2002 Annual Report

**Selected Consolidated Financial Data**

|                                                                           | At March 31,  
|-------------------------------------------------------------------------- | --------------
|                                                                           | 2002          
|                                                                           |               
|                                                                           | (In Thousands)
|Selected Financial Condition Data:                                         |               
|Total assets                                                               | $263,374      
|Loans receivable, net                                                      | 219,434       
|Investment securities and other earning assets(1)                          | 29,704        
|Real estate owned, net                                                     | 794           
|Deposits                                                                   | 204,535       
|Advances and other borrowed money                                          | 28,951        
|Stockholders' equity                                                       | 26,695        
|                                                                           | At March 31,  
|                                                                           | 2002          
|                                                                           |               
|                                                                           | (In Thousands)
|Selected Operations Data:                                                  |               
|Total interest income                                                      | $18,941       
|Total interest expense                                                     | 9,057         
|Net interest income                                                        | 9,884         
|Provision for loan losses                                                  | 373           
|Net interest income after provision for loan losses                        | 9,511         
|Service charges and fees on loans                                          | 3,287         
|Gain on sale of securities                                                 | --            
|Other noninterest income(2)                                                | 95            
|Noninterest expenses                                                       | 9,163         
|Income before income taxes                                                 | 3,730         
|Income taxes                                                               | 1,123         
|Net income                                                                 | $ 2,607       
|                                                                           |               
|                                                                           | 2002          
|                                                                           |               
|Other Data:                                                                |               
|Average interest-earning assets to
   average interest-bearing liabilities | 108.18        
|Average interest rate spread during year                                   | 3.66          
|Non-performing assets to total assets                                      | .36           
|Return on assets (ratio of net income   to average total assets)           | 1.03          
|Return on equity (ratio of net income   to average total equity)           | 10.01         
|Equity-to-assets ratio (ratio of average   equity to average assets)       | 10.27         
|Per Share Data:                                                            |               
|Net income-diluted                                                         | $1.14         
|Book value                                                                 | 11.84         
|Dividends                                                                  | .32           
|Dividend payout ratio                                                      | 28.08         
|Number of full-service offices                                             | 7             

(1) Includes federal funds sold, securities purchased under resale agreements and overnight deposits.(2) Other income includes customer service fees and commissions, gain or loss on disposal of property and other items..

1

|***Dear Stockholder:***This past year has been an unprecedented one for Community Financial Corporation. Your Corporation achieved record earnings for the year in addition to positive growth in deposits and loans. As you review the enclosed annual report we hope that you will share our pride for the accomplishments of this past year and our enthusiasm for the Corporation's continued success in the future. We were particularly pleased with our financial results for fiscal year 2002 considering the economic environment and the tragic impact of September 11th. The Community family joins together to pay tribute to those victims and heroes of the tragedy, and to our men and women in uniform who so unselfishly give of themselves to protect the freedoms that we hold so dear.

            Net income for fiscal year 2002 was $2.6 million compared to $1.7 million in the prior year, a 53% increase. Diluted earnings per share for 2002 were $1.14 compared to $0.72 in the prior year, a 58% increase. The increase in net income and diluted earnings per share were primarily attributable to increases in both net interest income and fee income of $1.75 million and $480,000 respectively.

            For the year, your Bank has enjoyed record loan production in excess of $112 million. Accompanied with this high level of production was a record level of payoffs, as a result of the declining interest rate environment during the year. Despite this record level of payoffs, our loan portfolio increased by $9.3 million or 4.3% to end the year at $223.8 million.  Deposits for the year increased by $30.2 million or 17.3% resulting in an ending balance of $204.5 million. As a result of our deposit growth and the redemption of a $20 million investment during the year, we were able to reduce our borrowings by $38.5 million or 57%, from $67.4 million at March 31, 2001, to $28.9 million at March 31, 2002. Our assets declined during the year from $270.2 million at March 31, 2001 to $263.4 million at March 31, 2002, a decrease of 2.5% for the year. |  | We recently recognized the 5th year anniversary of the formation of the Hampton Roads Region. This Region has become an important addition to our operations and its performance has exceeded even our most optimistic projections.  This past year, the Region experienced its strongest growth in loans and deposits in its short history, as loans increased by $19.5 million or 43.6%, and deposits increased by $11.7 million or 51%. With a current loan and deposit portfolio in excess of $64.3 million and $34.7 million respectively, we are very excited about the Hampton Roads Region's future potential and its continued contribution to our overall profitability.

            In addition to delivering record earnings, we have been very busy improving the products and services we offer to our customers. A new check processing and imaging system has been installed which allows us to provide better service to our checking account customers; and our seventh full service office was opened in Raphine, Virginia during December. This office had deposits totaling $4.5 million at March31, 2002. We believe our Raphine office  to be a logical expansion of our franchise in the Valley and will provide a much-needed banking option for the market between Staunton and Lexington. We have also announced the ground breaking of our new Verona branch, and are looking forward to expanding our service in this market beginning in the third quarter of fiscal year 2003. As always, we will continue to evaluate additional opportunities to improve our products and services and to enhance our branch net-work; however, we continue to be mindful of protecting our earnings trend when making these decisions. This is in keeping with our commitment to maintain controlled, profitable growth.
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|James R. Cooke Jr.Chairman of the Board |  |  |  | P. Douglas RichardPresident & CEO
|--------------------------------------- |  |  |  | ---------------------------------

2

**President's Letter**

We are confident that our bank and staff will continue to provide the personalized, friendly service and competitive products that our customers have come to expect and enjoy. We believe that the consolidations taking place in the
markets we serve, which many times result in larger impersonal institutions, will continue to present opportunities for us to increase market share and enhance stockholder value. Our challenge, as we grow, is not to lose site of the values that have set us apart from the market over the past 74 years.

In this uncertain economic environment, it is important to exercise sound business judgement. We believe we have the right team in place to meet this challenge. We thank our stockholders and customers for their continued support. The success we enjoyed this past year was truly the result of a combined effort among our staff, management, and board of directors. We look forward to that same effort this coming year.

***May God bless our nation..***

|James R. Cooke JrChairman of the Board |  | P. Douglas RichardPresident & CEO
|-------------------------------------- |  | ---------------------------------

3

|***Board of Directors*****Charles F. Andersen, M.D.** Dr. Andersen is an orthopedic surgeon in private practice in Waynesboro, Virginia.**JamesR.Cooke,Jr.,D.D.S.** Dr. Cooke has been, for the past 30 years, a practicing dentist in Staunton, Virginia.**Charles W. Fairchilds** Mr. Fairchilds has been the President of Allied Ready Mix in Waynesboro, Virginia since 1987.**Jane C. Hickok** Mrs. Hickok was elected Vice Chairman of the Board in October 1994 and Secretary of Community Financial in October 1998. She retired as President and Chief Executive Officer of Community Bank in October 1994 after serving since 1984. Mrs. Hickok also retired as President and Chief Executive Officer of Community Financial Corporation in January 1995, but continues to serve as a director of Community Financial and Community Bank. Mrs. Hickok was elected as a director of Community Bank in 1983 and as a director of Community Financial in 1990 when it became the holding company of Community Bank. | *Pictured front row, left to right: P. Douglas Richard,Jane C. Hickok, James R. Cooke, Jr., D.D.S.Back row, left to right: Charles F. Andersen, M.D.,Dale C. Smith, Charles W. Fairchilds, Morgan N. Trimyer, Jr.* | **P. Douglas Richard** Mr. Richard was appointed the Acting President and Chief Executive Officer of Community Financial and Community Bank on January 12, 2000, and became the President and Chief Executive Office of Community Financial and Community Bank on April 26, 2000. He was appointed to the Board of Directors of Community Financial on April 26, 2000. From January 1, 1997, to January 12, 2000, Mr. Richard was a Senior Vice President of Community Bank. From December 1993 to January 1996 he was President and Chief Executive Officer of Seaboard Bancorp.**Dale C. Smith** Mr. Smith is the General Manager and Chief Executive Officer of Augusta Cooperative-Farm Bureau, Inc., a farm supply and retail store.**Morgan N. Trimyer, Jr.** Mr. Trimyer served as Vice President and Partner of Welton, Duke & Hawks, Inc., an insurance company headquartered in Portsmouth, Virginia from 1984 to 2001. He was also a Vice President with Valley Insurance Agency, Inc. located in Lexington, Virginia, and has 30 years of experience in the insurance industry in Virginia. He currently serves as Vice President of Bankers Insurance, LLC and is the Director of Marketing.
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|                                                                                                                                                                                                                                                                                      | **Officers**                                                                                                                                                                                                                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|***Hampton Roads Board of Directors***

[PICTURE]*Pictured front row, left to right: Robert M. Thornton,James R. Cooke, Jr., P. Douglas Richard.Back row, left to right: Chris P. Kyriakides, William R. Waddell,Berard Harrison, Leslie Watson.Not pictured: Morgan N. Trimyer, Jr.* | P. Douglas RichardR. Jerry GilesBenny N. WernerNorman C. (Butch) Smiley, IIIChris P. KyriakidesRobert M. (Bobby) HoffmanJane P. OremKathy H. WillisRobert W. PenningtonDianne F. CampbellGary L. DavenportKay T. DeanDanny R. FieldsDarlene A. HallRichard J. MayerVirginia McCormackLyle A. MoffettRamona W. SavidgeThomas R. WagnerLinda B. WoodJoe P. ZakaibTeresa M. LayneMartha B. ChandlerLovetta L. MooreConnie R. SavageBarbara M. Wood | President & CEOSenior Vice President/Chief Financial OfficerSenior Vice PresidentSenior Vice President/Chief Lending OfficerSenior Vice President/Regional PresidentRegional Vice PresidentRegional Vice PresidentRegional Vice PresidentRegional Vice PresidentAssistant Vice PresidentAssistant Vice PresidentAssistant Vice PresidentAssistant Vice PresidentAssistant Vice PresidentAssistant Vice PresidentAssistant Vice PresidentAssistant Vice PresidentAssistant Vice PresidentAssistant Vice PresidentAssistant Vice PresidentAssistant Vice PresidentBranch OfficerAssistant SecretaryAssistant SecretaryAssistant SecretaryAssistant Secretary

4

**Management's Discussion & Analysis of Operations**

|**INTRODUCTION**Community Financial Corporation ("Community Financial") is a Virginia corporation.  Certain of the information presented herein relates to Community Bank, a wholly owned subsidiary of Community Financial and Community First Mortgage Corporation, a wholly owned subsidiary of Community Bank. References in this Annual Report to "we", "us" and "our" refer to Community Financial and/or Community Bank as the context requires.

Community Financial and Community Bank, like all thrift institutions and their holding companies, are subject to com-prehensive regulation, examination and supervision by the Office of Thrift Supervision, Department of the Treasury and the Federal Deposit Insurance Corporation.

Our 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. Like other financial institutions, we are subject to interest rate risk to the degree that our |  | interest-bearing liabilities, primarily deposits and borrowings with short- and medium-term maturities, mature or reprice more rapidly, or on a different basis, than our interest-earning assets, primarily loans with longer term maturities than deposits and borrowings.  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 non-interest income. Our net income cis 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/LIABILITYMANAGEMENT**

Management believes it is important to manage the relationship between interest rates and their effect on our net portfolio value.  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 our 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 net portfolio value which is acceptable given certain interest rate changes.

Presented in the following table, as of March 31, 2002 and 2001, is an analysis of the our interest rate risk as measured by changes in net portfolio value 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 global policy limits and in accordance with Office of Thrift Supervision regulations, based on the assumptions described below. The Board limits have been established with consideration of the dollar impact of various rate changes and our strong capital position.  As illustrated in the table, net portfolio value 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 interest rates decline, we do not experience a significant rise in market value for these loans because borrowers prepay at relatively high rates. The value of our deposits and borrowings change in approximately the same proportion in rising or falling rate scenarios.
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5

|                                     |                     | **March 31, 2002** | March 31, 2001    
|------------------------------------ | ------------------- | ------------------ | ------------------
|Change inInterest Rate(Basis Points) | Board Limit% Change | **$ Changein NPV** | **% Changein NPV**
|                                    
|**(Dollars in Thousands)**          
|+300                                 | -40%                | **$-3,798**        | **-11%**          
|+200                                 | -30                 | **-2,175**         | **-6**            
|+100                                 | -20                 | **-943**           | **-3**            
|-0-                                  | ---                 | **---**            | **----**          
|-100                                 | -20                 | **-351**           | **1**             
|-200                                 | -30                 | **---**            | **---**           
|-300                                 | -40                 | **---**            | **---**           

|Management generally works to maintain a neutral position regarding interest rate risk. In the current interest rate environment, our 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 our interest earning assets. As of March 31, 2002, approximately 49% of our gross loan portfolio consisted of loans which reprice during the life of the loan. We emphasize adjustable rate mortgage loans and have increased our portfolio of short-term consumer loans. Longer term fixed-rate mortgage loans, 20 to 30 years, are generally sold in the secondary market. We are currently originating fixed-rate loans for through our subsidiary, Community First Mortgage 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. We have also used Federal Home Loan Bank advances to provide funding for loan originations and to provide liquidity as needed.  In managing our asset/liability mix, we, at times, depending on the relationship between long- and short-term interest rates, market conditions, and consumer preference, may place somewhat greater emphasis on maximizing our net interest income than on strictly matching the interest rate sensitivity of our assets and liabilities. We believe the increased net income that may result from an acceptable mismatch in the actual maturity or repricing of our asset and liability portfolio can provide sufficient returns to justify the increased exposure to sudden and unexpected increases in interest rates which may result from such a mismatch. We have established limits, which may change from time to time, on the level of acceptable interest rate risk. There can be no assurance, however, that in the event |  | of an adverse change in interest rates, our efforts to limit interest rate risk will be successful.

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 adjustable rate mortgage 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.
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6

**Management's Discussion & Analysis of Operations**

**Average Balances, Interest Rates and Yields**

The following table sets forth certain information relating to categories of our interest-earning assets and 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.

|                                                                                     | **Year Ended March 31,**
|------------------------------------------------------------------------------------ | ------------------------
|                                                                                     | **2002**                
|                                                                                     | **AverageBalance**      
|                                                                                     | (Dollars in Thousands)  
|Interest-Earning Assets                                                              |                         
|Loans ...................................                                            | **$215,598**            
|Investment securitiesand other investments ........                                  | **34,270**              
|Total interest-earning assets                                                        | **249,868**             
|Interest-Bearing Liabilities                                                         |                         
|Deposits...............................                                              | **185,039**             
|FHLB advances andother borrowings................                                    | **45,929**              
|Total interest-bearing liabilities                                                   | **230,968**             
|Net interest income/interestrate spread...........................                   |                         
|Net interest-earningassets/net yield oninterest-earning assets........               | **$18,900**             
|Percentage of interest-earningassets to interest-bearingliabilities................. | **108.18%**             

7

The following table sets forth our interest rate spread at the dates indicated.

|                                            | March 31,
|------------------------------------------- | ---------
|                                            | **2002** 
|Yield On                                    |          
|Loans                                       | **7.18%**
|Investment securities and other investments | **4.87%**
|Total interest-earning assets               | **6.82%**
|                                            |          
|                                            |          
|                                            |          
|Cost Of                                     |          
|Deposits                                    | **3.27%**
|FHLB advances and other borrowings          | **1.95%**
|Total interest-bearing liabilities          | **3.11%**
|**Interest rate spread**                    | **3.71%**

**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 our 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.

|                                            | **Year Ended March 31,**    
|------------------------------------------- | ----------------------------
|                                            | **2002 v. 2001**            
|                                            | **Increase(Decrease)Due to**
|                                            | **Volume**                  
|                                            | (Dollars in Thousands)      
|Interest-Earning Assets                     |                             
|Loans                                       | **$ 1,107**                 
|Investments securitiesand other investments | **(456**                    
|Total interest-earnings assets              | **$ 651**                   
|Interest-Bearing Liabilities                |                             
|Deposits                                    | **$2,066**                  
|FHLB advances and other borrowings          | **(1,015**                  
|Total interest-bearing liabilities          | **$1,051**                  
|Net interest income                         |                             

8

**Management's Discussion & Analysis of Operations**

|**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.

At March 31, 2002, total non-performing assets, consisting of non-performing loans and real estate owned, were $941,000 or .36% of total assets compared to $1,156,000 or .43% at March 31, 2001. Non-performing assets at March 31, 2002 were comprised primarily of single family residential properties acquired through foreclosure. At March 31, 2002, the largest property in non-performing assets was a single family residential loan with an approximate value of $81,000. 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 our level of non-performing assets may not increase in the future.

We maintain an allowance for loan losses to provide for estimated potential losses in our loan portfolio. We determine the level of reserves based on loan performance, the value of the collateral, economic and market conditions, and previous experience.  We review the adequacy of the |  | allowance at least quarterly, utilizing our internal loan classifications system. During fiscal 2002, we increased our allowance for loan losses $198,000 to $1,676,000 due primarily to the growth in loans. Management believes that the loan loss reserve is adequate. We have had net charge-offs to our allowance for loan losses of $175,000, $61,000, and $381,000 for the years ended March 31, 2002, 2001 and 2000, respectively. The increase in net charge-offs from 2001 to 2002 is related primarily to increased foreclosures in fiscal 2002. 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.**FINANCIAL CONDITION**Total assets decreased $6.8 million to $263.4 million at March 31, 2002 as a result of a decrease in investment securities of $13.2 million, partially offset by an increase in loans of $9.3 million.  A decrease in borrowings of $38.5 million was funded by the decrease in investment securities and an increase in deposits of $30.2 million. The increase in deposits can be attributed primarily to an increase in demand deposits of $30.8 million.  Management believes the increase in demand deposits is primarily attributable to maintaining competitive rates. The increase in loans receivable was due primarily to competitive pricing on both |  | mortgage and consumer loans.  Stockholders' equity increased $890,000 to $26.7 million at March 31, 2002 compared to March 31, 2001. The increase was the result of $2.6 million of net income offset by dividends paid to stockholders of $732,000 and common stock repurchased of $981,000 in fiscal 2002.**RESULTS OF OPERATIONS**Our results of operations depend primarily on the level of our net interest income and noninterest income and the level of our 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 endedMarch 31, 2002 and 2001******General.***Net income for the year ended March 31, 2002 was $2,607,000 or $1.14 diluted earnings per share compared to $1,743,000 or $.72 diluted earnings per share for the year ended March 31, 2001. Net income increased due primarily to an increase in net interest income of $1.8 million.  Our return on average assets was 1.03% for the fiscal year ended 2002 compared to .68% for the fiscal year ended 2001. Return on average equity was 10.01% for fiscal year ended 2002 compared to 6.81% for fiscal year 2001.
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9

|Average equity to average assets was 10.27% for the fiscal year ended 2002 compared to 9.97% for the fiscal year ended 2001.  We paid dividends to stockholders of $732,000 during 2002 and $780,000 during fiscal 2001 representing a dividend payout ratio of 28.08% and 44.75% respectively.***Interest Income.***Total interest income decreased to $18,941,000 for the fiscal year ended March 31, 2002 as compared to $20,047,000 for the year ended March 31, 2001.  The decrease in total interest income can be attributed to a decrease in the yield on interest-earning assets offset by an increase in the average dollar volume of interest-earning assets, primarily $11.1 million in loans receivable. Average yields on total interest-earning assets decreased from 8.14% in fiscal 2001 to 7.58% for the current fiscal year due primarily to a lower rate environment.***Interest Expense.***Total interest expense decreased to $9,057,000 for the fiscal year ended March 31, 2002 from $11,914,000 for the fiscal year ended March 31, 2001. The decrease in total interest expense is attributable to a decrease in both the average dollar volume of borrowings and the cost of interest bearing liabilities. The cost of funds decreased from 5.18% for the year ended March 31, 2001 to 3.92% for the current year. The increase in deposit balances was due primarily to increases in demand deposits for the current fiscal year. |  | ***Provision for Loan Losses.***The provision increased to $373,000 for the fiscal ended March 31, 2002 from $321,000 for the fiscal year ended March 31, 2001 due primarily to an increase in loan growth for fiscal 2002. We monitor our loan loss reserve on a quarterly basis and make allocations as necessary.  Management believes that the level of our loan loss reserve is adequate. As of March 31, 2002, the total allowance for loan losses amounted to $1,676,000. At March 31, 2002, our total allowance as a percentage of total loans receivable was .75% and as a percentage of total non-performing loans was 178%.***Noninterest Income.***Noninterest income increased to $3,382,000 in fiscal 2002 as compared to $2,899,000 for the fiscal year ended March 31, 2001, primarily due to increased fees on sale of secondary mortgage loans in the Bank's mortgage subsidiary.***Noninterest Expense.***Total noninterest expense increased to $9,164,000 for the fiscal year ended March 31, 2002 from $8,241,000 for the fiscal year ended March 31, 2001 due primarily to an increase in compensation expense and data processing expense, primarily related to the opening of a new branch in Raphine during fiscal 2002.***Taxes.***Total taxes increased to $1,123,000 during the fiscal year ended March 31, 2002 from $728,000 during fiscal 2001. The effective tax rate for the fiscal year ended March 31, 2002 was 30.1% as compared to 29.4% for the fiscal year ended March 31, 2001. |  | ***Comparison of Years endedMarch 31, 2001 and 2000General.***Net income for the fiscal year ended March 31, 2001 was $1,743,000 or $.72 diluted earnings per share compared to $1,324,000 or $.52 diluted earnings per share for the fiscal year ended March 31, 2000. Net income increased due primarily to an increase in net interest income of $695,000.

Our return on average assets was .68% for the fiscal year ended 2001 compared to .60% for the fiscal year ended 2000. Return on average equity was 6.81% for the fiscal year ended 2001 compared to 5.11% for fiscal year 2000. Average equity to average assets was 9.97% for the fiscal year ended 2001 compared to 11.66% for the fiscal year ended 2000. We paid dividends to stockholders of $780,000 during 2001 and $819,000 during fiscal 2000 representing a dividend payout ratio of 44.75% and 61.90% respectively.***Interest Income.***Total interest income increased to $20,047,000 for the fiscal year ended March 31, 2001 as compared to $16,154,000 for the fiscal year ended March 31, 2000.  The increase in total interest income can be attributed to both increases in the average dollar volume of interest-earning assets, primarily $14.5 million in investment securities and $25.7 million in loans receivable and an increase in the yield on interest earning assets. Average yields on total interest-earning assets increased from 7.84% in fiscal 2000 to 8.14% for the fiscal year ended March 31, 2001 due primarily to a higher rate environment.
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10

**Management's Discussion & Analysis of Operations**

|***Interest Expense.***Total interest expense increased to $11,914,000 for the fiscal year ended March 31, 2001 from $8,716,000 for the fiscal year ended March 31, 2000. The increase in total interest expense is attributable to increases in both the average dollar volume of interest-bearing liabilities of $38.0 million and the cost of interest bearing liabilities. The cost of funds increased from 4.54% for the fiscal year ended March 31, 2000 to 5.18% for the current year. The increase in deposit balances was due primarily to increases in certificates of deposit for the fiscal year ended March 31, 2001.***Provision for Loan Losses.***The provision increased to $321,000 for the fiscal ended March 31, 2001 from $283,000 for the fiscal year ended March 31, 2000 due primarily to an increase in loan growth for fiscal 2001. We monitor our loan loss reserve on a quarterly basis and make allocations as necessary. Management believes that the level of our loan loss reserve is adequate. As of March 31, 2001, the total allowance for loan losses amounted to $1,478,000. At March 31, 2001, our total allowance as a percentage of total loans receivable was .68% and as a percentage of total non-performing loans was 128%.***Noninterest Income.***Noninterest income decreased to $2,899,000 in fiscal 2001 as compared to $3,196,000 for the fiscal year ended March 31, 2000, |  | primarily due to a decrease in gain on sale of securities, offset by increased fees and gains on sale of secondary mortgage loans in the Bank's mortgage subsidiary.***Noninterest Expense.***Total noninterest expense decreased to $8,241,000 for the fiscal year ended March 31, 2001 from $8,258,000 for the fiscal year ended March 31, 2000 due primarily to a decrease in compensation expense offset by an increase in data processing expense.***Taxes.***Total taxes decreased to $728,000 during the year ended March 31, 2001 from $770,000 during fiscal 2000. The effective tax rate for the year ended March 31, 2001 was 29.4% as compared to 36.8% for the year ended March 31, 2000.  The decrease in taxes is attributable primarily to both an increase in tax preferenced income and a change in the treatment of bad debt losses.**Liquidity and Capital Resources**Our principal sources of funds are customer deposits, advances from the Federal Home Loan Bank of Atlanta, amortization and prepayment of loans, proceeds from the sale of loans and funds provided from operations.  Management maintains investments in liquid assets based upon its assessment of (i) our need for funds, (ii) expected deposit flows, (iii) the yields available on short-term liquid assets, (iv) the |  | liquidity of our loan portfolio and (v) the objectives of our asset/liability management program.

Liquidity represents our ability to meet our on-going funding requirements for contractual obligations, the credit needs of customers, withdrawal of customers' deposits and operating expenses.  

Our dominant source of funds during the fiscal year ended March 31, 2002 was from deposits which increased by $30.2 million.  

Our cash decreased $2.0 million from $5.2 million at March 31, 2001 to $3.2 million at March 31, 2002. The decrease in cash was related to the increase in loans receivable.

At March 31, 2002, we had commitments to purchase or originate $9.5 million of loans.  Certificates of deposit scheduled to mature in one year or less at March 31, 2002 totaled $52.8 million.  Based on our historical experience,
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11

|management believes that a significant portion of such deposits will remain with us.

Management further believes that loan repayments and other sources of funds will be adequate to meet our foreseeable short- and long-term liquidity needs.

At March 31, 2002, we had tangible and core capital of 9.07% of adjusted total assets, which was in excess of their respective requirements of 1.5% and 4.0%.  We also had risk-based capital of 14.04% of risk weighted assets, which also exceeded its requirement of 8.0%.**IMPACT OF INFLATION ANDCHANGING PRICES**The consolidated financial statements and related data presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America 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 our assets and liabilities are critical to the maintenance of acceptable performance levels.**ACCOUNTINGPRONOUNCEMENTS**For a discussion of certain accounting pronouncements implemented by us during fiscal 2002 and new pronouncements which will be implemented in the future, see Summary of Accounting Policies to Consolidated Financial Statements.**FORWARD-LOOKINGSTATEMENTS**This annual report contains forward-looking statements about the Company and its subsidiary which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect |  | to anticipated future operating and financial performance, growth opportunities, interest rates, cost savings and funding advantages expected or anticipated to be realized by management.  Words such as "may," "could," "should," "would," "believe," "anticipate," "estimate," "expect," "intend," "plan" and similar expressions are intended to identify these forward-looking statements.  Forward-looking statements by the Company and its management are based on beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management and are not guarantees of future performance.  Factors discussed under the caption "Management's Discussion and Analysis of Operations" and identified in our filings with the SEC and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12

|**YHB****Yount, Hyde & Barbour, P.C.**
Certified Public Accountants
and Consultants | 
|----------------------------------------------------------------------------------- | 

**Report of Independent Certified Public Accountants**

To the Board of Directors
Community Financial Corporation
Staunton, Virginia

We have audited the accompanying balance sheet of Community Financial Corporation and
subsidiary as of March 31, 2002, and the related statements of income, stockholders' equity and
cash flows for the year then ended.  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 audit.  The financial statements of Community Financial Corporation and
subsidiary for the years ended March 31, 2001 and 2000 were audited by other auditors whose
report, dated April 22, 2001, expressed an unqualified opinion on those statements.

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

In our opinion, the 2002 financial statements referred to above present fairly, in all material
respects, the financial position of Community Financial Corporation and subsidiary as of March
31, 2002, and the results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States of America.



|50 S. Cameron St.P.O. Box 2560Winchester, VA 22604(540) 662-3417 |  | Offices located in: Winchester, Middleburg, Leesburg, and Culpeper, VirginiaMember: American Institute of Certified Public Accountants / Virginia Society of Certified Public Accountants
|---------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

13

## Community Financial Corporation & Subsidiary

### Consolidated Balance Sheets

|***March 31,***                                                                                               | **2002**          |  | 2001          | 
|------------------------------------------------------------------------------------------------------------- | ----------------- |  | ------------- | 
|                                                                                                             
|                                                                                                              |                   |  |               | 
|**Assets**                                                                                                    |                   |  |               | 
|                                                                                                              |                   |  |               | 
|Cash (including interest bearing deposits of approximately
   **$1,931,000** and $2,697,000)                  | **$   3,206,926** |  | $   5,168,499 | 
|Securities                                                                                                    |                   |  |               | 
|Held to maturity (fair value approximates **$16,781,000**
     and $30,170,000 at March 31, 2002 and 2001)    | **16,773,803**    |  | 29,905,180    | 
|Available for sale, at fair value                                                                             | **8,399,486**     |  | 8,421,433     | 
|Investment in Federal Home Loan Bank stock, at cost                                                           | **2,600,000**     |  | 3,150,000     | 
|Loans receivable, net                                                                                         | **219,433,684**   |  | 210,549,785   | 
|Loans held for sale                                                                                           | **4,409,122**     |  | 4,008,013     | 
|Real estate owned, net                                                                                        | **793,603**       |  | 451,310       | 
|Property and equipment, net                                                                                   | **5,421,183**     |  | 5,827,020     | 
|Accrued interest receivable                                                                                   | **1,580,884**     |  | 1,661,422     | 
|Prepaid expenses and other assets                                                                             | **755,280**       |  | 1,032,871     | 
|                                                                                                             
|                                                                                                              | $263,373,971      |  | $270,175,533  | 
|                                                                                                             
|**Liabilities and Stockholders' Equity**                                                                      |                   |  |               | 
|**Liabilities**                                                                                               |                   |  |               | 
|Deposits                                                                                                      | **$204,535,456**  |  | $174,307,472  | 
|Advances from Federal Home Loan Bank                                                                          | **28,000,000**    |  | 63,000,000    | 
|Securities sold under agreement to repurchase                                                                 | **950,805**       |  | 4,422,389     | 
|Advance payments by borrowers for taxes and insurance                                                         | **254,846**       |  | 293,168       | 
|Other liabilities                                                                                             | **2,937,754**     |  | 2,347,815     | 
|                                                                                                             
|Total liabilities                                                                                             | **236,678,861**   |  | 244,370,844   | 
|                                                                                                             
|**Commitments and Contingencies**                                                                             |                   |  |               | 
|                                                                                                             
|Stockholders' Equity                                                                                          |                   |  |               | 
|Preferred stock, $.01 par value, authorized 3,000,000    shares, none outstanding                             | --                |  | --            | 
|Common stock, $.01 par value, 10,000,000 authorized    shares, **2,253,147** and 2,348,832 shares outstanding | **22,531**        |  | 23,488        | 
|Additional paid-in capital                                                                                    | **4,326,489**     |  | 4,500,450     | 
|Retained earnings                                                                                             | **20,223,498**    |  | 19,144,552    | 
|Accumulated other comprehensive income                                                                        | **2,122,592**     |  | 2,136,199     | 
|                                                                                                             
|Total stockholders' equity                                                                                    | **26,695,110**    |  | 25,804,689    | 
|                                                                                                             
|                                                                                                              | $263,373,971      |  | $270,175,533  | 
|                                                                                                             
|*See accompanying summary of accounting policies and notes to consolidated financial statements.*            

14

## Community Financial Corporation & Subsidiary

### Consolidated Statements of Income

|***Year Ended March 31,***                               | **2002**            |   | 2001            |   | 2000            |  
|-------------------------------------------------------- | ------------------- | - | --------------- | - | --------------- | -
|                                                        
|**Interest income**                                      |                     |   |                 |   |                 |  
|Loans                                                    | **$16,869,736**     |   | $17,347,457     |   | $14,565,894     |  
|Investment securities                                    | **1,453,478**       |   | 2,522,462       |   | 1,448,006       |  
|Other investments                                        | **618,098**         |   | 177,337         |   | 140,048         |  
|                                                        
|Total interest income                                    | **18,941,312**      |   | 20,047,256      |   | 16,153,948      |  
|                                                        
|**Interest expense**                                     |                     |   |                 |   |                 |  
|Deposits                                                 | **7,449,753**       |   | 7,709,614       |   | 6,380,089       |  
|Borrowed money                                           | **1,607,377**       |   | 4,204,419       |   | 2,335,487       |  
|                                                        
|Total interest expense                                   | **9,057,130**       |   | 11,914,033      |   | 8,715,576       |  
|                                                        
|**Net interest income**                                  | **9,884,182**       |   | 8,133,223       |   | 7,438,372       |  
|                                                         |                     |   |                 |   |                 |  
|Provision for loan losses                                | **372,708**         |   | 320,635         |   | 282,854         |  
|                                                        
|**Net interest income after provision for  loan losses** | **9,511,474**       |   | 7,812,588       |   | 7,155,518       |  
|                                                        
|**Noninterest income**                                   |                     |   |                 |   |                 |  
|Service charges, fees and commissions                    | **3,006,799**       |   | 2,408,678       |   | 1,366,212       |  
|Gain on sale of securities                               | --                  |   | --              |   | 601,412         |  
|Gain on sale of loans                                    | **279,843**         |   | 412,650         |   | 1,015,447       |  
|Other                                                    | **95,321**          |   | 77,907          |   | 213,400         |  
|                                                        
|Total noninterest income                                 | **3,381,963**       |   | 2,899,235       |   | 3,196,471       |  
|                                                        
|**Noninterest expense**                                  |                     |   |                 |   |                 |  
|Compensation and employee benefits                       | **4,913,086**       |   | 4,329,702       |   | 4,712,025       |  
|Occupancy                                                | **1,323,565**       |   | 1,037,806       |   | 942,354         |  
|Data processing                                          | **828,848**         |   | 803,180         |   | 563,732         |  
|Insurance                                                | **32,752**          |   | 32,295          |   | 72,530          |  
|Other                                                    | **2,065,342**       |   | 2,037,783       |   | 1,967,601       |  
|                                                        
|Total noninterest expense                                | **9,163,593**       |   | 8,240,766       |   | 8,258,242       |  
|                                                        
|**Income before income taxes**                           | **$3,729,844**      |   | $2,471,057      |   | $2,093,747      |  
|                                                        
|Income taxes                                             |                     |   |                 |   |                 |  
|Current                                                  | **1,341,215**       |   | 875,002         |   | 920,799         |  
|Deferred                                                 | **(218,567**        | ) | (147,336        | ) | (150,932        | )
|                                                        
|Total income taxes                                       | **1,122,648**       |   | 727,666         |   | 769,867         |  
|                                                        
|**Net income**                                           | **$2,607,196**      |   | $1,743,391      |   | $1,323,880      |  
|                                                        
|Earnings per share                                       |                     |   |                 |   |                 |  
|Basic                                                    | **$          1.14** |   | $           .72 |   | $           .52 |  
|Diluted                                                  | **$          1.14** |   | $           .72 |   | $           .52 |  
|                                                        

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

15

## Community Financial Corporation & Subsidiary

### Consolidated Statements of Stockholders' Equity

|                                                                                                  | *CommonStock* |   | *AdditionalPaid-inCapital* |   | *RetainedEarnings* |   | *AccumulatedOtherComprehensiveIncome* |   | *TotalStockholders'Equity* |  
|------------------------------------------------------------------------------------------------- | ------------- | - | -------------------------- | - | ------------------ | - | ------------------------------------- | - | -------------------------- | -
|                                                                                                 
|**Balance, March 31, 1999**                                                                       | 25,721        |   | 4,897,207                  |   | 19,395,509         |   | 2,065,291                             |   | 26,383,728                 |  
|Comprehensive income                                                                              |               |   |                            |   |                    |   |                                       |   |                            |  
|Net income                                                                                        | --            |   | --                         |   | 1,323,880          |   | --                                    |   | 1,323,880                  |  
|Change in unrealized gain    on available for sale    securities                                  | --            |   | --                         |   | --                 |   | (879,379                              | ) | (879,379                   | )
|Total comprehensive income                                                                        | --            |   | --                         |   | --                 |   | --                                    |   | 444,501                    |  
|Cash dividends, $.32 per share                                                                    | --            |   | --                         |   | (819,493           | ) | --                                    |   | (819,493                   | )
|Repurchase of stock  (60,620 shares)                                                              | (606          | ) | (115,178                   | ) | (498,877           | ) | --                                    |   | (614,661                   | )
|                                                                                                 
|**Balance, March 31, 2000**                                                                       | 25,115        |   | 4,782,029                  |   | 19,401,019         |   | 1,185,912                             |   | 25,394,075                 |  
|Comprehensive income                                                                              |               |   |                            |   |                    |   |                                       |   |                            |  
|Net income                                                                                        | --            |   | --                         |   | 1,743,391          |   | --                                    |   | 1,743,391                  |  
|Change in unrealized gain    on available for sale    securities                                  | --            |   | --                         |   | --                 |   | 950,287                               |   | 950,287                    |  
|Total comprehensive income                                                                        | --            |   | --                         |   | --                 |   | --                                    |   | 2,693,678                  |  
|Cash dividends, $.32 per share                                                                    | --            |   | --                         |   | (780,102           | ) | --                                    |   | (780,102                   | )
|Exercise of stock options                                                                         | 60            |   | 38,940                     |   | --                 |   | --                                    |   | 39,000                     |  
|Repurchase of stock  	(168,774 shares)                                                            | (1,687        | ) | (320,519                   | ) | (1,219,756         | ) | --                                    |   | (1,541,962                 | )
|                                                                                                 
|**Balance, March 31, 2001**                                                                       | 23,488        |   | 4,500,450                  |   | 19,144,552         |   | 2,136,199                             |   | 25,804,689                 |  
|Comprehensive income                                                                              |               |   |                            |   |                    |   |                                       |   |                            |  
|Net income                                                                                        | --            |   | --                         |   | 2,607,196          |   | --                                    |   | 2,607,196                  |  
|Change in unrealized gain    on available for sale    securities                                  | --            |   | --                         |   | --                 |   | (13,607                               | ) | (13,607                    | )
|Total comprehensive income                                                                        | --            |   | --                         |   | --                 |   | --                                    |   | 2,593,589                  |  
|Cash dividends, **$.**32 per share                                                                | --            |   | --                         |   | (732,079           | ) | --                                    |   | (732,079                   | )
|Exercise of stock options                                                                         | 10            |   | 9,740                      |   | --                 |   | --                                    |   | 9,750                      |  
|Repurchase of stock  (96,685 shares)                                                              | (967          | ) | (183,701                   | ) | (796,171           | ) | --****                                |   | (980,839                   | )
|                                                                                                 
|**Balance, March 31, 2002**                                                                       | **$22,531**   |   | **$4,326,489**             |   | **$20,223,498**    |   | **$2,122,592**                        |   | **$26,695,110**            |  
|                                                                                                 
|*See accompanying summary of accounting policies and notes to consolidated financial statements.*

### Consolidated Statements of Cash Flows

|***Year Ended March 31,***                                                          | **2002**         |       | 2001         |   | 2000         |  
|----------------------------------------------------------------------------------- | ---------------- | ----- | ------------ | - | ------------ | -
|                                                                                   
|**Operating activities**                                                            |                  |       |              |   |              |  
|Net income                                                                          | **$  2,607,196** |       | $  1,743,391 |   | $  1,323,880 |  
|Adjustments to reconcile net income to    net cash provided by operating activities |                  |       |              |   |              |  
|Provision for loan losses                                                           | **372,708**      |       | 320,635      |   | 282,854      |  
|Depreciation                                                                        | **683,259**      |       | 742,575      |   | 715,219      |  
|Amortization of premium and accretion              of discount on securities, net   | **(111,759**     | **)** | (65,031      | ) | 3,662        |  
|(Decrease) in net deferred loan              origination fees                       | **(56,390**      | **)** | (69          | ) | (81,228      | )
|Loans originated for sale                                                           | **(77,568,899**  | **)** | (59,763,000  | ) | (59,081,330  | )
|Proceeds from loan sales                                                            | **77,167,790**   |       | 58,675,000   |   | 59,083,634   |  
|Deferred income taxes                                                               | **(218,567**     | **)** | 347,349      |   | (401,119     | )
|Gain on sale of securities                                                          | **--**           |       | --           |   | (601,412     | )
|(Increase) decrease in other assets                                                 | **376,696**      |       | (319,851     | ) | (124,425     | )
|Increase in other liabilities                                                       | **778,524**      |       | 178,618      |   | 104,920      |  
|                                                                                   
|Net cash provided by operating activities                                           | **4,030,558**    |       | 1,859,617    |   | 1,224,655    |  
|                                                                                   

16

## Community Financial Corporation & Subsidiary

### Consolidated Statements of Cash Flows *(Continued)*

|***Year Ended March 31,***                                                | **2002**         |       | 2001         |   | 2000         |  
|------------------------------------------------------------------------- | ---------------- | ----- | ------------ | - | ------------ | -
|                                                                         
|**Investing activities**                                                  |                  |       |              |   |              |  
|Proceeds from maturities of held to    maturity securities                | **25,240,000**   |       | 2,162,552    |   | 6,237,420    |  
|Purchase of held to maturity securities                                   | **(11,996,864**  | **)** | (5,297,230   | ) | (27,260,915  | )
|Proceeds from sale of securities                                          | **--**           |       | --           |   | 612,189      |  
|Purchase of available for sale securities                                 | **--**           |       | --           |   | (4,942,534   | )
|Net increase in loans                                                     | **(10,587,213**  | **)** | (24,840,781  | ) | (19,522,241  | )
|Purchase of property and equipment                                        | **(277,422**     | **)** | (99,971      | ) | (1,292,303   | )
|Improvements to other real estate owned                                   | **(49,096**      | )     | --           |   | --           |  
|Proceeds from sale of real estate owned                                   | **1,075,232**    |       | 1,281,213    |   | 559,904      |  
|Redemption of FHLB stock                                                  | **650,000**      |       | --           |   | 1,350,000    |  
|Purchase of FHLB stock                                                    | **(100,000**     | **)** | (1,200,000   | ) | (1,791,800   | )
|                                                                         
|Net cash provided (absorbed) by  investing activities                     | **3,954,637**    |       | (27,994,217  | ) | (46,050,280  | )
|**Financing activities**                                                  |                  |       |              |   |              |  
|Net increase (decrease) in certificates  of deposit                       | **$   (534,215** | **)** | $18,568,848  |   | $  4,793,639 |  
|Net increase (decrease) in savings and  checking deposits                 | **30,762,199**   |       | (2,829,651   | ) | 759,560      |  
|Proceeds from issuance of common stock                                    | **9,750**        |       | 39,000       |   | --           |  
|Repurchase of stock                                                       | **(980,839**     | **)** | (1,541,962   | ) | (614,661     | )
|Increase (decrease) in securities sold under  agreements to repurchase    | **(3,471,584**   | **)** | (15,577,611  | ) | 20,000,000   |  
|Dividends paid                                                            | **(732,079**     | **)** | (780,102     | ) | (819,493     | )
|Proceeds (repayments) from advances                                       | **(35,000,000**  | **)** | 26,000,000   |   | 18,000,000   |  
|                                                                         
|Net cash provided (absorbed) by  financing activities                     | **(9,946,768**   | **)** | 23,878,522   |   | 42,119,045   |  
|                                                                         
|(Decrease) in cash and cash equivalents                                   | **(1,961,573**   | **)** | (2,256,078   | ) | (2,706,580   | )
|                                                                         
|Cash and cash equivalents - beginning of year                             | **5,168,499**    |       | 7,424,577    |   | 10,131,157   |  
|                                                                         
|Cash and cash equivalents - end of year                                   | **$  3,206,926** |       | $  5,168,499 |   | $  7,424,577 |  
|                                                                         
|                                                                          |                  |       |              |   |              |  
|**Supplemental Disclosure of Cash Flow  Information**                     |                  |       |              |   |              |  
|                                                                         
|Cash payments of interest expense                                         | **$  7,846,883** |       | $12,127,146  |   | $  8,722,056 |  
|                                                                         
|Cash payments of income taxes                                             | **$  1,442,418** |       | $    456,114 |   | $    967,226 |  
|                                                                         
|**Supplemental Schedule of Non-Cash  Investing and Financing Activities** |                  |       |              |   |              |  
|                                                                         
|Transfers from loans to real estate acquired  through foreclosure         | **$  1,386,996** |       | $    909,521 |   | $  1,031,173 |  
|                                                                         

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

17

## 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") and Community First Mortgage
Corporation ("Community First Mortgage"), a wholly-owned subsidiary of 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.  Community
First Mortgage originates mortgage loans to sell to third party investors.

The Office of Thrift Supervision ("OTS") is the primary regulator for federally chartered savings associations, as well
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**

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

Declines in the fair value of held to maturity and available for sale securities below their costs that are deemed to be
other |  | than temporary are reflected in earnings as realized losses.  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.
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

18

## Community Financial Corporation & Subsidiary

|**Allowance for Loan Losses**

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.

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.  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.
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.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the
Corporation does not separately identify individual consumer and residential loans for impairment disclosures.

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.**Sale of Loans andParticipation 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.

The Corporation allocates 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 three to ten years for furniture and equipment and five to fifty years for buildings and
improvements.**Income Taxes**

Deferred income tax assets and liabilities are determined using the balance sheet method.  Under this method, the net
deferred tax asset or liability is determined based on the tax effects of the temporary difference between the book and
tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and
laws.**Earnings Per Share**

Basic earnings per 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 stock options that could share in the earnings of the Corporation.  The computation of basic
and diluted earnings per share is presented in Note 11.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

## Community Financial Corporation & Subsidiary

|**Comprehensive Income**

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) established
rules for the reporting of comprehensive income and its components.  Comprehensive income is defined to include
all changes in equity except those resulting from investments by and distribution to shareholders.  Comprehensive
income consists of net income and unrealized gains on available for sale securities and is presented in the
Consolidated Statements of Stockholders' Equity.**Cash and Cash Equivalents**

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks,
interest-bearing deposits and federal funds sold.**Other**

Certain reclassifications have been made in the prior years' consolidated financial statements to conform to the March
31, 2002 presentation.**Recent AccountingPronouncements**

In July 2001, the Financial Accounting Standards Board issued two statements - Statement of Financial Accounting
Standards (SFAS) No. 141, *Business Combinations,* and SFAS No. 142, *Goodwill and Other Intangible Assets,* which
will potentially impact the accounting for goodwill and |  | other intangible assets.  SFAS No. 141 eliminates the pooling
method of accounting for business combinations and requires that intangible assets that meet certain criteria be
reported separately from goodwill.  The Statement also requires negative goodwill arising from a business
combination to be recorded as an extraordinary gain.  SFAS No. 142 eliminates the amortization of goodwill and
other intangibles that are determined to have an indefinite life.  The Statement requires, at a minimum, annual
impairment tests for goodwill and other intangible assets that are determined to have an indefinite life.

The Corporation does not have any goodwill and other intangible assets.

In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, *Accounting for Asset Retirement
Obligations.*  This Statement addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and associated retirement costs.  This Statement is effective for financial
statements issued for fiscal years beginning after June 15, 2002.  The Statement is not expected to have a material
effect on the Corporation's financial statements.

In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, *Accounting for the* |  | Impairment or
Disposal of Long-Lived Assets.  The Statement addresses financial accounting and reporting for the impairment or
disposal of long-lived assets.  This Statement is effective for financial statements issued for fiscal years and interim
periods beginning after December 15, 2001.  The Statement is not expected to have a material effect on the
Corporation's financial statements.

In April of 2002, the Financial Accounting Standards Board issued SFAS 145, *Rescission of SFAS Statements No.
4, 44 and 64, Amendment of SFAS Statement No. 13, and Technical Corrections*.  The Statement removes criteria for
reporting gains and losses from debt extinguishment as extraordinary items on the income statement, citing that debt
extinguishment has become part of the risk management strategy of many companies.  The Statement also modifies
accounting treatment for leases in cases where capital leases are modified into operating leases.  The treatment
requires that a capital lease modified in this manner be accounted for under the sale-leaseback provisions under either
SFAS 98 or SFAS 28 as applicable.  This Statement shall be applied in fiscal years beginning after May 15, 2002.
The Statement is not expected to have a material effect on the Corporation's financial statements.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

20

## Notes to Consolidated Financial Statements

**1.**  **Securities**

A summary of the amortized cost and estimated market values of securities is as follows:

|***March 31, 2002***                                
|----------------------------------------------------
|                                                    
|                                                    
|                                                    
|**Held to Maturity**                                
|                                                    
|United States government and    agency obligations  
|                                                    
|Other                                               
|                                                    
|                                                    
|                                                    
|**Available for Sale**                              
|                                                    
|Federal Home Loan Mortgage    Corporation securities
|                                                    
|                                                    
|                                                    

|***March 31, 2001***                                
|----------------------------------------------------
|                                                    
|                                                    
|                                                    
|**Held to Maturity**                                
|                                                    
|United States government and    agency obligations  
|                                                    
|Corporate obligations                               
|                                                    
|Other                                               
|                                                    
|                                                    
|                                                    
|**Available for Sale**                              
|                                                    
|Federal Home Loan Mortgage    Corporation securities
|                                                    
|                                                    
|                                                    

The amortized cost and estimated market value of securities at March 31, 2002, by contractual maturity, are as follows:

|                                                 
|-------------------------------------------------
|                                                 
|                                                 
|                                                 
|**Held to Maturity**                             
|                                                 
|Due in one year or less                          
|Due in one through five years                    
|Due in five through ten years                    
|                                                 
|                                                 
|                                                 
|**Available for Sale**                           
|Federal Home Loan Mortgage Corporation Securities
|                                                 
|                                                 
|                                                 

Securities having a market value of $1,517,417 at March 31, 2002 were pledged by the Corporation for purposes
required by law.

21

## Community Financial Corporation & Subsidiary

**2.  Loans Receivable, Net**

Loans receivable are summarized as follows

|***March 31,***           | **2002**         | 2001            
|------------------------- | ---------------- | ----------------
|                         
|Residential real estate   | **$118,730,888** | ****$136,635,978
|Commercial real estate    | **45,154,022**   | ****37,640,675  
|Construction and land     | **26,878,167**   | ****13,886,116  
|Commercial business       | **14,737,436**   | ****14,167,204  
|Consumer                  | **23,881,655**   | ****16,704,561  
|                         
|                          | **229,382,168**  | ****219,034,534 
|                         
|********Less              |                  |                 
|Loans in process          | **8,141,658**    | ****6,819,563   
|Deferred loan fees, net   | **131,147**      | ****187,537     
|Allowance for loan losses | **1,675,679**    | ****1,477,649   
|                         
|                          | **9,948,484**    | 8,484,749       
|                         
|                          | **$219,433,684** | $210,549,785    
|                         

Loans serviced for others amounted to approximately $3,377,689 and $4,662,000 at March 31, 2002 and 2001,
respectively.  The loans are not included in the accompanying consolidated balance sheets.

The weighted average interest rate on loans receivable was approximately 7.18% and 8.43% at March 31, 2002 and
2001, respectively.

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

|***Year Ended March 31,*****                        | **2002**       |       | 2001       |   | 2000       |  
|--------------------------------------------------- | -------------- | ----- | ---------- | - | ---------- | -
|                                                   
|Balance at beginning of year                        | **$1,477,649** |       | $1,218,168 |   | $1,315,888 |  
|                                                    |                |       |            |   |            |  
|Provision charged to expense                        | **372,708**    |       | 320,635    |   | 282,854    |  
|                                                    |                |       |            |   |            |  
|Losses charged to the allowance, net of  recoveries | **(174,678**   | **)** | (61,154    | ) | (380,574   | )
|                                                    |                |       |            |   |            |  
|Balance at end of year                              | **$1,675,679** |       | $1,477,649 |   | $1,218,168 |  
|                                                   

There were no loans considered impaired as of March 31, 2002.  Nonaccrual loans excluded from impaired loan
disclosure amounted to $142,234 at March 31, 2002.  If interest on these loans had been accrued, such income would
have approximated $5,098 for the year ended March 31, 2002.

**3.**  **Property and Equipment**

Property and equipment are summarized as follows:

|***March 31,***                                | **2002**       | 2001      
|---------------------------------------------- | -------------- | ----------
|                                              
|Buildings                                      | **$4,248,900** | $4,190,880
|Land and improvements                          | **2,020,133**  | 1,985,733 
|Furniture and equipment                        | **2,867,938**  | 2,749,740 
|Construction in progress                       | **8,546**      | --        
|                                              
|                                               | **9,145,517**  | 8,926,353 
|Less accumulated depreciation and amortization | **3,724,334**  | 3,099,333 
|                                              
|**Net  properties and equipment**              | **$5,421,183** | $5,827,020
|                                              

22

## Notes to Consolidated Financial Statements

**4.**  **Deposits**

|***March 31,***               | **2002**         | 2001        
|----------------------------- | ---------------- | ------------
|                             
|****Demand deposits****       |                  |             
|Savings accounts              | **$ 36,142,520** | $ 14,413,730
|NOW accounts                  | **30,968,115**   | 26,341,852  
|Money market deposit accounts | **13,416,092**   | 9,008,946   
|                             
|Total demand deposits         | **80,526,727**   | 49,764,528  
|                              |                  |             
|**Time deposits**             | **124,008,729**  | 124,542,944 
|                             
|                              | **$204,535,456** | $174,307,472
|                             

The aggregate amount of time deposit accounts with a minimum denomination of $100,000 was approximately
$22,616,987 and $23,463,000 at March 31, 2002 and 2001, respectively.

Time deposits mature as follows:

|***March 31,***     | **2002**          | 2001        
|------------------- | ----------------- | ------------
|                   
|Within one year     | **$  52,837,823** | $106,730,989
|One to two years    | **19,169,440**    | 15,585,843  
|More than two years | **52,001,466**    | 2,226,112   
|                   
|                    | **$124,008,729**  | $124,542,944
|                   

Interest expense on deposits is summarized as follows:

|***Year Ended March 31,***            | **2002**       | 2001       | 2000      
|------------------------------------- | -------------- | ---------- | ----------
|                                     
|Time deposits                         | **$6,265,873** | $6,594,537 | $5,143,629
|Money market deposit and NOW accounts | **623,481**    | 685,805    | 795,965   
|Savings                               | **560,399**    | 429,272    | 440,495   
|                                     
|                                      | **$7,449,753** | $7,709,614 | $6,380,089
|                                     

**5.**  **Fair Value of Financial Instruments**

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

|***March 31,***                                | **2002**             |                   | ****2001         |              
|---------------------------------------------- | -------------------- | ----------------- | ---------------- | -------------
|                                              
|                                               | ***CarryingAmount*** | ***FairValue***   | *CarryingAmount* | *FairValue*  
|                                              
|**Financial assets**                           |                      |                   |                  |              
|Cash and short-term investments                | **$   3,206,926**    | **$   3,206,926** | $   5,168,499    | $   5,168,000
|Securities                                     | **25,173,289**       | **25,180,163**    | 38,326,613       | 38,591,000   
|Loans, net of allowance for loan losses        | **223,842,806**      | **225,465,000**   | 214,557,798      | 213,760,000  
|                                               |                      |                   |                  |              
|**Financial liabilities**                      |                      |                   |                  |              
|Deposits                                       | **204,535,456**      | **204,159,000**   | 174,307,472      | 174,441,000  
|Advances from Federal Home Loan Bank           | **28,000,000**       | **28,000,000**    | 63,000,000       | 63,000,000   
|Securities sold under agreements to repurchase | **950,805**          | **950,805**       | 4,422,389        | 4,422,000    
|                                               |                      |                   |                  |              

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.

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.

23

## Community Financial Corporation & Subsidiary

**5.**  **Fair Value of Financial Instruments (continued)**

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

For advances that mature within one year of the balance sheet date, carrying value is considered a reasonable estimate
of fair value.  The fair values of all other advances are estimated using discounted cash flow analysis based on the
Corporation's current incremental borrowing rate for similar types of advances.

Securities sold under agreements to repurchase

Securities sold under agreements to repurchase are treated as short-term borrowings and the carrying value
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.

**6.**  **Advances From Federal Home Loan Bank**

Advances from the Federal Home Loan Bank are summarized as follows:

|**Due in year ending March 31, |                
|------------------------------ | ---------------
|                              
|2003                           | **$28,000,000**
|                              

The weighted average interest rate on advances was 1.94% and 5.19% at March 31, 2002 and 2001, 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.  Value of this collateral as of March 31, 2002 was $95,100,000.

24

## Notes to Consolidated Financial Statements

**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,***                 | **2002**        | 2001            | 2000       
|------------------------------------------ | --------------- | --------------- | -----------
|                                          
|Maximum amount outstanding during the year | **$65,000,000** | ****$63,000,000 | $42,000,000
|                                          
|Average amount outstanding during the year | **$44,122,346** | ****$48,339,373 | $32,583,333
|                                          
|Average interest rate during the year      | **3.48%**       | ****6.37%       | 5.68%      
|                                          

**7.**  **Securities Sold Under Agreements to Repurchase**

The following is a summary of certain information regarding the Bank's repurchase agreements:

|***Year Ended March 31,***                                   | **2002**        | 2001         | 2000       
|------------------------------------------------------------ | --------------- | ------------ | -----------
|                                                            
|Balance at end of year                                       | **$   950,805** | $  4,422,389 | $20,000,000
|                                                            
|Weighted average interest rate during the year               | **2.97%**       | 6.58%        | 5.74%      
|                                                            
|Average amount outstanding during the year                   | **$   979,905** | $16,695,213  | $10,000,000
|                                                            
|Maximum amount outstanding at any month end  during the year | **$2,091,152**  | $20,000,000  | $20,000,000
|                                                            

**8.**  **Income Taxes**

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

|***March 31,***              | **2002**         |       | 2001            |  
|---------------------------- | ---------------- | ----- | --------------- | -
|                            
|**Deferred tax assets**      |                  |       |                 |  
|Allowance for losses         | **$    476,262** |       | $   320,782     |  
|Other                        | **1,937**        |       | 884             |  
|                            
|                             | **478,199**      |       | 321,666         |  
|                            
|**Deferred tax liabilities** |                  |       |                 |  
|Depreciable assets           | **(24,279**      | **)** | ****(78,818     | )
|FHLMC stock                  | **(1,300,943**   | **)** | (1,309,283      | )
|FHLB stock                   | **(28,825**      | **)** | ****(36,320     | )
|                            
|                             | **(1,354,047**   | **)** | (1,424,421      | )
|                            
|Net deferred tax liability   | **$  (875,848**  | **)** | ****$(1,102,755 | )
|                            

Differences between the statutory and effective tax rates are summarized as follows:

|***Year Ended March 31,***                           | **2002** |       | ****2001 |   | 2000 |  
|---------------------------------------------------- | -------- | ----- | -------- | - | ---- | -
|                                                    
|Tax at statutory rate                                | **34.0** | **%** | 34.0     | % | 34.0 | %
|Increases (decreases) in taxes resulting from        |          |       |          |   |      |  
|State income taxes, net of federal benefit           | **2.2**  |       | 1.3      |   | 2.1  |  
|Non-taxable interest and dividend received deduction | **(8.0** | **)** | ****(6.1 | ) | (3.3 | )
|Other                                                | **1.9**  |       | 0.2      |   | 4.0  |  
|                                                    
|                                                     | **30.1** | **%** | 29.4     | % | 36.8 | %
|                                                    

25

## Community Financial Corporation & Subsidiary

The components of other comprehensive income (loss) are summarized as follows:

|***Year Ended March 31,***                                                     | **2002**        |       | 2001        |   | 2000        |  
|------------------------------------------------------------------------------ | --------------- | ----- | ----------- | - | ----------- | -
|                                                                              
|Unrealized gains (losses) on securities:                                       |                 |       |             |   |             |  
|Unrealized holding gain (losses) arising during the period                     | **$   (21,947** | **)** | $1,532,721  |   | $  (889,052 | )
|Less reclassification adjustment for gains (losses)     included in net income | **--**          |       | --          |   | 601,421     |  
|                                                                              
|Other comprehensive income (loss), before tax                                  | **(21,947**     | **)** | 1,532,721   |   | (1,490,473  | )
|                                                                               |                 |       |             |   |             |  
|Income tax (expense) benefit related to items of other  comprehensive income   | **8,340**       |       | (582,434    | ) | 611,094     |  
|                                                                              
|Other comprehensive income (loss), net of tax                                  | **$   (13,607** | **)** | $   950,287 |   | $  (879,379 | )
|                                                                              

**10.**  **Stockholders' Equity and Regulatory Capital Requirements**

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

|*March 31, 2002*   | ***AmountRequired*** |  | ***PercentRequired*** |   | ***ActualAmount*** |  | ***ActualPercent*** |   | ***ExcessAmount***** | 
|------------------ | -------------------- |  | --------------------- | - | ------------------ |  | ------------------- | - | -------------------- | 
|                  
|Tangible Capital   | **$3,947,000**       |  | **1.50**              | % | **$23,870,000**    |  | **9.07**            | % | **$19,923,000**      | 
|Core Capital       | **10,525,000**       |  | **4.00**              |   | **23,870,000**     |  | **9.07**            |   | **13,345,000**       | 
|Risk-based Capital | **15,422,000**       |  | **8.00**              |   | **27,045,000**     |  | **14.04**           |   | **11,623,000**       | 

|*March 31, 2001*   | *AmountRequired* |  | *PercentRequired* |   | *ActualAmount* |  | *ActualPercent* |   | *ExcessAmount* | 
|------------------ | ---------------- |  | ----------------- | - | -------------- |  | --------------- | - | -------------- | 
|                  
|Tangible Capital   | $ 4,048,000      |  | 1.50              | % | $22,168,000    |  | 8.21            | % | $18,120,000    | 
|Core Capital       | 10,795,000       |  | 4.00              |   | 22,168,000     |  | 8.21            |   | 11,373,000     | 
|Risk-based Capital | 16,033,000       |  | 8.00              |   | 25,179,000     |  | 12.56           |   | 9,146,000      | 

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.

26

## Notes to Consolidated Financial Statements

**10.**  **Stockholders' Equity and Regulatory Capital Requirements (continued)**

Capital distributions by OTS-regulated savings banks 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" savings bank to make capital distributions during a calendar year equal to
net income for the current year plus the previous two years net income, less capital distributions paid over that same
time period.  Any distributions in excess of that amount require prior OTS notice, with the opportunity for OTS to
object to the distribution.  A Tier 1 savings bank is defined as a savings bank 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 savings banks 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.

**11.**  **Earnings Per Share**

During the year ended March 31, 2000, the Board of Directors authorized a stock repurchase program under which
up to 5%, or 128,607 shares, of the then outstanding shares of the Corporation's stock may be repurchased.  During
the year ended March 31, 2001, the Board of Directors increased the number of shares of the Corporation's stock
which may be repurchased to 372,961.  During the years ended March 31, 2002 and 2001, 96,685 and 168,774 shares,
respectively, were repurchased for an aggregate amount of approximately $981,000 and $1,542,000, respectively.

Earnings per share is calculated as follows:

|***Year Ended March 31,***              | **2002**            | 2001            | 2000           
|--------------------------------------- | ------------------- | --------------- | ---------------
|                                       
|**Basic earnings**                      |                     |                 |                
|                                        |                     |                 |                
|Income available to common shareholders | **$2,607,196**      | $1,743,391      | $1,323,880     
|                                       
|Weighted average shares outstanding     | **2,285,975**       | 2,435,180       | 2,561,343      
|                                       
|Basic earnings per share                | **$          1.14** | $           .72 | $           .52
|                                       

27

## Community Financial Corporation & Subsidiary

**11.**  **Earnings Per Share (continued)**

|***Year Ended March 31,***                | **2002**            | 2001             | 2000            
|----------------------------------------- | ------------------- | ---------------- | ----------------
|                                         
|**Diluted earnings per share**            |                     |                  |                 
|                                          |                     |                  |                 
|Income available to common shareholders   | **$2,607,196**      | $1,743,391       | $1,323,880      
|                                         
|Weighted average shares outstanding       | **2,285,975**       | 2,435,180        | 2,561,343       
|                                          |                     |                  |                 
|Dilutive effect of stock options          | **6,212**           | --               | --              
|                                         
|Total weighted average shares outstanding | **2,292,187**       | 2,435,180        | 2,561,343       
|                                         
|Diluted earnings per share                | **$          1.14** | $            .72 | $            .52

During the year ended March 31, 2002, stock options representing 112,700 shares were not included in the calculation
of earnings per share because they would have been antidilutive.

**12.**  **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,***                       | **2002**      |       | 2001      |   | 2000      |  
|------------------------------------------------ | ------------- | ----- | --------- | - | --------- | -
|                                                
|**Net periodic pension cost**                    |               |       |           |   |           |  
|                                                 |               |       |           |   |           |  
|Service cost - benefits earned during the period | **$  90,161** |       | $  87,355 |   | $  74,653 |  
|Interest cost on projected benefit obligations   | **64,504**    |       | 58,100    |   | 48,874    |  
|Actual return on plan assets                     | **(52,247**   | **)** | (45,515   | ) | (39,563   | )
|Net amortization and deferral                    | **(13,391**   | **)** | (11,942   | ) | (10,954   | )
|                                                
|                                                 | **$  89,027** |       | $  87,998 |   | $  73,010 |  
|                                                
|**Accumulated benefit obligation**               |               |       |           |   |           |  
|                                                 |               |       |           |   |           |  
|Vested benefits                                  | **$741,857**  |       | $608,830  |   | $511,450  |  
|Non-vested benefits                              | **11,833**    |       | 14,370    |   | 23,503    |  
|                                                
|                                                 | **$753,690**  |       | $623,200  |   | $534,953  |  
|                                                

28

## Notes to Consolidated Financial Statements

**12.**  **Employee Benefit Plans (continued)**

|***March 31,***                                              | **2002**          |       | ****2001    |  
|------------------------------------------------------------ | ----------------- | ----- | ----------- | -
|                                                            
|**Accrued pension cost**                                     |                   |       |             |  
|                                                             |                   |       |             |  
|Projected benefit obligation                                 | **$1,078,895**    |       | $885,325    |  
|Fair value of plan assets, primarily IPG insurance contracts | **956,857**       |       | ****836,978 |  
|                                                            
|Projected benefit obligation in excess of assets             | **(122,038**      | **)** | (48,347     | )
|                                                             |                   |       |             |  
|Unrecognized prior service cost                              | **3,104**         |       | 6,204       |  
|Unrecognized net loss                                        | **162,565**       |       | ****58,756  |  
|Unrecognized net asset                                       | **(16,529**       | **)** | ****(24,796 | )
|                                                            
|                                                             | **$      27,102** |       | $    (8,183 | )

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

|***Year Ended March 31,***                           | **2002** |       | 2001 |  
|---------------------------------------------------- | -------- | ----- | ---- | -
|                                                    
|**Weighted average discount rate**                   | **7.00** | **%** | 7.75 | %
|                                                    
|**Expected long-term rate of return on plan assets** | **7.50** | **%** | 7.50 | %
|                                                    
|**Increase in future compensation levels**           | **5.00** | **%** | 5.00 | %
|                                                    
|                                                     |          |       |     

The measurement dates used to value the plan assets were December 31, 2002 and 2001.

**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
October 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 approximately $223,200, $156,200 and $154,400 for
the years ended March 31, 2002, 2001 and 2000, respectively.

29

## Community Financial Corporation & Subsidiary

**13.**  **Stock Option Plan**

The Corporation has a noncompensatory stock option plan (the "Plan") designed to provide long-term incentives to
employees.  All options are exercisable upon grant date.

The following table summarizes options outstanding:

|***Year Ending March 31,***             | **2002**    | 2001  | 2000                             
|--------------------------------------- | ----------- | ----- | ---------------------------------
|                                       
|                                        | **Shares**  |       | **Weighted-AverageExercisePrice**
|                                       
|Options outstanding atbeginning of year | **190,950** |       | **$11.60**                       
|                                        |             |       |                                  
|Granted                                 | **15,000**  |       | **10.88**                        
|Forfeited                               | **(200**    | **)** | **12.00**                        
|Exercised                               | **(1,000**  | **)** | **9.75**                         
|                                       
|Options outstanding  at end of year     | **204,750** |       | **$11.56**                       
|                                       

The weighted average fair value of options granted during the years ended March 31, 2002, 2001 and 2000 were $2.84,
$2.84 and $2.38, respectively.

The Corporation applies Accounting Principals Board Opinion 25 in accounting for stock options granted to
employees.  Had compensation expense been determined based upon the fair value of the awards at the grant date and
consistent with the method under Statement of Financial Accounting Standards 123, the Corporation's net earnings
and net earnings per share would have been decreased to the pro forma amounts as indicated in the following table:

|**Net income** | **2002**       | 2001       | 2000      
|-------------- | -------------- | ---------- | ----------
|              
|As reported    | **$2,607,196** | $1,743,391 | $1,323,880
|Pro forma      | **2,580,866**  | 1,692,271  | 1,283,921 
|               |                |            |           
|               |                |            |           

|**Net income per share** | **Basic** | **Diluted** | Basic    | Diluted | Basic | Diluted
|------------------------ | --------- | ----------- | -------- | ------- | ----- | -------
|                        
|As reported              | **$1.14** | **$1.14**   | $0.72    | $0.72   | $0.52 | $0.52  
|Pro forma                | **1.13**  | **1.13**    | ****0.69 | 0.69    | 0.50  | 0.50   

30

## Notes to Consolidated Financial Statements

**13.  Stock Option Plan (continued)**

The fair value of each options granted is estimated on the date of grant using the Black-Sholes option pricing model
with the following assumptions used for grants for the year ended March 31, 2002: a risk free interest rate of 5.51%,
dividend yield of 2.79%, expected weighted average term of 10 years, and a volitality of 18.88%.

The following table summarizes information about stock options outstanding and exercisable at March 31, 2002:

|                  | Options Outstanding/Exercisable
|----------------- | -------------------------------
|                 
|                  | Number ofShares                
|                 
|                  |                                
|$  8.25 - $  9.90 | **58,000**                     
|$10.00 - $15.00   | **146,750**                    
|                 
|                  | **204,750**                    
|                 

**14.**  **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, 2002, the Corporation had outstanding
commitments to originate loans of approximately $9,495,000, unused lines of credit amounted to approximately
$13,364,000 and standby letters of credit totaled approximately $381,000 at March 31, 2002.

**Leases**

The Corporation is obligated under several noncancellable operating leases.  Future minimum annual rental
commitments under the leases are as follows:

|***Year Ending March 31,*** | ***Amount***  
|--------------------------- | --------------
|                            |               
|**2003**                    | **$253,808**  
|**2004**                    | **262,867**   
|**2005**                    | **270,852**   
|**2006**                    | **279,132**   
|**2007**                    | **287,718**   
|**Thereafter**              | **1,114,253** 
|                           
|                            | **$2,468,630**

Total lease expense was approximately $215,000, $215,000 and $219,000 for the years ended March 31, 2002,
2001 and 2000, respectively.

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

The Corporation maintains its cash accounts in several correspondent banks.  As of March 31, 2002, deposits in
excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC) were $1,960,159.

31

## Community Financial Corporation & Subsidiary

**15.**  **Related Party Transactions**

The Corporation has had, and may be expected to have in the future, banking transactions in the ordinary course of
business with directors, principal shareholders, executive officers, their immediate families and affiliated
companies in which they are principal shareholders (commonly referred to as related parties), on the same terms,
including interest rates and collateral, as those prevailing at the time for comparable transactions with others.  At
March 31, 2002 and 2001, these loans totaled $996,399 and $1,250,446, respectively.  During the year ended
March 31, 2002, total principal payments were $254,047.  There were no principal additions during the year.

**16.**  **Selected Quarterly Financial Data (Unaudited)**

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

|***Year ended March 31, 2002***                      | FirstQuarter | SecondQuarter | ThirdQuarter | FourthQuarter
|---------------------------------------------------- | ------------ | ------------- | ------------ | -------------
|                                                    
|Total interest income                                | **$5,204**   | **$4,939**    | **$4,448**   | **$4,350**   
|Total interest expense                               | **2,767**    | **2,504**     | **1,992**    | **1,794**    
|                                                    
|Net interest income                                  | **2,437**    | **2,435**     | **2,456**    | **2,556**    
|Provision for loan losses                            | **58**       | **116**       | **75**       | **124**      
|                                                    
|Net interest income after provision  for loan losses | **2,379**    | **2,319**     | **2,381**    | **2,432**    
|                                                     |              |               |              |              
|Other income                                         | **809**      | **834**       | **861**      | **878**      
|Other expenses                                       | **2,129**    | **2,222**     | **2,223**    | **2,590**    
|                                                    
|Income before income taxes                           | **1,059**    | **931**       | **1,019**    | **720**      
|                                                     |              |               |              |              
|Income tax expense                                   | **336**      | **289**       | **340**      | **157**      
|                                                    
|Net income                                           | **$   723**  | **$   642**   | **$   679**  | **$   563**  
|                                                    
|Earnings per share                                   |              |               |              |              
|Basic                                                | **$0.31**    | **$0.28**     | **$0.30**    | **$0.25**    
|Diluted                                              | **0.31**     | **0.28**      | **0.30**     | **0.25**     
|                                                    

32

## Notes to Consolidated Financial Statements

**16.**  **Selected Quarterly Financial Data (Unaudited) (continued)**

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

|***Year ended March 31, 2001***                      | FirstQuarter | SecondQuarter | ThirdQuarter | FourthQuarter
|---------------------------------------------------- | ------------ | ------------- | ------------ | -------------
|                                                    
|Total interest income                                | $4,660       | $5,038        | $5,150       | $5,199       
|Total interest expense                               | 2,742        | 3,062         | 3,116        | 2,994        
|                                                    
|Net interest income                                  | 1,918        | 1,976         | 2,034        | 2,205        
|Provision for loan losses                            | 66           | 101           | 41           | 113          
|                                                    
|Net interest income after provision  for loan losses | 1,852        | 1,875         | 1,993        | 2,092        
|                                                     |              |               |              |              
|Other income                                         | 748          | 761           | 706          | 685          
|Other expenses                                       | 1,915        | 2,033         | 2,187        | 2,106        
|                                                    
|Income before income taxes                           | 685          | 603           | 512          | 671          
|                                                     |              |               |              |              
|Income tax expense                                   | 248          | 202           | 181          | 97           
|                                                    
|Net income                                           | $   437      | $   401       | $   331      | $   574      
|                                                    
|Earnings per share                                   |              |               |              |              
|Basic                                                | $  0.18      | $  0.16       | $  0.14      | $  0.24      
|Diluted                                              | 0.18         | 0.16          | 0.14         | 0.24         
|                                                    

33

## Community Financial Corporation & Subsidiary

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

|**Condensed Balance Sheets**            
|----------------------------------------
|***March 31,***                         
|                                        
|**Assets**                              
|                                        
|Investment in the Bank, at equity       
|Cash                                    
|Prepaid expenses and other assets       
|                                        
|                                        
|                                        
|                                        
|**Liabilities and Stockholders' Equity**
|                                        
|**Liabilities**                         
|                                        
|**Stockholders' Equity**                
|Common stock                            
|Additional paid-in capital              
|Retained earnings                       
|Accumulated other comprehensive income  
|                                        
|Total stockholders' equity              
|                                        
|                                        
|                                        

|**Condensed Statements of Income**                                
|------------------------------------------------------------------
|***Year Ended March 31,***                                        
|                                                                  
|**Income**                                                        
|Dividend from Bank                                                
|Interest income                                                   
|                                                                  
|********Total income                                              
|                                                                  
|**Noninterest expenses**                                          
|                                                                  
|**Income before equity in undistributed net   income of the Bank**
|Equity in earnings of Bank, net of distributions                  
|                                                                  
|**Income before income taxes**                                    
|Income tax (benefit)                                              
|                                                                  
|**Net income**                                                    
|                                                                  

34

## Notes to Consolidated Financial Statements

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

|**Condensed Statements of Cash Flows**          
|------------------------------------------------
|***Year Ended March 31,***                      
|                                                
|**Operating activities**                        
|Net income                                      
|Adjustments                                     
|Equity in earnings of Bank, net of distributions
|(Increase) decrease in prepaid and other assets 
|                                                
|Net cash provided by operating activities       
|                                                
|**Investing activities**                        
|Net cash provided by investing activities       
|                                                
|**Financing activities**                        
|Cash dividends paid on common stock             
|Repurchase of common stock                      
|Stock options exercised                         
|                                                
|Net cash absorbed by financing activities       
|                                                
|**Increase (decrease) in cash**                 
|                                                
|****Cash,** beginning of year**                 
|                                                
|**Cash,** end of year                           

35

## Stockholder Information

**Form 10-KSB Report**

A copy of the our Annual Report on Form 10-KSB for the fiscal year ended March 31, 2002 including financial statements, as filed with the SEC, will be furnished without charge to our stockholders upon written request to the Secretary, Community Financial Corporation, 38 North Central Avenue, Staunton, Virginia 24401.

|**Independent Auditors***Yount, Hyde & Barbour, P.C.*
50 South Cameron Street
Winchester, Virginia 22601**Market Makers***Scott & Stringfellow, Inc**Knight Securities L.P.**Anderson & Strudwick, Inc.**Sandler O'Neill & Partners***Transfer Agent**
Community Bank
acts as Transfer Agent for
Community Financial Corporation | **Legal Counsel***Nelson, McPherson, Summers**& Santos*
12 North New Street
Staunton, Virginia 24401*Silver, Freedman & Taff, L.L.P.*
1700 Wisconsin Avenue, N.W.
Washington, D.C. 20007*Williams, Mullen, Christian & Dobbins*
Two James Center
1021 East Cary Street
Richmond, Virginia 23210
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

**Common Stock**

As of May 31, 2002, there were approximately 510 holders of record of Community Financial common stock. Community Financial common stock is traded on The Nasdaq Small Cap Market under the symbol "CFFC." The shareholders of record number does not reflect persons or entities who hold their stock in nominee or "street" name.

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

|Fiscal 2002    | High   |  | Low   |  | Close |  | Dividend Declared
|-------------- | ------ |  | ----- |  | ----- |  | -----------------
|June 2001      | $10.25 |  | $9.63 |  | $9.90 |  | $ .08            
|September 2001 | 10.90  |  | 9.90  |  | 10.60 |  | .08              
|December 2001  | 11.05  |  | 10.05 |  | 10.60 |  | .08              
|March 2002     | 11.50  |  | 10.88 |  | 11.13 |  | .08              
|               |        |  |       |  |       |  |                  
|               |        |  |       |  |       |  |                  
|               |        |  |       |  |       |  |                  
|               |        |  |       |  |       |  |                  
|               |        |  |       |  |       |  |                  
|Fiscal 2001    | High   |  | Low   |  | Close |  | Dividend Declared
|June 2000      | $10.25 |  | $8.75 |  | $8.75 |  | $ .08            
|September 2000 | 9.13   |  | 8.13  |  | 8.44  |  | .08              
|December 2000  | 9.50   |  | 8.00  |  | 9.50  |  | .08              
|March 2001     | 10.00  |  | 9.50  |  | 9.63  |  | .08              

The Board of Directors of Community Financial makes dividend payment decisions with consideration of a variety of factors, including earnings, financial condition, market considerations and regulatory restrictions. Our ability to pay dividends is limited by restrictions imposed by the Virginia Stock Corporation Act, and indirectly, by the Office of Thrift Supervision Restrictions on dividend payments from Community Bank to Community Financial (Community Financial's primary source of funds for the payment of dividends to its stockholders) are described in Note 10 of the Notes to Consolidated Financial Statements contained in this Annual Report.

36

**Mortgage Corporation**

|During the fiscal year ending March 31, 2002, Community First Mortgage Corporation enjoyed its second consecutive year of profitability. The retail division of the Company closed $77.5 million in permanent residential mortgage loans, representing an increase of $18.2 million over the previous fiscal year. The Company's well earned reputation for providing quality service to its customers was a major factor in the recruitment of several new loan officers both the Richmond and Staunton markets. These new loan officers, as well as a lower interest rate environment relative to Fiscal |  | 2001, were the primary ingredients of the Company's increase in retail production.  The construction lending division, which was established in Fiscal 2000, once again experienced solid growth in Fiscal 2002. The division's builder loan and construction permanent loan programs attracted more new customers, thereby expanding the Company's market share in these portfolios. At fiscal year end, the con-struction lending division had originated $13.1 million in new loans, with $10.67 million in outstanding com-mitments and $7.55 million disbursed.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

***Community First MortgageCorporation Employees***

Tony Bottoms*President*

**Staff**

|Kerri Bliss
Lorey Bowles
Lisa Collins
Mary Jean Davis
Steve Davis
Diane Fox
Lisa Kurtz | Debbie Giambanco
Tom Gill
Becky Heldreth
Barbara Henderson
Debra Lynch
David Jones
Bob Michaux
Susan Miller | Rick Perkins
Karen Poe
Brenda Smith
Molly Stout
Kimberly Stump
Becky Tinsley
Dawn Warren
|-------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------

**Community First Mortgage Corporation:**

|**Main Office**9201 Arboretum Parkway, Suite 210Richmond, Virginia 23236(804) 330-9800 | **Staunton Office**101 Community WayStaunton, Virginia 24401(540) 213-3770
|-------------------------------------------------------------------------------------- | --------------------------------------------------------------------------

37

|                                                                                    |  |                                                                                       
|----------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------
|**Richmond Road Branch**101 Community Way -- Staunton, Virginia 24401(540) 213-3888 |  | **Waynesboro Branch**2934 West Main Street -- Waynesboro, Virginia 22980(540) 943-5000

|**Executive andAdministrative OfficeRetail BankingCorporateHeadquarters,Staunton** |  | 38 North Central AvenueStaunton, Virginia 24401(540) 886-0796Fax: (540) 885-0643E-Mail:cbnk@cbnk.comWeb Address:www.cbnk.com
|---------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------

|                                                                             |  |                                                                                                  
|---------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------
|**Raphine Branch**2134 Raphine Road -- Raphine, Virginia 24472(540) 377-5300 |  | **Stuarts Draft Branch**2658 Stuarts Draft Highway -- Stuarts Draft, Virginia 24477(540) 337-1514

38

**Community Bank Offices**

[DRAWING]

**Artist Rendering for new Retail Branch Office on Route 11 in Verona**
21 Dick Huff Lane, Verona, Virginia(projected opening date December 2002)



**Hampton Roads Region.**

|                                                                                                                 |  |                                                                                                                 
|---------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------
|**Regional Headquarters, Hilltop, Virginia Beach**621 Nevan Road -- Virginia Beach, Virginia 23451(757) 491-8810 |  | **Kemps River, Virginia Beach**5300 Kemps River Drive, Suite 100 -- Virginia Beach, Virginia 23464(757) 424-5600

39

**Corporate Profile**

|Community 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, Community Bank converted to the stock form of organization through the sale and issuance of 656,134 shares of its common stock. Community Financial was organized in 1989 for the purpose of becoming a thrift institution holding company.  Effective January 31, 1990, Community Bank completed the holding company reorganization of the bank and Community Financial acquired all of the issued and outstanding shares of common stock of Community Bank . In 1996, Community Financial changed its place of incorporation to the Commonwealth of Virginia from the State of Delaware.

   The principal asset of Community Financial is the outstanding stock of Community Bank, its wholly owned subsidiary.  Community Financial presently has no separate operations and its business consists only of the business of Community Bank.

   Community Bank's primary business is to meet the financial needs of individuals, businesses and community organizations. |  | Community Bank offers real estate, business and personal loans with complementary deposit services such as checking, savings, certificates of deposits, money market and retirement accounts. Flexible, local and prompt decisions on loan and other financial service needs are a primary advantage of banking with Community Bank. "Our Name Really Does Say It All."

   Both Community Financial and Community Bank conduct business through a main office located at 38 North Central Avenue, Staunton, Virginia 24401, a second Staunton office at 101 Community Way, Staunton, Virginia 24401, a Waynesboro office at 2934 West Main Street, Waynesboro, Virginia 22980, a Stuarts Draft office at Routes 340 and 608, Stuarts Draft, Virginia 24477, a Raphine office at 2134 Raphine Road, Raphine, Virginia 24472, a Verona office at 21 Dick Huff Lane, Verona, Virginia (projected opening date December, 2002) and two Virginia Beach office at 5300 Kemps River Drive, Suite 100, Virginia Beach, Virginia 23467 and 621 Nevan Road, Virginia Beach, Virginia. The Bank's subsidiary, Community First Mortgage Corporation, conducts business at 9201 Arboretum Parkway, Suite 210, Richmond, Virginia 23236.
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

***Community Bank Employees***

|Cassie Beaty
Michelle Coffey
Danny Fields
Wanda Garrison
Peggy Miller
Janice Pappas
Fran Stauffer
Susan Swisher
Courtney Williams
Gretchen Abshire
Becky Ballew
Tysha Blackburn
Darlene Hall
Alisha Hammer
Heather Miller
Jessie Palmieri
Jennifer Raybin
Lee Ralston Shaner
Grace Dick
Kathleen Fornadel
Ann Hottel
Carolyn Howell | Julie Krumpter
Teresa Layne
Stephanie Leach
Virginia McCormack
Beth Miller
Wendi Pell
Sally Pritchett
Kendell Rexrode
Rachel Sellers
Marie Schmitt
Sara Tyree
Kelly Vandevander
Dee Wimer
Dianne Campbell
David Cropp
Thomas Fleisher
Rose Lilly
Edgar Kurtz
John Seidler
Edgar Smith
Glenn VanLear
Benny Werner | Ann Wescott
Jennifer Boxler
Janet Braithwaite
Lona Cannon
Jessica Green
Dana Rogers
Teresa Tolley
Joe Zakaib
Pam Addington
Maria Dimapelis
Denia Jove
Lovetta Moore
Teresa Ridgeway
Dianne Booth
Diane Decker
Robert Hoffman
Teresa Knapton
Ellen Kutchak
Chris Kyriakides
Rosalie Moster
Jane Orem
Catherine Pauly | Robert Pennington
Connie Savage
Connie West-Williams
Stacy Whaley
Kathy Willis
Jim Fordham
Hugh McMenamin
Jeff Wagner
Doug Richard
Brenda Haley
Jerry Giles
Renee Fangman
Rich Mayer
Janet Redifer
Pamela Ritchie
Romona Savidge
Amanda Campbell
Jennifer Campbell
Charlott Dean
Kay Dean
Melissa Galvin
Janice Seagraves | Heather West
Stephanie Wimer
Kim Aldhizer
Deborah Burnett
Martha Chandler
Ariel Fix
Emilie McKenzie
Lyle Moffett
Karen Sheehan
Sean Smoker
Linda Turner
Barbara Wood
Butch Smiley
Thomas Wagner
Gary Davenport
Stacy Clemmer
Tonna Lotts
Debra Poole
Linda Wood
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------