --
                                                 ============    ============    ============
</TABLE>

          See accompanying summary of accounting policies and notes to
                       consolidated financial statements.



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
--------------------------------------------------------------------------------

Principles of Consolidation

The  accompanying  consolidated  financial  statements  include the  accounts of
Community  Financial   Corporation  (the  "Corporation")  and  its  wholly-owned
subsidiary,  Community Bank (the "Bank"). All material intercompany accounts and
transactions have been eliminated in consolidation.

Nature of Business and Regulatory Environment

The  Bank  is a  federally  chartered  thrift  and  the  primary  asset  of  the
Corporation.  The  Corporation  provides  a full range of  banking  services  to
individual and corporate customers through its wholly-owned subsidiary.

The Office of Thrift Supervision ("OTS"), is the primary regulator for federally
chartered savings associations, as well as savings and loan holding companies.

The  Bank's  deposits  are  insured  up to  applicable  limits  by  the  Savings
Association  Insurance  Fund  ("SAIF"),  which is  administered  by the  Federal
Deposit  Insurance  Corporation  ("FDIC").  The FDIC has  specific  authority to
prescribe  and  enforce  such  regulations  and  issue  such  orders as it deems
necessary to prevent  actions or practices by savings  associations  that pose a
serious threat to the SAIF.

The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
effective January 1, 1993. FDICIA contained provisions which allow regulators to
impose prompt corrective action on  undercapitalized  institutions in accordance
with a categorized capital-based system.

Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of  assets  and  liabilities  at the date of the
financial  statements and the reported  amounts of revenues and expenses  during
the reporting period. Actual results could differ from those estimates.

Securities

Investments  in debt  securities  classified as  held-to-maturity  are stated at
cost, adjusted for amortization of premiums and accretion of discounts using the
level yield method.  Management has a positive  intent and ability to hold these
securities to maturity and, accordingly,  adjustments are not made for temporary
declines in their market value below amortized cost.  Investment in Federal Home
Loan Bank stock is stated at cost.

Investments in debt and equity securities classified as  available-for-sale  are
stated at market value with  unrealized  holding gains and losses  excluded from
earnings and reported as a separate  component of stockholders'  equity,  net of
tax effect, until realized.



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)
--------------------------------------------------------------------------------

Securities (continued)

Investments  in debt and equity  securities  classified as trading are stated at
market value.  Unrealized  holding gains and losses for trading  securities  are
included in the statement of income.

Gains and losses on the sale of  securities  are  determined  using the specific
identification method.

Loans Receivable

Loans  receivable  consists  primarily of long-term real estate loans secured by
first deeds of trust on single family  residences,  other residential  property,
commercial  property  and land  located  primarily  in the  state  of  Virginia.
Interest  income on  mortgage  loans is recorded  when earned and is  recognized
based on the level yield  method.  The  Corporation  provides an  allowance  for
accrued  interest  deemed to be  uncollectible,  which is netted against accrued
interest receivable in the consolidated balance sheets.

The  Corporation  defers loan  origination  and commitment  fees, net of certain
direct loan  origination  costs,  and the net deferred fees are  amortized  into
interest  income over the lives of the related loans as yield  adjustments.  Any
unamortized  net fees on loans fully repaid or sold are  recognized as income in
the year of repayment or sale.

The Corporation places loans on nonaccrual status after being delinquent greater
than 90 days or earlier if the  Corporation  becomes aware that the borrower has
entered  bankruptcy  proceedings,  or in  situations  in which  the  loans  have
developed  inherent  problems  prior to being 90 days  delinquent  that indicate
payments of principal or interest will not be made in full. Whenever the accrual
of interest is stopped,  previously  accrued but uncollected  interest income is
reversed. Thereafter,  interest is recognized only as cash is received until the
loan is reinstated, to accrual status.




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)
--------------------------------------------------------------------------------

Loans Receivable (continued)

The allowance for loan losses is maintained at a level  considered by management
to be adequate  to absorb  future  loan  losses  currently  inherent in the loan
portfolio.  Management's  assessment  of the adequacy of the  allowance is based
upon type and volume of the loan portfolio, past loan loss experience,  existing
and  anticipated  economic  conditions,  and other factors which deserve current
recognition  in  estimating  future loan losses.  Additions to the allowance are
charged to  operations.  Loans are  charged-off  partially or wholly at the time
management determines collectibility is not probable. Management's assessment of
the adequacy of the  allowance is subject to  evaluation  and  adjustment by the
Corporation's regulators.

Effective  April  1,  1995,  the  Corporation  adopted  Statement  of  Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment
of a Loan" (as amended by SFAS No. 118,  "Accounting by Creditors for Impairment
of a Loan-Income Recognition and Disclosures"). The effect of adopting these new
accounting   standards  were   immaterial  to  the  operating   results  of  the
Corporation.

A loan is considered  to be impaired  when it is probable  that the  Corporation
will be unable to collect all  principal and interest  amounts  according to the
contractual  terms of the loan  agreement.  A performing  loan may be considered
impaired.  The allowance for loan losses related to loans identified as impaired
is primarily  based on the excess of the loan's  current  outstanding  principal
balance over the estimated  fair market value of the related  collateral.  For a
loan that is not  collateral-dependent,  the allowance is recorded at the amount
by which the outstanding  principal balance exceeds the current best estimate of
the future cash flows on the loan  discounted at the loan's  original  effective
interest rate.

For impaired  loans that are on nonaccrual  status,  cash payments  received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment  received on a nonaccrual  loan may be  recognized  as
interest income to the extent allowed by the loan contract,  assuming management
expects to fully collect the remaining principal balance on the loan.

Real Estate Owned

Real estate acquired through  foreclosure is initially  recorded at the lower of
fair value,  less selling  costs,  or the balance of the loan on the property at
date of  foreclosure.  Costs  relating to the  development  and  improvement  of
property are  capitalized,  whereas  those  relating to holding the property are
charged to expense.

Valuations are periodically performed by management, and an allowance for losses
is  established  by a charge to operations  if the carrying  value of a property
exceeds its estimated fair value.



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)
--------------------------------------------------------------------------------

Sale of Loans and Participation in Loans

The Corporation is able to generate funds by selling loans and participations in
loans to the Federal Home Loan Mortgage  Corporation and other investors.  Under
participation service agreements, the Corporation continues to service the loans
and the participant is paid its share of principal and interest collections.

Effective  April  1,  1996,  the  Corporation  adopted  Statement  of  Financial
Accounting  Standards No. 122 ("SFAS 122"),  "Accounting for Mortgage  Servicing
Rights an  Amendment  of FASB  Statement  No.  65".  The  implementation  of the
pronouncement  did not have a  material  effect  on the  consolidated  financial
statements.  SFAS 122  requires  entities to allocate  the cost of  acquiring or
originating  mortgage loans between the mortgage servicing rights and the loans,
based on their relative fair values,  if the bank sells or securitizes the loans
and retains the mortgage servicing rights.

The cost of mortgage  servicing  rights is amortized in proportion  to, and over
the  period  of,  estimated  net  servicing  revenues.  Impairment  of  mortgage
servicing rights is assessed based on the fair value of those servicing  rights.
Fair values are estimated using  discounted cash flows based on a current market
interest rate. For purposes of measuring  impairment,  the rights are stratified
based on the  predominant  risk  characteristics  of the underlying  loans.  The
amount of impairment  recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.

Property and Equipment

Property  and  equipment  is  stated  at  cost  less  accumulated  depreciation.
Provisions for depreciation are computed using the straight-line method over the
estimated  useful lives of the individual  assets.  Expenditures for betterments
and major  renewals are  capitalized  and ordinary  maintenance  and repairs are
charged to operations as incurred.  Estimated useful lives are five to ten years
for  furniture  and  equipment  and  five  to  fifty  years  for  buildings  and
improvements.

Income Taxes

Deferred  income taxes are  recognized  for the tax  consequences  of "temporary
differences" by applying enacted  statutory tax rates applicable to future years
to  differences  between the financial  statement  carrying  amounts and the tax
bases of existing assets and liabilities.

For tax years beginning prior to January 1, 1996, savings banks that met certain
definitional tests and other conditions  prescribed by the Internal Revenue Code
were allowed, within limitations, to deduct from taxable income an allowance for
bad debts using the "percentage of taxable  income"  method.  The cumulative bad
debt reserve,  upon which no taxes have been paid, was approximately  $1,056,000
at March 31, 1997.

Section  1616 of the Small  Business  Job  Protection  Act of 1996  (the  "Act")
repealed the percentage of taxable income method of computing bad debt reserves,
and  required  the  recapture  into taxable  income of "excess 


<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)
--------------------------------------------------------------------------------

Income Taxes (continued)

reserves",  on a ratable  basis over the next six  years.  Excess  reserves  are
defined in  general,  as the excess of the  balance of the tax bad debt  reserve
(using the  percentage of taxable income method) as of the close of the last tax
year beginning  before January 1, 1996 over the balance of the reserve as of the
close of the last tax year  beginning  before  January 1, 1988. The recapture of
the  reserves  is  deferred  if the  Corporation  meets  the  "residential  loan
requirement"  exception,  during either or both of the first two years beginning
after December 31, 1995. The residential loan requirement is met, in general, if
the principal  amount of residential  loans made by the  Corporation  during the
year is not less  than the  Corporation's  "base  amount".  The base  amount  is
defined as the average of the principal amounts of residential loans made during
the six most recent tax years beginning before January 1, 1996.

As a result of the Act, the  Corporation  must  recapture  into  taxable  income
approximately  $1,267,000  ratably over the next six years,  beginning  with the
year ending March 31, 1997. If the  residential  loan  requirement  exception is
met, as discussed  above,  the income will be includable  over the third through
eighth years following the year ended March 31, 1997.

New Accounting Pronouncements

In October 1995,  the  Financial  Accounting  Standards  Board  ("FASB")  issued
Statements of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS No. 123 allows companies to continue to account
for their stock option plans in  accordance  with APB Opinion 25 but  encourages
the adoption of a new  accounting  method based on the  estimated  fair value of
employee  stock  options.  Companies  electing  not to follow the new fair value
based method are required to provide expanded  footnote  disclosures,  including
pro forma net income and  earnings per share,  determined  as if the company had
applied  the  new  method.   SFAS  No.  123  was  adopted  by  the   Corporation
prospectively  beginning  April 1, 1996.  Disclosures  required  by SFAS 123 are
presented in Note 10.

Effective  January  1,  1997 the  Corporation  adopted  Statement  of  Financial
Accounting Standards No. 125 (SFAS 125), "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities". This Statement provides
accounting  and  reporting  standards  for  transfers and servicing of financial
assets and extinguishments of liabilities. After a transfer of financial assets,
an entity  recognizes  the financial  and  servicing  assets it controls and the
liabilities it has incurred, derecognizes financial assets when control has been
surrendered,  and derecognizes  liabilities when  extinguished.  In addition,  a
transfer of financial  assets in which the  transferor  surrenders  control over
those assets is accounted for as a sale to the extent that  consideration  other
than  beneficial  interests in the  transferred  assets is received in exchange.
SFAS 125 is effective  for  transfers  and  servicing  of  financial  assets and
extinguishments  of liabilities  occurring  after December 31, 1996 and is to be
applied  prospectively.  The  application of this  pronouncement  did not have a
material effect on the financial statements of the Corporation.



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)
--------------------------------------------------------------------------------

New Accounting Pronouncements (continued)

In February 1997, the FASB issued  Statement of Financial  Accounting  Standards
No. 128,  "Earnings per Share" ("SFAS 128"). SFAS 128 is effective for financial
statements,  including  interim periods issued for periods ending after December
15, 1997.  SFAS 128  provides a different  method for  calculating  earnings per
share than is currently  used in accordance  with APB 15,  "Earnings per Share."
SFAS 128 provides for the  calculation of basic and diluted  earnings per share.
Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding  for the period.  Diluted  earnings per share reflects the potential
dilution of  securities  that could  share in earnings of an entity,  similar to
fully diluted earnings per share.  Management does not expect the application of
this pronouncement to have a material effect on the financial  statements of the
Corporation.

Earnings Per Share

Earnings per share is computed based on the weighted average number of shares of
common stock  outstanding  during each period  including the assumed exercise of
dilutive stock options,  and is  retroactively  adjusted for stock dividends and
stock splits.  The weighted average number of shares of common stock outstanding
for the years ended March 31, 1997, 1996 and 1995 were 1,272,085,  1,258,068 and
1,227,690, respectively.

Statement of Cash Flows

For purposes of this presentation, cash equivalents include federal funds sold.

Other

Certain  reclassifications  have  been  made in the  prior  years'  consolidated
financial statements to conform to the March 31, 1997 presentation.



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

1.    Securities (continued)

A summary of the amortized cost and estimated  market values of securities is as
follows:
<TABLE>
<CAPTION>

March 31, 1997
--------------
                                                      Gross          Gross        Estimated
                                   Amortized       Unrealized     Unrealized        Market
                                      Cost            Gains         Losses          Value
                                   ---------       ----------     ----------      ---------
<S>                              <C>             <C>             <C>              <C>   
Held to Maturity

  United States government
    and agency obligations        $4,876,286      $   14,235      $   34,287      $4,856,234

  Corporate obligations              296,128              --             628         295,500

  Other                               25,023             460              --          25,483
                                  ----------      ----------      ----------      ----------
                                   5,197,437          14,695          34,915       5,177,217
Available for Sale

  Federal Home Loan Mortgage
    Corporation stock                 80,605       2,162,615              --       2,243,220
                                  ----------      ----------      ----------      ----------
                                  $5,278,042      $2,177,310      $   34,915      $7,420,437
                                  ==========      ==========      ==========      ==========
</TABLE>





<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

1.    Securities (continued)

A summary  of the  amortized  cost and  estimated  market  values of  investment
securities is as follows:
<TABLE>
<CAPTION>

March 31, 1996
--------------
                                                       Gross           Gross      Estimated
                                  Amortized         Unrealized       Unrealized     Market
                                    Cost               Gains           Losses       Value
                                  ---------         ----------       ----------   ---------
<S>                               <C>            <C>                 <C>          <C> 
Held to Maturity

  United States government
    and agency obligations        $5,749,143      $   43,821         $21,194      $5,771,770

  Corporate obligations              293,612              13              --         293,625

  Other                               25,023             360              --          25,383
                                  ----------      ----------         -------      ----------
                                   6,067,778          44,194          21,194       6,090,778

Available for Sale

  Federal Home Loan Mortgage
    Corporation stock                 80,605       1,673,840              --       1,754,445
                                  ----------      ----------         -------      ----------
                                  $6,148,383      $1,718,034         $21,194      $7,845,223
                                  ==========      ==========         =======      ==========
</TABLE>






<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------


1.    Securities (continued)

The amortized  cost and estimated  market value of securities at March 31, 1997,
by contractual maturity, are shown below:


March 31, 1997
--------------
                                                                    Estimated
                                              Amortized               Market
                                                Cost                   Value
                                              ---------             ---------
Held to Maturity

  Due in one year or less                    $1,500,258            $1,514,493
  Due in one through five years               3,672,156             3,637,241
  Other                                          25,023                25,483
                                             ----------            ----------
                                              5,197,437             5,177,217
                                             ----------            ----------
Available for Sale
  Federal Home Loan Mortgage
    Corporation stock                            80,605             2,243,220
                                             ----------            ----------
                                             $5,278,042            $7,420,437
                                             ==========            ==========




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

2.    Loans Receivable

Loans receivable are summarized as follows:

March 31,                                           1997             1996
---------                                           ----             ----
Real estate loans
  First mortgage conventional
      One to four family                        $ 96,968,331     $ 91,031,523
      Multi-family                                18,787,851       20,453,598
      Commercial                                  18,720,436       18,160,142
      Short-term construction                      5,204,235        6,415,254
                                                ------------     ------------
Total real estate loans                          139,680,853      136,060,517

Less
  Loans in process                                 1,619,476        1,830,271
  Deferred loan fees, net                            372,460          411,371
  Allowance for loan losses                          602,910          706,755
                                                ------------     ------------
Net real estate loans                            137,086,007      133,112,120
                                                ------------     ------------
Consumer loans
  Deposit account                                    338,976          234,093
  Unsecured personal                               4,417,470        3,615,716
  Automobile                                       1,645,893        1,469,633
  Home equity                                      1,630,347          379,605
  Other                                            4,210,428        3,206,164
                                                ------------     ------------
Total consumer loans                              12,243,114        8,905,211

Less
  Deferred loan fees (origination costs), net        (12,467)         (15,087)
  Allowance for loan losses                          436,103          293,523
                                                ------------     ------------
Net consumer loans                                11,819,478        8,626,775
                                                ------------     ------------
                                                $148,905,485     $141,738,895
                                                ============     ============



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

2.    Loans Receivable (continued)

Loans serviced for others amounted to approximately $10,513,000, $11,264,000 and
$11,782,000 at March 31, 1997, 1996 and 1995,  respectively.  The loans were not
included in the accompanying consolidated statements of financial condition.

The weighted average interest rate on loans receivable was  approximately  8.15%
and 8.32% at March 31, 1997 and 1996, respectively.

A summary of the allowance for loan losses is as follows:

Year Ended March 31,                        1997           1996          1995
--------------------                        ----           ----          ----

Balance at beginning of year             $1,000,278     $  762,621     $660,652

Provision charged to expense                180,561        307,361      108,946

Losses charged to the allowance,
  net of recoveries                        (141,826)       (69,704)      (6,977)
                                         ----------     ----------     --------
Balance at end of year                   $1,039,013     $1,000,278     $762,621
                                         ==========     ==========     ========

Of the total allowance for loan losses at March 31, 1997 and 1996, approximately
$783,700 and $791,300, respectively, is not specifically allocated to identified
problem loans.

The following  information  relates to the  Corporation's  impaired  loans which
includes  troubled  debt  restructurings  that meet the  definition  of impaired
loans:

As of and for the year ended March 31,                       1997         1996
--------------------------------------                       ----         ----

Impaired loans with a specific allowance                   $416,882     $425,030
Impaired loans with no specific allowance                        --           --
                                                           --------     --------

Total impaired loans                                       $416,882     $425,030
                                                           ========     ========

Total allowance related to impaired loans                  $195,270     $145,270
Average balance of impaired loans for the year             $420,956     $425,030
Interest income on impaired loans for the year
  recorded on a cash basis                                 $  4,004     $     --
                                                           ========     ========




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

3.    Property and Equipment

Property and equipment are summarized as follows:

March 31,                                              1997              1996
---------                                              ----              ----

Buildings                                           $3,201,387        $3,174,401
Land and improvements                                  876,276           873,244
Furniture and equipment                                757,018           745,391
                                                    ----------        ----------
                                                     4,834,681         4,793,036

Less accumulated depreciation                        1,292,573         1,100,993
                                                    ----------        ----------
                                                    $3,542,108        $3,692,043
                                                    ==========        ==========

4.    Deposits

March 31,                                            1997               1996
---------                                            ----               ----

Demand deposits
  Savings accounts                              $ 12,577,540        $ 12,178,293
  NOW accounts                                    15,576,036          13,371,037
  Money market deposit
    accounts                                       9,935,309          10,444,131
                                                ------------        ------------
Total demand deposits                             38,088,885          35,993,461

Time deposits                                     78,506,000          73,508,000
                                                ------------        ------------
                                                $116,594,885        $109,501,461
                                                ============        ============



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------


4.   Deposits (continued)

The aggregate  amount of time deposit  accounts with a minimum  denomination  of
$100,000 was approximately $6,594,000 and $5,285,000 at March 31, 1997 and 1996,
respectively.

Time deposits mature as follows:

March 31,                                           1997                1996
---------                                           ----                ----

Within one year                                 $58,772,000          $47,197,000
One to two years                                 10,715,000           15,478,000
More than two years                               9,019,000           10,833,000
                                                -----------          -----------
                                                $78,506,000          $73,508,000
                                                ===========          ===========

Interest expense on deposits is summarized as follows:

Year Ended March 31,                           1997        1996          1995
--------------------                           ----        ----          ----

Time deposits                               $4,045,717   $3,999,200   $2,755,991
Money market deposit and NOW accounts          649,194      624,182      842,809
Savings                                        359,973      353,806      395,863
                                            ----------   ----------   ----------
                                            $5,054,884   $4,977,188   $3,994,663
                                            ==========   ==========   ==========




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

5.     Fair Value of Financial Instruments

The estimated  fair values of the  Corporation's  financial  instruments  are as
follows:

<TABLE>
<CAPTION>


March 31,                                        1997                         1996 
---------                           ---------------------------   ----------------------------

                                      Carrying          Fair        Carrying          Fair
                                       Amount           Value        Amount           Value
                                    ------------  -------------   -------------  -------------
<S>                                  <C>          <C>             <C>             <C>
Financial assets
  Cash and short-term investments   $  4,922,213   $  4,922,000    $  3,673,085   $  3,673,000
  Securities                           7,440,657      7,420,000       7,822,223      7,845,000
  Loans, net of allowance for
   loan losses                       148,905,485    148,253,000     141,738,895    141,443,000

Financial liabilities
  Deposits                          $116,594,885   $116,795,000    $109,501,461   $109,467,000
  Advances from Federal Home
   Loan Bank                          26,000,000     26,000,000      27,000,000     27,000,000


                                       Notional         Fair         Notional         Fair
                                        Amount          Value         Amount          Value
                                    ------------  -------------   -------------  -------------

Unrecognized financial instruments
  Commitments to extend credit      $ 11,179,000   $ 11,179,000    $  9,294,000   $  9,294,000

</TABLE>

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.

Cash and short-term investments

For those short-term  investments,  the carrying amount is a reasonable estimate
of fair value.

Securities

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



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                                Notes to Consolidated Statements
                                                                     (continued)
--------------------------------------------------------------------------------

5.   Fair Market Value of Financial Instruments (continued)

Loan receivables

The fair value of loans is estimated by discounting  the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
remaining  maturities.  This  calculation  ignores loan fees and certain factors
affecting the interest  rates  charged on various  loans such as the  borrower's
creditworthiness  and compensating  balances and dissimilar types of real estate
held as collateral.

Deposit liabilities

The fair value of demand deposits,  savings  accounts,  and certain money market
deposits  is the amount  payable on demand at the balance  sheet date.  The fair
value of  fixed-maturity  certificates  of deposit is estimated  using the rates
currently offered for deposits of similar remaining maturities.

Advances from Federal Home Loan Bank

All advances  from Federal  Home Loan Bank are due within  approximately  ninety
days from the balance sheet date.  Therefore,  the carrying amount  approximates
fair value.

Commitments to extend credit

The fair value of commitments is estimated  using the fees currently  charged to
enter into similar  agreements,  taking into account the remaining  terms of the
agreements and the present  creditworthiness  of the  borrowers.  For fixed-rate
loan  commitments,  fair value also  considers the  difference  between  current
levels of interest  rates and the committed  rates.  Because of the  competitive
nature of the  marketplace,  loan fees vary greatly with no fees charged in many
cases. Therefore, management has concluded no value should be assigned.

6.  Advances From Federal Home Loan Bank

The advances to the  Corporation at March 31, 1997 and 1996 mature within twelve
months.  The weighted  average  interest rate on advances was 6.85% and 5.88% at
March 31, 1997 and 1996, respectively.  These advances are collateralized by the
investment in FHLB stock and the Corporation's portfolio of first mortgage loans
under a Blanket Floating Lien Agreement.




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

6.   Advances From Federal Home Loan Bank (continued)

Information  related to borrowing activity from the Federal Home Loan Bank is as
follows:

Year Ended March 31,               1997          1996           1995
--------------------               ----          ----           ----

Maximum amount outstanding
 during the year               $28,000,000    $27,000,000    $25,000,000
                               ===========    ===========    ===========
Average amount outstanding
 during the year               $26,541,667    $25,346,995    $20,120,548
                               ===========    ===========    ===========
Average interest rate during
 the year                             5.58%          6.07%          4.81%
                               ===========    ===========    ===========


7.    Income Taxes

Deferred  tax  assets  (liabilities),  included  in "Other  liabilities"  in the
consolidated balance sheets are as follows:

March 31,                                             1997               1996
---------                                             ----               ----

Deferred tax assets
  Deferred loan fees                              $     6,522         $  27,674
  Other                                                 7,364            10,158
                                                  -----------         ---------
                                                       13,886            37,832
                                                  -----------         ---------
Deferred tax liabilities
  Depreciable assets                                 (143,335)         (136,997)
  FHLMC stock                                        (821,794)         (644,428)
  FHLB stock                                          (90,852)          (90,852)
  Allowance for losses                                 (6,351)          (40,679)
  Other                                               (93,965)          (23,605)
                                                  -----------         ---------
                                                   (1,156,297)         (936,561)
                                                  -----------         ---------
Net deferred tax liability                        $(1,142,411)        $(898,729)
                                                  ===========         =========


<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

8.    Stockholders' Equity and Regulatory Capital Requirements

Savings  institutions  must maintain specific capital standards that are no less
stringent  than the capital  standards  applicable  to national  banks.  The OTS
regulations  currently  have three  capital  standards  including (i) a tangible
capital  requirement,  (ii) a core capital  requirement,  and (iii) a risk-based
capital requirement. The tangible capital standard requires savings institutions
to maintain tangible capital of not less than 1.5% of adjusted total assets. The
core capital standard requires a savings institution to maintain core capital of
not less than 3.0% of adjusted  total assets.  The risk-based  capital  standard
requires risk-based capital of not less than 8.0% of risk-weighted assets.

The following table presents the Bank's  regulatory  capital levels at March 31,
1997, relative to the OTS requirements applicable at that date:

                       Amount      Percent     Actual     Actual       Excess
                      Required    Required     Amount     Percent      Amount
                      --------    --------     ------     -------      ------

Tangible Capital     $2,498,000    1.50%   $19,779,000     11.88%    $17,281,000
Core Capital          4,996,000    3.00     19,779,000     11.88      14,783,000
Risk-based Capital    8,908,000    8.00     20,562,000     18.46      11,654,000

The  Bank may not  declare  or pay a cash  dividend,  or  repurchase  any of its
capital stock if the effect  thereof would cause the net worth of the Bank to be
reduced below certain requirements imposed by federal regulations.

Capital  distributions  by  OTS-regulated  savings  associations  are limited by
regulation  ("Capital  Distribution  Regulation").   Capital  distributions  are
defined to include, in part, dividends,  stock repurchases and cash-out mergers.
The  Capital  Distribution  Regulation  permits a "Tier 1"  association  to make
capital  distributions  during a  calendar  year up to 100% of its net income to
date plus the amount that would reduce by one-half its surplus  capital ratio at
the beginning of the calendar year. Any  distributions  in excess of that amount
require  prior  OTS  notice,  with  the  opportunity  for OTS to  object  to the
distribution.  A Tier 1 association is defined as an association  that has, on a
pro forma basis after the  proposed  distribution,  capital  equal to or greater
than the OTS fully phased-in capital  requirement and has not been deemed by the
OTS to be "in need of more  than  normal  supervision".  The  Bank is  currently
classified as a Tier 1 institution for these purposes.  The Capital Distribution
Regulation  requires  that  associations  provide the  applicable  OTS  District
Director  with  a  30-day  advance  written  notice  of  all  proposed   capital
distributions whether or not advance approval is required by the regulation. The
Bank did not pay any  dividends to the  Corporation  during the year ended March
31, 1997.





<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------


8.  Stockholders' Equity and Regulatory Capital Requirements (continued)

Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special  assessment on SAIF members to capitalize the SAIF at
the  designated  reserve level of 1.25% as of September  30, 1996.  Based on the
Corporation's  deposits as of March 31, 1995,  the date for measuring the amount
of the  special  assessment,  the  Corporation  paid  a  special  assessment  of
approximately  $671,000.  Excluding this special assessment,  net of tax effect,
net income and  earnings  per share for the year ended March 31, 1997 would have
been approximately $2,151,000 and $1.69, respectively.  The FDIC has lowered the
premium for deposit  insurance  from that prior to the special  assessment  to a
level necessary to maintain the SAIF at its required reserve level.

9.  Employee Benefit Plans

Pension Plan

The  Corporation  has a  noncontributory  defined  benefit pension plan covering
substantially  all of its employees.  The benefits are based on years of service
and  final  average  compensation.   The  Corporation's  funding  policy  is  to
contribute  amounts to the pension  trust at least equal to the minimum  funding
requirements of the Employee Retirement Income Security Act of 1974 (ERISA), but
not in excess of the maximum tax deductible  amount.  Contributions are intended
to  provide  not only for  benefits  attributed  to service to date but also for
those  expected  to be earned  in the  future.  The  following  is a summary  of
information with respect to the plan:

Year Ended March 31,                           1997        1996         1995
--------------------                           ----        ----         ----

Net periodic pension cost

Service cost - benefits earned
 during the period                           $ 30,176     $ 27,872     $ 31,633
Interest cost on projected benefit
 obligations                                   34,077       38,884       37,054
Actual return on plan assets                  (37,684)     (29,905)     (30,625)
Net amortization and deferral                  (6,695)     (15,502)     (11,117)
                                             --------     --------     --------
                                             $ 19,874     $ 21,349     $ 26,945
                                             ========     ========     ========

Accumulated benefit obligation

Vested benefits                              $441,077     $393,678     $334,321
Non-vested benefits                             5,743       27,792       47,105
                                             --------     --------     --------
                                             $446,820     $421,470     $381,426
                                             ========     ========     ========



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

9.    Employee Benefit Plans (continued)

Year Ended March 31,                                     1997            1996
--------------------                                     ----            ----

Accrued pension cost

Projected benefit obligation                           $537,272        $540,141
Fair value of plan assets, primarily
  IPG insurance contracts                               546,708         539,114
                                                       --------        --------

Assets in excess (deficit) of projected
  benefit obligation                                      9,436          (1,027)

Unrecognized prior service cost                          18,604          21,704
Unrecognized net (gain) loss                            (47,270)        (11,766)
Unrecognized net asset                                  (57,864)        (66,131)
                                                       --------        --------
                                                       $(77,094)       $(57,220)
                                                       ========        ========

The following  assumed  rates were used in  determining  the  projected  benefit
obligations:

Year Ended March 31,                                    1997        1996
--------------------                                    ----        ----

Weighted average discount rate                          7.0%        7.0%
                                                        ====        ====
Expected long-term rate of return on
  plan assets                                           7.5%        7.5%
                                                        ====        ====
Increase in future compensation levels                  5.0%        5.5%
                                                        ====        ====

The  measurement  date used to value the plan assets was December 31, 1996,  and
1995.




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

9.   Employee Benefit Plans (continued)

Employee Stock Ownership Plan

The Employee  Stock  Ownership and 401(k) Profit  Sharing Plan (the "Plan") is a
combination  of a profit  sharing  plan with 401(k) and a stock bonus plan.  The
Plan provides for retirement,  death,  and disability  benefits for all eligible
employees.

An employee becomes eligible for  participation  after completion of one year of
service.  After  meeting the  eligibility  requirements,  an employee  becomes a
member of the Plan on the  earliest  January 1, April 1, July 1, or  September 1
occurring on or after his qualification.

The  contributions to the Plan are discretionary and are determined by the Board
of  Directors.  The  contributions  are limited  annually to the maximum  amount
permitted  as a  tax  deduction  under  the  applicable  Internal  Revenue  Code
provisions.

Profit-sharing, pension plan, and retirement expenses were as follows:

                        ESOP and         Supplemental
     Year Ended          Pension           Unfunded
      March 31,           Plan            Retirement*          Total
     ----------         --------         ------------          -----

        1995             $44,556            $6,996            $51,552
        1996              38,325             1,749             40,074
        1997              43,513                --             43,513

*For a former executive officer, amounts are authorized annually.



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

10.       Stock Option Plan

Under the terms of the Employee  Stock  Ownership  Plan ("the plan)",  the Stock
Option Committee may grant options for the purchase of shares up to 10% of total
stock  issued  in the  conversion  of the Bank from  mutual  to the stock  form.
Incentive  stock options may be granted to full-time  employees at a price equal
to the market  value at the date of the grant,  and the  aggregate  fair  market
value  cannot  exceed  $100,000 per employee the first year that the employee is
granted an incentive stock option. Non-incentive stock options may be granted to
directors,  officers  and key  employees  at a price of not less than the market
value per share at the date of grant of such option.  All stock options  granted
to owners of less than 10% of the  Corporation's  stock must be exercised within
10 years. The following table represents options outstanding under the Plan:

<TABLE>
<CAPTION>
Year Ending March 31,            1997                   1996                  1995
---------------------     -------------------   -------------------   -------------------
                                    Weighted-             Weighted-             Weighted-
                                     average               average               average
                                    exercise              exercise              exercise
                          Shares      price      Shares     price      Shares     price
                          -------------------   -------------------   -------------------
<S>                       <C>        <C>         <C>       <C>         <C>       <C>   
Options outstanding at
  beginning of year       36,000     $16.04      49,630    $ 5.66      80,224    $ 4.69

Options granted           30,500      21.37      28,100     18.47       3,000     13.00
Options exercised         (5,650)     11.52     (27,820)     4.00     (33,594)     4.00
Options forfeited           (200)     20.00     (13,910)     8.00          --        --
                          ------     ------     -------    ------     -------    ------
Options outstanding at
  end of year             60,650     $17.13      36,000    $16.04      49,630    $ 5.66
                          ------     ------     -------    ------     -------    ------
</TABLE>

All options are exercisable upon date of grant. The remaining  contractual lives
of the options granted in 1997,  1996 and 1995 are 9.2 years,  8.8 years and 8.0
years,  respectively,   at  March  31,  1997.  The  weighted  average  remaining
contractual life of total options is 8.5 years at March 31, 1997.

The Corporation applies APB Opinion 25 and related interpretations in accounting
for its  plan.  Accordingly,  no  compensation  cost  has been  recognized.  Had
compensation cost for the Corporation's  stock option plan been determined based
on the fair value at the grant date consistent with the methods of SFAS 123, the
Corporation's net income and net income per share would have been reduced to the
pro forma amounts indicated below. In accordance with the transition  provisions
of SFAS 123, the pro forma amounts reflect  options with grant dates  subsequent
to April 1, 1995.



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

10. Stock Option Plan (continued)

Year Ended March 31                            1997             1996
-------------------                            ----             ----

Net income:
 As reported                                $1,734,734       $2,011,538
 Pro forma                                   1,611,900        1,914,873

Net income per share:
 As reported                                     $1.36            $1.60
 Pro forma                                        1.27             1.52


For purposes of computing the pro forma amounts  indicated above, the fair value
of each option on the date of grant is estimated using the Black-Scholes  option
pricing model with the  following  assumptions  for the grant in 1997:  dividend
yield of 2%, expected  volatility of 18%,  risk-free  interest rate of 7% and an
expected option life of 10 years.

11.   Commitments and Contingencies

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.  The   Corporation   evaluates  each   customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed  necessary  by the  Corporation  upon  extension  of credit,  is based on
management's  credit evaluation of the counterparty.  Collateral held varies but
may include single family  residences,  other residential  property,  commercial
property  and  land.  At  March  31,  1997,  the   Corporation  had  outstanding
commitments to originate  loans with variable  interest  rates of  approximately
$5,510,000 and loans with fixed rates of approximately  $1,570,000. In addition,
unused lines of credit amounted to approximately $4,099,000 at March 31, 1997.



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

11.   Commitments and Contingencies (continued)

Leases

The  Corporation is obligated under a  noncancellable  operating lease beginning
April 1, 1997.  Future minimum annual rental  commitments  under the lease is as
follows:

          Year Ending
            March 31                           Amount
          -----------                          ------

              1998                            $ 28,800
              1999                              31,200
              2000                              33,600
              2001                              36,000
              2002                              38,400
                                              --------
                                              $168,000
                                              ========

The  Corporation  has entered into an agreement with a data service center which
requires  minimum annual payments of approximately  $115,000  through  September
1997.

In the normal course of business,  the  Corporation  has entered into employment
agreements with certain officers of the Bank.



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

12.   Selected Quarterly Financial Data (Unaudited)

Condensed quarterly financial data is shown as follows:
(Dollars in thousands except per share data)

Year Ended March 31, 1997
-------------------------
                                      First       Second      Third       Fourth
                                     Quarter     Quarter     Quarter     Quarter
                                     -------     -------     -------     -------

Total interest income                $3,144       $3,151     $3,232      $3,251
Total interest expense                1,633        1,600      1,653       1,650
                                     ------       ------     ------      ------

Net interest income                   1,511        1,551      1,579       1,601
Provision for loan losses                33           70         53          25
                                     ------       ------     ------      ------

Net interest income after provision
  for loan losses                     1,478        1,481      1,526       1,576

Other income                            118          130        136         135

Other expenses                          716        1,462        734         893
                                     ------       ------     ------      ------

Income before income taxes              880          149        928         818

Income taxes                            330           54        349         307
                                     ------       ------     ------      ------

Net income                           $  550       $   95     $  579      $  511
                                     ======       ======     ======      ======
Earnings per share                   $  .43       $  .08     $  .46      $  .39
                                     ======       ======     ======      ======




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

12.   Selected Quarterly Financial Data (Unaudited)

Condensed quarterly financial data is shown as follows:
(Dollars in thousands except per share data)

Year Ended March 31, 1996
-------------------------
                                      First       Second      Third       Fourth
                                     Quarter     Quarter     Quarter     Quarter
                                     -------     -------     -------     -------

Total interest income                $2,973       $3,095     $3,159      $3,160
Total interest expense                1,552        1,637      1,678       1,648
                                     ------       ------     ------      ------

Net interest income                   1,421        1,458      1,481       1,512
Provision for loan losses                25           43         32         207
                                     ------       ------     ------      ------

Net interest income after provision
  for loan losses                     1,396        1,415      1,449       1,305

Other income                            109          115        114         118
Other expenses                          696          686        705         722
                                     ------       ------     ------      ------

Income before income taxes              809          844        858         701

Income taxes                            304          316        322         258
                                     ------       ------     ------      ------

Net income                           $  505       $  528     $  536      $  443
                                     ======       ======     ======      ======

Earnings per share                   $  .41       $  .42     $  .42      $  .35
                                     ======       ======     ======      ======




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

13.  Condensed Financial Information of the Corporation (Parent Company Only)

Condensed financial information is shown for the parent company only as follows:

                   Condensed Statements of Financial Condition

March 31,                                            1997              1996
---------                                            ----              ----

  Assets

Investment in the Bank, at equity                 $19,905,521       $18,122,381
Cash                                                2,071,134         2,505,783
Investment securities                                      --           249,931
Prepaid expenses and other assets                      19,520             9,296
                                                  -----------       -----------
                                                  $21,996,175       $20,887,391
                                                  ===========       ===========

  Liabilities and Stockholders' Equity

Liabilities                                       $        --       $    16,823
Stockholders' Equity
  Common stock                                         12,753            12,697
  Additional paid-in capital                        4,716,677         4,651,634
  Retained earnings                                17,266,745        16,206,237
                                                  -----------       -----------

Total stockholders' equity                         21,996,175        20,870,568
                                                  -----------       -----------

                                                  $21,996,175       $20,887,391
                                                  ===========       ===========




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

13.  Condensed Financial Information of the Corporation (Parent Company Only)
     (continued)

                         Condensed Statements of Income

Year Ended March 31,                          1997         1996         1995
--------------------                          ----         ----         ----

Income
  Interest income                          $    4,900   $   34,224   $  129,049
  Dividends received from Bank                     --           --      201,472
                                           ----------   ----------   ----------

Total income                                    4,900       34,224      330,521
                                           ----------   ----------   ----------

Noninterest expenses                          (83,187)     (62,755)     (53,084)
                                           ----------   ----------   ----------

Income (loss) before equity in
  undistributed net income of the Bank        (78,287)     (28,531)     277,437
Equity in undistributed net income of
  the Bank                                  1,783,140    2,028,221    1,525,064
                                           ----------   ----------   ----------

Income before income taxes                  1,704,853    1,999,690    1,802,501
Income taxes                                  (29,881)     (11,848)      31,020
                                           ----------   ----------   ----------

Net income                                 $1,734,734   $2,011,538   $1,771,481
                                           ==========   ==========   ==========



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)
--------------------------------------------------------------------------------

13.  Condensed Financial Information of the Corporation (Parent Company Only)
     (continued)

                       Condensed Statements of Cash Flows

<TABLE>
<CAPTION>
Year Ended March 31,                                      1997           1996           1995
--------------------                                      ----           ----           ----   
<S>                                                    <C>            <C>            <C>        
Operating activities
  Net income                                           $ 1,734,734    $ 2,011,538    $ 1,771,481
  Adjustments
    Equity in income of the Bank                        (1,783,140)    (2,028,221)    (1,726,536)
    (Increase) decrease in prepaid and other assets        (10,224)        12,189         (4,239)
    Increase (decrease) in other liabilities               (16,823)           654          9,935
                                                       -----------    -----------    -----------

Net cash provided (absorbed) by operating activities       (75,453)        (3,840)        50,641
                                                       -----------    -----------    -----------
Investing activities
  Proceeds from maturities of investment securities        249,931        996,776        984,738
  Purchase of investment securities                             --             --     (2,231,445)
  Dividends received from Bank                                  --             --        201,472
                                                       -----------    -----------    -----------

Net cash provided (absorbed) by investing activities       249,931        996,776     (1,045,235)
                                                       -----------    -----------    -----------
Financing activities
  Cash dividends paid on common stock                     (674,226)      (529,100)      (436,612)
  Stock options exercised                                   65,099        111,280        134,376
                                                       -----------    -----------    -----------

Net cash absorbed by financing activities                 (609,127)      (417,820)      (302,236)
                                                       -----------    -----------    -----------

Increase (decrease) in cash                               (434,649)       575,116     (1,296,830)

Cash, beginning of year                                  2,505,783      1,930,667      3,227,497
                                                       -----------    -----------    -----------

Cash, end of year                                      $ 2,071,134    $ 2,505,783    $ 1,930,667
                                                       ===========    ===========    ===========
</TABLE>



<PAGE>




Report of Independent Certified Public
Accountants on Supplemental Material


Our  audits of the  basic  consolidated  financial  statements  included  in the
preceding  section of this report were  performed  for the purpose of forming an
opinion  on those  consolidated  financial  statements  taken  as a  whole.  The
supplemental  material  presented  in the  following  section of this  report is
presented for purposes of additional  analysis and is not a required part of the
basic consolidated financial statements.  Such information has been subjected to
the  auditing  procedures  applied  in  the  audits  of the  basic  consolidated
financial  statements  and, in our  opinion,  is fairly  stated in all  material
respects in relation to the basic consolidated  financial  statements taken as a
whole.




                                                    Certified Public Accountants


Richmond, Virginia
April 24, 1997



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                                     Consolidating Balance Sheet
                                                                  March 31, 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                               Community
                                                Community                      Financial
                                 Community      Financial                     Corporation
                                    Bank       Corporation    Eliminations    Consolidated
                                 ---------     -----------    ------------    ------------

Assets
<S>                            <C>             <C>            <C>             <C>         
Cash, including interest-
  bearing deposits             $  4,922,213    $ 2,071,134    $  2,071,134    $  4,922,213
Securities                                                                  
  Held to maturity                5,197,437             --              --       5,197,437
  Available for sale              2,243,220             --              --       2,243,220
Investment in Federal                                                       
  Home Loan Bank stock            1,400,000             --              --       1,400,000
Loans receivable, net           148,905,485             --              --     148,905,485
Real estate owned, net              173,245             --              --         173,245
Property and equipment,                                                     
  net                             3,542,108             --              --       3,542,108
Accrued interest                                                            
  receivable                        989,438             --              --         989,438
Prepaid expenses and                                                        
  other assets                      314,516         19,520              --         334,036
Investment in subsidiary                 --     19,905,521      19,905,521              --
                               ------------    -----------    ------------    ------------

                               $167,687,662    $21,996,175    $ 21,976,655    $167,707,182
                               ============    ===========    ============    ============
</TABLE>
                                                                           



<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                                     Consolidating Balance Sheet
                                                                  March 31, 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                               Community
                                                Community                      Financial
                                 Community      Financial                     Corporation
                                    Bank       Corporation    Eliminations    Consolidated
                                 ---------     -----------    ------------    ------------

Liabilities and Stockholders' Equity

Liabilities
<S>                            <C>             <C>            <C>             <C>         
Deposits                       $118,666,019    $        --    $  2,071,134    $116,594,885
Advances from Federal Home
  Loan Bank                      26,000,000             --              --      26,000,000
Advance payments by borrowers
  for taxes and insurance           135,561             --              --         135,561
Other liabilities                 1,639,740             --              --       1,639,740
                               ------------    -----------    ------------    ------------

                                146,441,320             --       2,071,134     144,370,186
                               ------------    -----------    ------------    ------------

Stockholders' Equity
  Common stock                        6,678         12,753           6,678          12,753
  Additional paid-in
    capital                       4,869,248      4,716,677       4,869,248       4,716,677
  Retained earnings              15,029,595     17,266,745      15,029,595      17,266,745
  Net unrealized gain on
    securities available
    for sale                      1,340,821             --              --       1,340,821
                               ------------    -----------    ------------    ------------

                                 21,246,342     21,996,175      19,905,521      23,336,996
                               ------------    -----------    ------------    ------------

                               $167,687,662    $21,996,175    $21,976,655     $167,707,182
                               ============    ===========    ============    ============
</TABLE>




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                               Consolidating Statement of Income
                                                       Year Ended March 31, 1997
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            Community
                                               Community                    Financial
                                 Community     Financial                   Corporation
                                    Bank      Corporation   Eliminations  Consolidated
                                 ---------    -----------   ------------  ------------
<S>                             <C>           <C>            <C>          <C>        
Interest income
  Loans                         $12,188,714   $        --    $       --   $12,188,714
  Investment securities             467,728         4,136            --       471,864
  Other investments                 116,645           764            --       117,409
                                -----------   -----------    ----------   -----------

Total interest income            12,773,087         4,900            --    12,777,987
                                -----------   -----------    ----------   -----------

Interest expense
  Deposits                        5,054,884            --            --     5,054,884
  Borrowed money                  1,480,747            --            --     1,480,747
                                -----------   -----------    ----------   -----------

Total interest expense            6,535,631            --            --     6,535,631
                                -----------   -----------    ----------   -----------

Net interest income               6,237,456         4,900            --     6,242,356

Provision for loan losses           180,561            --            --       180,561
                                -----------   -----------    ----------   -----------

Net interest income
  after provision for
  loan losses                     6,056,895         4,900            --     6,061,795
                                -----------   -----------    ----------   -----------

Noninterest income
  Service charges, fees
    and commissions                 509,748            --            --       509,748
  Other                               8,994            --            --         8,994
                                -----------   -----------    ----------   -----------

Total noninterest income            518,742            --            --       518,742
                                -----------   -----------    ----------   -----------
</TABLE>




<PAGE>

                                                 Community Financial Corporation
                                                                  and Subsidiary

                                               Consolidating Statement of Income
                                                       Year Ended March 31, 1997
                                                                     (continued)
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                            Community
                                               Community                    Financial
                                 Community     Financial                   Corporation
                                    Bank      Corporation   Eliminations  Consolidated
                                 ---------    -----------   ------------  ------------
<S>                             <C>           <C>            <C>          <C>        
Noninterest expenses
Compensation and employee       $ 1,333,550   $        --    $       --   $ 1,333,550
  benefits
Occupancy                           399,290            --            --       399,290
Data processing                     349,150            --            --       349,150
BIF/SAIF premium disparity
  assessment                        670,765            --            --       670,765
Insurance                           189,143            --            --       189,143
Other                               780,654        83,187            --       863,841
                                -----------   -----------    ----------   -----------

Total noninterest expenses        3,722,552        83,187            --     3,805,739
                                -----------   -----------    ----------   -----------
Income (loss) before equity
  in net income of subsidiary
  and income taxes                2,853,085       (78,287)           --     2,774,798

Equity in net income of
  subsidiary                             --     1,783,140     1,783,140            --
                                -----------   -----------    ----------   -----------

Income before income taxes        2,853,085     1,704,853     1,783,140     2,774,798

Income taxes                      1,069,945       (29,881)           --     1,040,064
                                -----------   -----------    ----------   -----------

Net income                      $ 1,783,140   $ 1,734,734    $1,783,140   $ 1,734,734
                                ===========   ===========    ==========   ===========
</TABLE>


<PAGE>




Item 8.  Changes in and Disagreements with Accountants on
         Accounting and Financial Disclosure
----------------------------------------------------------

     There has been no Current  Report on Form 8-K filed  within 24 months prior
to the  date of the most  recent  financial  statements  reporting  a change  in
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.


                                    PART III

Item 9.  Directors and Executive Officers, Promoters and Control
         Persons; Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------------------------

     Information  concerning  directors of the Registrant is incorporated herein
by reference from the Company's  definitive  Proxy Statement for the 1996 Annual
Meeting of Stockholders,  except for the information contained under the heading
"Compensation    Committee   Report"   and   "Stockholder   Return   Performance
Presentation," a copy of which will be filed not later than 120 days after the
close of the fiscal year.

     Information  concerning  executive  officers as set forth in Part I of this
report under the caption "Executive Officers."

     Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
directors  and  executive  officers,  and  persons  who own  more  than 10% of a
registered  class  of the  Company's  equity  securities,  to file  with the SEC
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Officers, directors and

                                       52

<PAGE>



greater  than 10%  stockholders  are required by SEC  regulation  to furnish the
Company with copies of all Section 16(a) forms they file.

     To the Company's knowledge,  based solely on a review of the copies of such
reports  furnished  to the  Company and  written  representations  that no other
reports were  required,  during the last fiscal year ended March 31,  1996,  all
Section 16(a) filing  requirements  applicable  to its  officers,  directors and
greater than 10 percent beneficial owners were complied with.

Item 10.  Executive Compensation
--------------------------------

     Information  concerning  executive  compensation is incorporated  herein by
reference  from the  Company's  definitive  Proxy  Statement for the 1997 Annual
Meeting of  Stockholders,  a copy of which will be filed not later than 120 days
after the close of the fiscal year.


Item 11.  Security Ownership of Certain Beneficial Owners and
          Management
-------------------------------------------------------------

     Information  concerning security ownership of certain beneficial owners and
management is  incorporated  herein by reference  from the Company's  definitive
Proxy  Statement for the 1997 Annual  Meeting of  Stockholders,  a copy of which
will be filed not later than 120 days after the close of the fiscal year.


Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

     Information   concerning   certain   relationships   and   transactions  is
incorporated  herein by reference from the Company's  definitive Proxy Statement
for the 1997 Annual Meeting of  Stockholders,  a copy of which will be filed not
later than 120 days after the close of the fiscal year.


                                     PART IV

Item 13.  Exhibits and Reports on 8-K
-------------------------------------

     (a) Exhibits:

          See Exhibit Index.

     (B) Reports on Form 8-K

          No reports on Form 8-K have been filed  during the three month  period
ended March 31, 1997.


                                       53

<PAGE>



                                SIGNATURES

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

                                  COMMUNITY FINANCIAL CORPORATION


Date:June 27, 1997                By:/s/ Thomas W. White
                                     -------------------
                                     Thomas W. Winfree
                                     (Duly Authorized Representative)


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


By:/s/ Thomas W. Winfree             By:/s/ James R. Cooke, Jr.
   ---------------------                -----------------------
   Thomas W. Winfree                    James R. Cooke, Jr.
   President and Chief                  Chairman of the Board
   Executive Officer                      and Director
   (Principal Executive Officer)

Date:  June 27, 1997                 Date:  June 27, 1997



By:/s/ Jane C. Hickok                By:/s/ Charles F. Andersen
   ------------------                   -----------------------
   Jane C. Hickok                       Charles F. Andersen
   Vice Chairman of the Board           Director
     and Director

Date: June 27, 1997                  Date: June 27, 1997



By:/s/ Dale C. Smith                 By:/s/ Kenneth L. Elmore
   -----------------                    ---------------------
   Dale C. Smith                        Kenneth L. Elmore
   Director                             Director


Date: June 27, 1997                  Date: June 27, 1997


By:/s/ R. Jerry Giles                By:/s/ Charles W. Fairchilds
   ------------------                   -------------------------
   R. Jerry Giles                       Charles W. Fairchilds
   Chief Financial Officer              Director
   (Principal Financial and
     Accounting Officer)

Date: June 27, 1997                  Date: June 27, 1997


                                       54

<PAGE>




                                INDEX TO EXHIBITS



EXHIBIT NUMBER             DESCRIPTION

3.1  Registrant's Articles of Incorporation,  as currently in effect, filed as a
     exhibit to Registrant's  Report on Form S- 4 (File No.  33-28817) dated May
     19, 1989, is incorporated herein by reference.

3.2  Registrant's  Bylaw,  as  currently  in  effect,  filed  as  a  exhibit  to
     Registrant's Report on Form S-4 (File No. 33- 28817) dated May 19, 1989, is
     incorporated herein by reference.

10.1 Registrant'  1987 Stock Option and Incentive  Plan,  filed as an exhibit to
     Registrant's Report on Form S-4 (File No. 33- 28817) dated May 19, 1989, is
     incorporated herein by reference.

10.2 Employee Stock Ownership Plan,  filed on June 28, 1993 as Exhibit 10 to the
     Annual Report on Form 10-KSB40 for the fiscal year ended March 31, 1993, is
     incorporated herein by reference.

10.3 Registrant'  1996 Stock Option and  Incentive  Plan,  filed as Exhibit E to
     Registrant's  Proxy  Statement  on Schedule  14A for the annual  meeting of
     shareholders held on July 31, 1996, is incorporated herein by reference.

10.4 Employment Agreement between Community Bank and Mr. Winfree

21.1 Subsidiaries of Registrant

23.1 Consents of Experts and Counsel

27.1 Financial Data Schedule

                                       55