SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

     For the fiscal year ended March 31, 1998

                                       OR

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

     For the transition period from ______ to _______

     Commission file number 0-18265.

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

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

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

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

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

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

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

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

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

     The Issuer had  $14,715,897  in gross  income for the year ended  March 31,
1998.


<PAGE>



   As of May 29, 1998, there were issued and outstanding 2,568,446 shares of the
Issuer's  Common Stock.  The aggregate  market value of the voting stock held by
non-affiliates  of the  Issuer,  computed  by  reference  to the  average of the
closing bid and asked price of such stock as of May 29, 1998, was  approximately
$30,700,000.  (The  exclusion from such amount of the market value of the shares
owned by any person  shall not be deemed an  admission  by the Issuer  that such
person is an affiliate of the Issuer.)

                       DOCUMENTS INCORPORATED BY REFERENCE

PART  III of  Form  10-KSB--Proxy  Statement  for the  1998  Annual  Meeting  of
Stockholders.

Transitional Small Business Disclosure Format:

              Yes [ ]    No[X]

                                        2

<PAGE>



                                  PART I

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

General
-------

     Community  Financial  Corporation  ("Community"  or  the  "Company")  is  a
Virginia  corporation  which  owns  Community  Bank (the  "Bank").  The Bank was
organized  in  1928  as a  Virginia-chartered  building  and  loan  association,
converted to a federally-chartered savings and loan association in 1955 and to a
federally-chartered  savings bank in 1983.  In 1988,  the Bank  converted to the
stock form of organization through the sale and issuance of shares of its Common
Stock.  The  Company  effected a  two-for-one  stock split in the form of a 100%
stock dividend in November 1994 and March 1998.

     The principal  asset of the Company is the  outstanding  stock of the Bank,
its wholly owned subsidiary.  The Company  presently has no separate  operations
and its business consists only of the business of the Bank. The Company's Common
Stock trades on The Nasdaq  Stock  Market under the symbol  "CFFC." In November,
1997 the Bank  established  Community  First  Mortgage  Corporation  ("Community
First"),  a wholly owned  mortgage  banking  subsidiary  to  originate  and sell
mortgage loans. Community First has yet to fully begin operations.

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

     At March 31,  1998,  Community  had $183.9  million in assets,  deposits of
$138.2 million and stockholders'  equity of $25.5 million.  Community's  primary
business consists of attracting deposits from the general public and originating
real estate loans and other types of investments  through its offices located in
Staunton, Waynesboro, Stuart Drafts and Virginia Beach, Virginia.

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

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



                                        3

<PAGE>


Forward-Looking Statements

This Quarterly Report on Form 10-K contains certain  forward-looking  statements
with respect to the financial  condition,  results of operations and business of
the  Company.  These  forward-looking   statements  involve  certain  risks  and
uncertainties. When used in this Quarterly Report on Form 10-K or future filings
by the Company with the  Securities  and Exchange  Commission,  in the Company's
press  releases  or  other  public  or  shareholder  communications,  or in oral
statements made with the approval of an authorized  executive officer, the words
or phrases  "will likely  result",  "are  expected  to",  "will  continue",  "is
anticipated",  "estimate",  "project",  "believe"  or  similar  expressions  are
intended  to  identify  "forward-looking  statements"  within the meaning of the
Private Securities  Litigation Reform Act of 1995. The Company wishes to caution
readers not to place  undue  reliance  on any such  forward-looking  statements,
which speak only as of the date made, and to advise readers that various factors
including regional and national economic conditions, changes in levels of market
interest  rates,  credit  risks  of  lending  activities,  and  competitive  and
regulatory  factors could affect the Company's  financial  performance and could
cause the Company's actual results for future periods to differ  materially from
those anticipated or projected.

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

Year 2000
---------

  The  Corporation  is  conducting  a formal  review of its  systems and systems
providers,  due to concerns regarding  possible  consequences that the year 2000
may pose to  computer  and other  operating  systems  utilized  in its  business
activities.  While a preliminary  review has resulted in the  identification  of
certain issues which require  resolution,  management  believes that appropriate
plans are in place to resolve these issues in a timely manner.  Management  does
not  believe  the  resolution  of these  issues  will  significantly  impair the
Corporation's  ability to provide necessary  services to our customers,  nor are
the costs  involved in this  program  expected to have a material  impact on the
Corporations earnings or financial condition.

                                        4

<PAGE>



Lending Activities
------------------

     General. The Company, like most other thrift institutions, concentrates its
lending  activities on first mortgage  conventional loans secured by residential
and, to a lesser extent, commercial real estate with an emphasis on multi-family
housing.  The Company makes construction loans secured by commercial real estate
and one-to four-family residential properties.  Additionally,  the Company makes
consumer loans in order to increase the  diversification  and decrease  interest
rate  sensitivity  of its  loan  portfolio  and  to  increase  interest  income.
Substantially,  all of the Company's loans are originated within its market area
which includes Shenandoah, Rockingham, Page, Highland, Augusta, Albemarle, Bath,
Rockbridge  and Nelson  Counties in  Virginia.  The Company  opened an office in
Virginia Beach,  Virginia in April,  1997 which will expand the Bank's market to
the Hampton Roads area.

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

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

     The aggregate amount of loans that the Bank is permitted to make to any one
borrower, including related entities, and the aggregate amount that the Bank may
invest in any one real estate project,  with certain  exceptions,  is limited to
the greater of 15% of unimpaired  capital and surplus or $500,000.  At March 31,
1998,  the maximum  amount  which the Bank could have loaned to one borrower and
the borrower's related entities and invested in any one project

                                        5

<PAGE>



was approximately $3.4 million. At March 31, 1998, the Bank had no borrower,  or
groups of borrowers, with loans outstanding in excess of $2.7 million.



                                        6

<PAGE>

     Loan Portfolio Composition.  The following table sets forth the composition
of the Company's total loan portfolio in dollars and percentages as of the dates
indicated.

<TABLE>
<CAPTION>
                                                                          March 31,
                   -----------------------------------------------------------------------------------------------------
                         1998                1997                1996               1995                 1994
                   -----------------------------------------------------------------------------------------------------
                    Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent    Amount   Percent
                   -----------------------------------------------------------------------------------------------------
                                                            (Dollars in Thousands)
<S>                <C>        <C>       <C>        <C>      <C>        <C>      <C>        <C>      <C>        <C>
Real Estate Loans:
-----------------
Residential          $ 94,962  56.92     $ 96,968    63.83%  $ 91,212   62.92%   $ 86,331   62.90%   $ 77,485   61.59%
Commercial             40,115  24.04       37,508    24.69     38,433   26.51      39,667   28.90      41,144   32.71
Construction           10,071   6.04        5,204     3.42      6,415    4.43       4,336    3.15       2,992    2.38
                     --------  ------    --------   ------   --------  ------    --------  ------    --------  -------
  Total real estate   145,148  87.00      139,680    91.94    136,060   93.86     130,334   94.95     121,621   96.68
                     --------  ------    --------   ------    --------  ------    --------  ------    --------  ------
Consumer Loans:
--------------
Unsecured personal      1,935   1.16        4,418     2.91      3,616    2.50       3,600    2.62       1,922    1.53
Secured personal        3,066   1.84          546      .36        ---     ---         ---     ---         ---     ---
Automobile              3,970   2.38        1,646     1.08      1,470    1.01       1,072     .78         687     .55
Home equity             7,086   4.25        1,630     1.07        380     .26         412     .30         505     .40
Deposit account           277    .16          339      .22        234     .16         267     .20         259     .21
Other                      35    .02           76      .05        496     .34       1,577    1.15         809     .63
                     --------  ------     --------   -----    --------  ------    --------  ------    --------  ------
  Total consumer       16,369   9.81        8,655     5.69      6,196    4.27       6,928    5.05       4,182    3.32

Commercial business     5,321   3.19        3,588     2.37      2,709    1.87         ---     ---         ---     ---
                     --------   -----    --------    -----   --------  ------    --------  ------      -------  ------
Total loans
 receivable          $166,838 100.00%    $151,923   100.00%  $144,965  100.00%   $137,262  100.00%   $125,803  100.00%
                     --------  ======    --------   =====-   --------  ======    --------  ======    --------  ======
Less:
Undisbursed loans in
 process                3,003               1,619               1,830               1,477               1,330
Deferred fees and
 unearned discounts       247                 361                 396                 507                 625
Allowance for losses    1,117               1,038               1,000                 763                 703
                     --------             --------            --------            --------            --------
  Total net items       4,367               3,018               3,226               2,747               2,658
                     --------             --------            --------            --------            --------
  Total loans
   receivable, net   $162,471            $148,905            $141,739            $134,515            $123,145
                     ========            ========            ========            ========            =========

</TABLE>

                                        7

<PAGE>



     The following  table shows the  composition of the Company's loan portfolio
by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>
                                                                     March 31,
                   -------------------------------------------------------------------------------------------------
                            1998              1997              1996                 1995                 1994
                   -------------------------------------------------------------------------------------------------
                      Amount   Percent   Amount    Percent   Amount   Percent   Amount   Percent     Amount  Percent
                   -------------------------------------------------------------------------------------------------
                                                                (Dollars in Thousands)
<S>                  <C>      <C>       <C>         <C>    <C>        <C>      <C>         <C>     <C>        <C>
Fixed-Rate Loans:
Real Estate:
 Residential          $ 13,539    8.12%  $ 11,161    7.34%  $ 12,863    8.87%  $ 12,896    9.40%   $ 14,880   11.83%
 Commercial              6,442    3.86      6,223    4.10      5,548    3.83      2,765    2.01       3,832    3.05
                      --------  ------   --------  ------   --------  ------   ---------  ------    --------  ------
 Total real
  estate loans(1)       19,981   11.98     17,384   11.44     18,411   12.70     15,661   11.41      18,712   14.88
                      --------  ------   --------  ------   --------  ------    --------  ------    --------  ------
Consumer                14,716    8.82      8,114    5.33      5,902    4.07      6,516    4.75       3,677    2.92
Commercial business      4,767    2.86      3,588    2.37      2,709    1.87        ---     ---         ---     ---
                      --------  ------   --------  ------   --------  ------    --------  ------    --------  ------
 Total fixed-rate
   loans                39,464   23.66     29,086   19.14     27,022   18.64     22,177   16.16      22,389   17.80
                       --------  ------   --------  ------   --------  ------   -------   -----      ------   -----
Adjustable-Rate
 Loans:
Real Estate:
 Residential            86,074   51.59     87,336   57.49     80,773   55.72     75,023   54.66      64,532   51.30
 Commercial             39,093   23.43     34,960   23.01     36,876   25.44     39,650   28.88      38,377   30.50
                      --------  ------   --------  ------   --------  ------    --------  ------    --------  ------
 Total real estate
  loans(2)             125,167   75.02    122,296   80.50    117,649   81.16    114,673   83.54     102,909   81.80
                      --------  ------   --------  ------   --------  ------    --------  ------    --------  ------
Consumer                 1,653     .99        541     .36        294     .20        412     .30         505     .40
Commercial Business        554     .33        ---     ---        ---     ---        ---     ---         ---     ---
                      --------  ------   --------  ------   --------  ------    --------  ------    --------  ------
 Total adjustable-
  rate loans           127,374   76.34    122,837   80.86    117,943   81.36    115,085   83.84     103,414   82.20
                      --------  ------   --------  ------   --------  ------    --------  ------    --------  ------
 Total loans
  receivable          $166,838  100.00%  $151,923  100.00%  $144,965  100.00%  $137,262  100.00%   $125,803  100.00%
                      --------  ======   --------  ======   --------  ======    -------- =======    -------- =======
</TABLE>
CONTINUED NEXT PAGE


                                        8

<PAGE>



<TABLE>
<CAPTION>


                                                                  March 31,
                      --------------------------------------------------------------------------------------------
                            1998           1997               1996                1995               1994
                      --------------------------------------------------------------------------------------------
                      Amount   Percent   Amount    Percent   Amount   Percent   Amount   Percent   Amount  Percent
                      --------------------------------------------------------------------------------------------
                                                              (Dollars in Thousands)
<S>                  <C>        <C>      <C>         <C>     <C>        <C>      <C>       <C>     <C>      <C>
Less:
Undisbursed loans
 in process              3,003            1,619               1,830               1,477             1,330
Deferred fees and
 unearned discounts        247              361                 396                 507               625

Allowance for losses     1,116            1,038               1,000                 763               703
                      --------          --------            --------            --------         --------
 Total net items         4,366            3,018               3,226               2,747             2,658
                      --------          --------            --------            --------         --------
 Total loans
  receivable, net     $162,472         $148,905            $141,739            $134,515          $123,145
                      ========          ========           ========            ========         =========
</TABLE>

----------------
(1)  Includes   residential   real  estate   construction   loans  of  $818,000,
     $1,529,000,  $2,424,000,  $1,588,000 and  $1,927,000  and  commercial  real
     estate   construction   loans  of   $4,321,000,   $3,675,000,   $3,991,000,
     $2,748,000,  and $1,065,000 at March 31, 1998,  1997,  1996, 1995 and 1994,
     respectively.  (2) Includes  residential real estate  construction loans of
     $3,833,000 and commercial real estate  construction  loans of $1,099,000 at
     March 31, 1998.


                                        9

<PAGE>


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

     The following table  illustrates the contractual  maturity of the Company's
loan portfolio at March 31, 1998. Mortgages which have adjustable interest rates
are shown as maturing based on  contractual  maturity and demand loans are shown
as maturing in one year or less.  This  schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.


<TABLE>
<CAPTION>

                               Real Estate
                        ------------------------
                        Mortgage(1)   Construction   Consumer    Total
                        -----------------------------------------------
                                          (In Thousands)
<S>                       <C>         <C>          <C>        <C>
Due During Years Ended
----------------------
04/01/98 - 03/31/99       $  8,977    $  9,917     $ 14,087    $ 34,109
04/01/99 - 03/31/03         15,263         154        4,723      20,140
04/01/03 and following     110,837           0        2,880     112,589
                          --------    --------     --------    --------
     Total                $135,077    $ 10,071     $ 21,690    $166,838
                          ========    ========     ========    ========
</TABLE>

-----------

(1)  Includes residential and commercial real estate loans.


  The total  amount of loans due after March 31,  1999 which have  predetermined
interest rates is $14.0 million,  while the total amount of loans due after such
date which have floating or adjustable interest rates is $118.7 million.

                                       10

<PAGE>


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

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

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

  In order to reduce its exposure to changes in interest rates,  the Company has
de-emphasized   the   origination  of  30-year   fixed-rate   one-to-four-family
residential  mortgage  loans for  retention in its own  portfolio.  For the year
ended  March  31,  1998,  79.5%  of  all  one-to-four-family  residential  loans
originated  by the Company  had  adjustable  interest  rates.  Although,  due to
competitive  market pressures,  the Company does originate  fixed-rate  mortgage
loans,  it currently  underwrites  and  documents all such loans to permit their
sale in the secondary mortgage market,  with a third-party  purchase  commitment
for the loan being  required  prior to  origination.  At March 31,  1998,  $12.7
million (excluding $818,000 of residential  construction loans) or 12.8%, of the
Company's  one-to-four-family  residential  mortgage loan portfolio consisted of
fixed-rate mortgage loans.

  The Company's current one-to-four-family residential adjustable-rate mortgages
("ARMs")  have interest  rates that adjust  primarily  every year,  generally in
accordance  with  the  rates on  one-year  U.S.  Treasury  Bills.  Although  the
Company's  primary  one-to-four-family  residential loan is one year adjustable,
the  Company has begun to offer a  residential  loan which  adjusts  every three
years generally in accordance with the rates on three year U.S.  Treasury Bills.
The Company's  ARMs  generally  limit  interest  rate  increases to 2% each rate
adjustment period and have an established ceiling rate at the time the loans are
made of up to 6% over the original  interest rate. To compete with other lenders
in its market area,  Community  makes one and three-year  ARMs at interest rates
which,  for the initial  period,  are below the index rate which would otherwise
apply to these loans.  Borrowers are  qualified,  however,  at the fully indexed
interest rate. At March 31, 1998, ARM loans totaled $86.0 million,  or 51.6%, of
the Company's total loans receivable before net items.  There are unquantifiable
risks  resulting from potential  increased  costs to the borrower as a result of
repricing.  It is possible,  therefore,  that during periods of rising  interest
rates, the risk of defaults on ARMs may increase due to the upward adjustment of
interest costs to borrowers.

 All  one-to-four-family  real estate  mortgage  loans being  originated  by the
Company contain a "due-on-sale" clause providing that the Company may declare

                                       11

<PAGE>


the unpaid  principal  balance  due and payable  upon the sale of the  mortgaged
property.  It is the  Company's  policy to  enforce  these  due-on-sale  clauses
concerning  fixed-rated  loan and to permit  assumptions  of ARMs, for a fee, by
qualified borrowers.

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


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

  The Company has  originated  and, in the past has purchased,  commercial  real
estate loans and loan  participations.  The Company also makes  commercial  real
estate construction loans. The Company's commercial real estate and construction
loans  are  secured  by  various  types of  commercial  real  estate,  including
multi-family  residential  buildings,  hotels and  motels,  convenience  stores,
commercial and industrial buildings,  shopping centers and churches. The Company
has in recent years placed more emphasis on  multi-family  housing loans for its
commercial real estate loan portfolio. At March 31, 1998, commercial real estate
and construction  loans aggregated $50.2 million or 30.5% of the Company's total
loans  receivable  before net items.  The Company's  commercial  real estate and
construction  loans are secured by properties  located in the  Company's  market
area.

  The  Company's  commercial  real estate loans are  generally  made at interest
rates that adjust based on yields for one-year U.S. Treasury securities,  with a
2% annual cap on rate  adjustments  and a 6% cap on interest rates over the life
of the loan. Typically,  the Company charges fees ranging from 1% to 2% on these
loans. At March 31, 1998, the Company had $6.4 million in fixed-rate  commercial
real estate and  construction  loans.  Commercial  real estate loans made by the
Company are fully amortizing with maturities ranging from five to 30 years.

  At March 31,  1998,  the Company  had $5.4  million or 3.2% of its total loans
receivable before net items invested in commercial  construction  loans compared
to $3.7  million or 2.4% at March 31, 1997.  At March 31, 1998,  the Company had
eleven  commercial  construction  loans,  the largest one having an  outstanding
balance of $1.1  million at March 31,  1998.  All of these  loans are  presently
performing in accordance with their terms. The Company's commercial construction
loans are generally  made for a one year term or less,  with a requirement  that
the borrower  have a commitment  for  permanent  financing  prior to funding the
construction  loan. The Company's  construction  loans  generally  provide for a
fixed rate of interest at the  prevailing  prime rate or  slightly  above.  Such
loans are  secured by the  personal  guarantees  of the  borrowers  and by first
mortgages on the projects.

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

                                       12

<PAGE>



examination of debt service coverage ratios, the borrower's creditworthiness and
prior credit history and reputation, and the Company generally requires personal
guarantees or  endorsements of borrowers.  The Company also carefully  considers
the location of the security property.

  At March 31,  1998,  the  Company  had 17  commercial  real  estate  loans (or
multiple  loans to one  borrower)  in excess of $1.0  million  with an aggregate
balance of $31.6 million.  Management is monitoring  one commercial  real estate
borrower with a balance of $1.4 million which was  delinquent at March 31, 1998.
Based on a current  appraisal of the property,  no allowance for loan losses has
been  recorded.  The largest was a group of loans to a single  borrower for $2.7
million secured primarily by multi-unit apartments,  single family rental houses
and a restaurant.

  The following  table presents  information as to Community's  commercial  real
estate  and  construction  lending  portfolio  as of March  31,  1998 by type of
project.
 <TABLE>
 <CAPTION>
                                               Number
                                                 of       Principal
                                                Loans      Balance
                                               ------    -----------
                                              (Dollars in Thousands)
<S>                                             <C>          <C>
Permanent financing:
  Multi-family residential
    building                                      49       $18,586
  Hotel and motel                                  1           222
  Commercial and industrial building              87        20,103
  Raw land                                        14         1,074
  Church                                           2           130
                                                 ---       -------
                                                 153        40,115
                                                 ---       -------
Acquisition and construction
  financing:
  Commercial and industrial building              11         5,420
                                                 ---       -------

   Total                                         164       $45,535
                                                 ===       =======
</TABLE>

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

                                       13

<PAGE>



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

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

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

  The Company offers various  secured and unsecured  consumer  loans,  including
unsecured personal loans,  automobile loans, deposit account loans,  installment
and demand loans,  and home equity loans and credit card  receivables.  At March
31, 1998,  the Company had $16.4  million or 9.8% of its total loans  receivable
before net items invested in consumer loans.  With the exception of $1.7 million
home equity loans at March 31, 1998,  the  Company's  consumer  loans have fixed
interest rates and generally have terms ranging from 90 days to five years.  The
largest component of consumer loans are home equity loans.  Community originates
all of its  consumer  loans in its  market  area and  intends  to  continue  its
consumer lending in this geographic area.

  The Company offers VISA credit card accounts.  At March 31, 1998, 1,113 credit
card accounts had been issued, with an aggregate outstanding balance of $370,233
and unused credit available of $2.5 million.  The Company  presently  charges no
annual membership fee and an annual rate of interest of 15.98%.

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

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

                                       14

<PAGE>



substantial collection efforts against the borrower. In addition,  consumer loan
collections are dependent on the borrower's continuing financial stability,  and
thus are more likely to be adversely affected by job loss,  divorce,  illness or
personal bankruptcy.  Furthermore,  the application of various federal and state
laws,  including federal and state bankruptcy and insolvency laws, may limit the
amount which can be  recovered  on such loans.  Such loans may also give rise to
claims and defenses by a consumer loan borrower against an assignee of such loan
such as the Company,  and a borrower may be able to assert against such assignee
claims  and  defenses  which  it  has  against  the  seller  of  the  underlying
collateral.  The Company adds general provisions to its loan loss allowance,  in
amounts determined in accordance with industry standards,  at the time the loans
are  originated.  Consumer loan  delinquencies  often  increase over time as the
loans  age.  Accordingly,  although  the level of  non-performing  assets in the
Company's  consumer loan  portfolio has generally been low ($45,000 at March 31,
1998),  there can be no assurance  that  delinquencies  will not increase in the
future.

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

         The Company also  orginiates  commercial  business  loans. At March 31,
1998 the Company had $5.3  million in  commercial  business  loans  outstanding,
representing  3.2% of the Company's  gross loan  portfolio.  The Company  offers
commercial  business loans to service  existing  customers,  to consolidate  its
banking  relationships with these customers,  and to further its asset/liability
management goals.

         Unlike residential mortgage loans which generally are made on the basis
of the borrower's ability to make repayment from his or her employment and other
income,  and which are  secured by real  property  whose  value tends to be more
easily ascertainable, commercial business loans are of higher risk and typically
are made on the basis of the borrower's  ability to make repayment from the cash
flow of the borrower's business.  As a result, the availability of funds for the
repayment of commercial  business loans may be dependent upon the success of the
business itself. The Company's  commercial  business loans almost always include
personal guarantees and are usually, but not always, secured by business assets.
However,  the  collateral  securing the loans may  depreciate  over time, may be
difficult  to appraise  and may  fluctuate  in value based on the success of the
business.  At March 31, 1998, the Company has $3.7 million of secured commercial
business loans and $1.6 million of unsecured commercial business loans.

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

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

  Federal  regulations  authorize the Company to make real estate loans anywhere
in the United States. However, at March 31, 1998, substantially all

                                       15

<PAGE>


of the  Company's  real estate loans were secured by real estate  located in the
Company's market area.

  Management  believes  that  purchases  of loans  and loan  participations  are
generally  desirable only when local mortgage  demand is less than the supply of
funds available for local mortgage  origination.  The Company purchased $629,000
in loans in fiscal 1998.

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

                                       16

<PAGE>



  The following table shows the loan origination,  purchase,  sale and repayment
activities of the Company for the periods indicated.


<TABLE>
<CAPTION>

                                              Year Ended March 31,
                                          ----------------------------
                                            1998      1997      1996
                                          ----------------------------
                                                 (In Thousands)
<S>                                      <C>       <C>       <C>
Origination by Type:
-------------------
Adjustable Rate:
 Real estate - one- to four-family
                residential               $20,724  $21,687   $16,132
             - commercial                   9,693    5,974     1,449
             - home equity                    390      230       311
                                          -------   -------   -------
     Total adjustable rate                 30,807   27,891    17,892
                                          -------   -------   -------
Fixed Rate:
----------
 Real estate - one- to four-family
               residential                  5,345    3,280     4,636
             - commercial                     ---    1,092     2,109
 Non-real estate - consumer(1)             22,009   10,857     8,163
                                          -------   -------   -------
     Total fixed rate                      27,354   15,229    14,908
                                          -------   -------   -------
Sales and Repayments
--------------------
Real estate loans                           4,001    1,418     1,085
Principal repayments                       23,552   23,836    19,750
                                          -------   -------   -------
     Total reductions                      27,553   25,254    20,835
                                          -------   -------   -------
Increase (decrease) in other
 items, net                               (17,041) (10,699)   (4,741)
                                          -------   -------   -------
     Net increase (decrease)              $13,567  $ 7,167   $ 7,224
                                          =======   =======   =======
</TABLE>

-----------------

(1)  Consumer  loans  include the amounts  outstanding  on credit card  accounts
     opened by the Company and outstanding lines of credit on home equity loans.
     The total credit available was $4.6 million,  $4.1 million and $3.6 million
     at March 31, 1998, 1997 and 1996, respectively,  which would have increased
     fixed-rate consumer loans to $24.1 million, $14.9 million and $12.2 million
     at such dates, respectively.


                                       17

<PAGE>


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

  Community  realizes interest and loan fee income from its lending  activities.
The  Company  receives  loan fees on both  commercial  real  estate  and  one-to
four-family  residential  loans.  The  Company  receives  loan fees and  charges
related to existing loans,  which include late charges.  Interest on loans, loan
fees  and  service  charges  together  comprised  96.1% of the  Company's  total
revenues for the year ended March 31, 1998. Income from loan fees and other fees
is a volatile  source of income,  varying  with the volume and type of loans and
commitments made and with competitive and economic conditions.

  Loan fees and loan  origination  cost are deferred and amortized over the life
of the loans to which they relate.  The  remaining  deferred  fees are amortized
into  income  over the  estimated  remaining  lives of the  loans to which  they
relate,  using a method which approximates level yield. The Company had deferred
fees net of direct underwriting costs of $247,322 at March 31, 1998.

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

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


                                       18

<PAGE>



  The following table sets forth information  concerning delinquent mortgage and
other  loans at March  31,  1998.  The  amounts  presented  represent  the total
remaining  principal  balances  of the  related  loans,  rather  than the actual
payment amounts which are overdue.

<TABLE>
<CAPTION>

                        Residential          Commercial
                        Real Estate          Real Estate          Consumer
                      ------------------  ------------------ -----------------
                       Number    Amount   Number     Amount    Number   Amount
                      --------------------------------------------------------
                                        (Dollars in Thousands)
<S>                    <C>     <C>        <C>      <C>         <C>      <C>
Loans Delinquent for:
--------------------
30-59 days               7      $908         1     $1,368         15    $510
60-89 days               1        83         0          0          4      28
90 days and over         4       590         0          0          2      45
                        ---     -----      ---      -----       ----    ----
Total delinquent loans  12    $1,581         1     $1,368         21    $583
                        ===    =====       ===      =====       ====    ====

</TABLE>

  Federal  regulations  provide for the  classification  of loans,  debt, equity
securities and other assets considered to be of lesser quality as "substandard,"
"doubtful" or "loss" assets.  The regulations  require  insured  institutions to
classify their own assets and to establish prudent general allowances for losses
for assets  classified  "substandard"  or "doubtful."  For the portion of assets
classified as "loss," an  institution is required to either  establish  specific
allowances of 100% of the amount classified or charge such amount off its books.
Assets which do not currently expose the insured  institution to sufficient risk
to warrant  classification in one of the  aforementioned  categories but possess
potential  weaknesses  are  required  to  be  designated  "special  mention"  by
management.  In  addition,  the OTS may require the  establishment  of a general
allowance for losses based on assets  classified as "substandard" and "doubtful"
or based on the general  quality of the asset  portfolio of an  institution.  In
connection  with  the  filing  of its  periodic  reports  with  the  OTS  and in
accordance  with its  classification  of assets  policy,  the Company  regularly
reviews  the loans in its  portfolio  to  determine  whether  any loans  require
classification  in  accordance  with  applicable  regulations.  On the  basis of
management's review of its assets, at March 31, 1998, the Company had classified
$2.3 million of its assets as substandard,  none as doubtful or loss. All assets
of the Company that have been  classified are included below in either the table
of  non-performing  assets or under "Other  Loans of Concern." In addition,  the
Company  had $1.4  million  in special  mention  assets.  See "-  Non-Performing
Assets."

                                       19

<PAGE>



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

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

<TABLE>
<CAPTION>

                                               March 31,
                           --------------------------------------------------
                             1998     1997      1996      1995      1994
                           --------------------------------------------------
                                          (Dollars in Thousands)
<S>                       <C>       <C>       <C>       <C>       <C>

Non-accruing loans:
 Real Estate              $  590     $  400    $  ---    $    3    $  ---
 Consumer                     45        103       ---       ---       ---

Accruing Loans Delinquent
 More Than 90 Days:

 Residential                                       52                  15
 Commercial                  ---        ---       ---       ---        23
 Consumer                    ---        ---       541       ---        18
Real estate acquired         ---        ---       ---       ---       ---
 through foreclosure         303        173       148       350       380
                          ------     ------    -------   ------    ------
     Total                $  938     $  676    $  741    $  353   $   436
                          ======     ======    =======   ======    ======
     Total as a percentage
      of total assets        .51%       .40%      .46%      .23%      .32%
                          ======     ======    =======    ======    ======
Unallocated allowance for
  loan losses             $1,080     $  783    $  791    $  728    $  628
                          ======     ======    =======    ======    ======

</TABLE>

  At March 31, 1998, the Company's non-performing assets were comprised of three
single family residential properties, a combination single family house and farm
which  were  more  than  ninety  days past due,  real  estate  acquired  through
foreclosure of three single family dwellings, two rental properties of three and
two units respectively, and a five acre lot. Based on current market

                                       20

<PAGE>


values  of the  properties  securing  these  loans,  management  anticipates  no
significant losses in excess of the reserves for losses previously recorded.

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

  As of March 31,  1998,  there were $1.4 million in loans with respect to which
known  information  about the possible  credit  problems of the borrowers or the
cash flows of the security  properties have caused  management to have doubts as
to the ability of the borrowers to comply with present loan repayment  terms and
which may result in the  future  inclusion  of such items in the  non-performing
asset categories.

  The $1.4  million in other  loans of concern  referred  to above is  comprised
primarily of 10  residential  real estate  loans.  Seven of the loans are one-to
four family rental  properties  with three  borrowers and with an aggregate loan
balance of $880,000.  One loan is a multi-family property with a loan balance of
$384,000. The remaining two real estate loans are residential construction loans
to one  borrower  with a total  balance  of  $112,000.  The  balance of the $1.4
million in other loans is one consumer loan.  The Company is closely  monitoring
the status of these loans.

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

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

  The Company provides  valuation  reserves for anticipated  losses on loans and
real estate when its  management  determines  that a significant  decline in the
value of the  collateral  has  occurred,  as a result  of which the value of the
collateral  is less than the amount of the unpaid  principal of the related loan
plus  estimated  costs of  acquisition  and sale. In addition,  the Company also
provides reserves based on the dollar amount and type of collateral securing its
loans, in order to protect against  unanticipated  losses.  Although  management
believes   that  it  uses  the  best   information   available   to  make   such
determinations,  future adjustments to reserves may be necessary, and net income
could be significantly  affected, if circumstances differ substantially from the
assumptions used in making the initial determinations.  During 1998, the Company
increased  its  allowance  for losses on loans by $78,000 due  primarily  to the
increased loan volume,  especially in commercial real estate,  construction  and
consumer  loan. At March 31, 1998,  the Company had an allowance for loan losses
of $1.1  million  which  represent  .58% of total loans  receivable  and 119% of
nonperforming loans.

                                       21

<PAGE>



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

<TABLE>
<CAPTION>

                                     Year Ended March 31,
                      ------------------------------------------------
                        1998      1997      1996      1995       1994
                      ------------------------------------------------
                                     (Dollars in Thousands)
<S>                  <C>       <C>       <C>       <C>       <C>

Balance at beginning
  of period           $ 1,039    $1,000   $   763   $   661   $   613

Provision charged to
 operations               499       181       307       109        74
                      -------   -------   -------   -------   -------
Charge-offs:
-----------
  Residential real
   estate                 116        59       ---       ---       ---
  Consumer                376       110        71         7        28

Recoveries:
  Consumer                 71        27         1       ---         2
                      -------   -------   -------   -------   -------
Net charge-offs           421       142        70         7        26
                      -------   -------   -------   -------   -------
Balance at end
 of period            $ 1,117    $1,039    $1,000   $   763   $   661
                       =======   ======   =======   =======   =======

Ratio of net charge-
 offs during the
 period to  average
 loans outstanding
 during the period        .27%      .10%      .01%      .01%      .01%


</TABLE>


                                       22

<PAGE>

  The  distribution  of the allowance for losses on loans at the dates indicated
is summarized as follows:
<TABLE>
<CAPTION>
                                   Commercial
                      Residential  Real Estate  Construction  Consumer   Total
                      --------------------------------------------------------
                                         (Dollars in Thousands)
<S>                  <C>            <C>           <C>         <C>      <C>
March 31, 1998
--------------
Amount of loan loss
 allowance           $   376        $   161       $   116   $   464   $   1,117
Loan amounts by
 category             94,962         40,115        10,071    21,690     166,838
Percent of loans in
 each category to
 total loans           56.92%         24.04%         6.04%    13.00%      100.0%

March 31, 1997
--------------
Amount of loan loss
 allowance           $   385        $   140       $    78   $   436   $   1,039
Loan amounts by       96,968         37,508         5,204    12,243     151,923
 category
Percent of loans in
 each category to
 total loans           63.83%         24.69%         3.42%     8.06%      100.0%

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

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

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

<PAGE>



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

  The Bank  established  Community  First,  a mortgage  banking  subsidiary,  in
November, 1997. Community First is located in Richmond,  Virginia and originates
mortgage loans to sell to investors.  At March 31, 1998, Communitiy First had no
material operations.

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

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

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

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

  Historically,  the Bank has  maintained  its liquid  assets  above the minimum
requirements  imposed by federal regulations and at a level believed adequate to
meet  requirements  of normal daily  activities,  repayment of maturing debt and
potential  deposit  outflows.  Cash flow projections are regularly  reviewed and
updated to assure that adequate liquidity is provided. As of March 31, 1998, the
Bank's  liquidity  ratio  (liquid  assets as a  percentage  of net  withdrawable
savings and current borrowings) was 7.7%. See "Regulation Federal Home Loan Bank
System."

                                       24

<PAGE>



  The  contractual  maturities  and weighted  average  yields of the  investment
securities  portfolio,  excluding  FHLB of Atlanta stock and FHLMC common stock,
are indicated in the  following  table.  At March 31, 1995,  the Company did not
have any investment  securities  with  contractual  maturities in excess of five
years.


<TABLE>
<CAPTION>

                                       March 31, 1998
                      --------------------------------------------------
                        Within      1 to 5         Total Investment
                        1 Year       Years            Securities
                      ----------  ----------   -------------------------
                      Book Value  Book Value   Book Value   Market Value
                      ----------  ----------   ----------   ------------
                                  (Dollars in Thousands)
<S>                  <C>          <C>         <C>            <C>

Federal agency
 obligations          $     500   $    1,361   $  1,861     $    1,866
State agency
 obligations and
 commercial paper           323        1,000      1,323          1,355
                         ------       -------     -------        -------
Total investment
 securities           $     823    $   2,361    $ 3,184      $   3,221
                         ======       =======     =======        =======
Weighted average
 yield                    5.67%         6.59%      6.35%          6.28%
                           ===           ===        ===            ===



</TABLE>

                                       25

<PAGE>



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

<TABLE>
<CAPTION>

                                                  March 31,
                                    ----------------------------------------------
                            1998            1997            1996
                        ----------------------------------------------
                         Book    % of    Book    % of    Book     % of
                         Value   Total   Value   Total   Value   Total
                         -----   -----   -----   -----   -----   -----
                                    (Dollars in Thousands)
<S>                     <C>     <C>     <C>      <C>     <C>     <C>

Interest-bearing
 deposits with
 banks                   $2,866  100.0%   $1,015  100.0%  $1,147   100.0%

     Total               $2,866  100.0%   $1,015  100.0%  $1,147   100.0%
                         ======  =====    ======  =====   ======   =====
Investment securities:
 Federal agency
  obligations            $1,861   55.2%   $4,876   55.2%  $5,749    62.7%
 Floating-rate notes
  and commercial
  paper                   1,323    3.6       321    3.6      319     3.5
  FHLMC common
   stock                  3,905   25.4     2,243   25.4    1,754    19.1
                          -----  -----     -----   -----    -----  -----
     Subtotal             7,089   84.2     7,440   84.2    7,822    85.3

FHLB stock                1,600   15.8     1,400   15.8    1,350    14.7
                          -----  -----     -----   -----    -----  -----
     Total investment
      securities and
      FHLB stock         $8,689  100.0%   $8,840  100.0%  $9,172   100.0%
                         ======  =====    ======  =====   ======   =====


Average remaining life
 or term to repricing,
 excluding FHLMC common
 stock, FHLB stock and
 other marketable equity
 securities                 3 years          2 years          2 years


</TABLE>

  During  fiscal 1998 the market rates paid on investment  securities  declined.
During fiscal 1998, the Company  invested  primarily in federal and state agency
securities  with  maturities  of one to five  years  some of which are  callable
within three months to two years from date of purchase.


                                       26

<PAGE>



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

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

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

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

                                       27

<PAGE>



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

<TABLE>
OPTION>                                             At March 31,
                                          ----------------------------
                                            1998      1997      1996
                                          --------  --------  --------
                                                 (In Thousands)
<S>                                      <C>       <C>       <C>
Passbook and statement accounts           $12,443   $ 12,578  $ 12,179
NOW and Super NOW accounts                 21,080     15,576    13,583
Money market accounts                       8,349      9,935    10,232
One- to five-year fixed-rate
 certificates                              91,996     73,817    66,649
Six-month money market certificates         3,232      4,059     6,403
Jumbo certificates                          1,050        614       435
91-day certificates                            14         16        21
                                          --------  --------  --------
     Total                               $138,164   $116,595  $109,502
                                         ========   ========  ========
</TABLE>

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

<TABLE>
<CAPTION>

                                              Year Ended March 31,
                                          ----------------------------
                                             1998      1997     1996
                                          --------- --------- --------
                                                 (In Thousands)
<S>                                      <C>       <C>       <C>

Passbook and statement accounts           $  (135)  $    399   $     9
NOW and Super NOW accounts                  5,504      1,993     1,203
Money market accounts                      (1,586)      (297)   (1,388)
One-to five-year fixed-rate
 certificates                              18,179      7,168     4,630
Six-month money market certificates          (827)    (2,344)      108
Jumbo certificates                            436        179       (65)
91-day certificates                            (2)        (5)       (9)
                                          --------    -------   -------
     Total increase                       $21,569  $   7,093   $ 4,488
                                          ========    =======   =======

</TABLE>

                                       28

<PAGE>



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

<TABLE>
<CAPTION>

                                       Year Ended March 31,
                      -------------------------------------------------------
                            1998               1997               1996
                      -----------------   ----------------  -----------------
                                Average            Average            Average
                      Average    Rate     Average   Rate    Average     Rate
                      Balance    Paid     Balance   Paid    Balance     Paid
                      -------   -------   -------  -------  -------   -------
                                      (Dollars in Thousands)
<S>                  <C>        <C>      <C>       <C>     <C>          <C>

Deposit Category
----------------
Noninterest bearing
 demand deposits       $ 2,944    ---%    $  2,145     ---% $  2,653     ---%
Interest bearing
 demand deposits        23,715   2.96       21,412    3.03    20,486     3.05
Savings deposits        12,358   2.99       12,063    2.98    11,808     3.00
Time deposits           87,672   5.45       75,687    5.34    72,934     5.48
                      --------   -----    --------   -----   -------     ----
Total deposits        $126,689   4.61     $111,307    4.54% $107,881     4.61%
                      ========   =====    ========   =====   =======     ====


</TABLE>

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

                                       29

<PAGE>



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

<TABLE>
<CAPTION>

                                            Year Ended March 31,
                                     ---------------------------------
                                       1998        1997        1996
                                     ---------    --------    --------
                                            (Dollars in Thousands)
<S>                                 <C>          <C>         <C>

Opening balance                     $116,595    $109,502     $105,014
Net deposits (withdrawals)            16,718       2,983         (248)
Interest credited                      4,851       4,110        4,736
                                     ---------  --------     --------
Ending balance                      $138,164    $116,595     $109,502
                                     ---------  --------     --------
Net increase                        $ 21,569    $  7,093     $  4,488
                                     ---------   --------    --------
Percent increase                       18.50%       6.47%        4.27%
                                      ======       ======       ======

</TABLE>

  During the fiscal year ended March 31,  1998 the Company  increased  marketing
efforts and was more  competitive  in regard to rates which  contributed  to the
increase in  deposits.  The Company  experienced  an increase in both demand and
time  deposits  during fiscal March 31, 1998. To the extent that the Company may
rely on sources of funds other than  deposits,  the  Company's  earnings  may be
adversely  affected.  The Company may use borrowings as an alternative source of
funds. See "- Borrowings."

                                       30

<PAGE>



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

<TABLE>
<CAPTION>

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

March 31, 1998   $ 49      $ 5,729   $74,113   $16,402   $  ---   $   ---   $96,293
March 31, 1997     68       17,980    52,466     7,992      ---       ---    78,506
March 31, 1996    159       15,948    40,512    16,572      317       ---    73,508


</TABLE>

    The following  table  indicates the amount of the Company's  certificates of
deposit by time remaining until maturity as of March 31, 1998.
<TABLE>
<CAPTION>
                                               Maturity
                           3 Months    Over     Over       Over
                              or      3 to 6   6 to 12      12
                             less     Months    Months    Months     Total
                           --------  --------  ---------  ------   ---------
                                          (Dollars in Thousands)
<S>                       <C>       <C>       <C>       <C>       <C>
Certificates of deposit
 less than $100,000        $21,506  $13,910    $26,689   $23,192   $85,298

Certificates of deposit
 of $100,000 or more.        3,405    2,467      2,888     2,235    10,995
                           -------    ------    -------   -------   -------
    Total certificates
      of deposit           $24,911  $16,377    $29,577   $25,427    $96,293
                           =======   ======    =======   =======    =======
</TABLE>

Borrowings
----------

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


                                       31

<PAGE>



  The Company's  borrowings,  from time to time,  also include  securities  sold
under  agreements  to  repurchase,  with  mortgage-backed  securities  or  other
securities  pledged as collateral.  The proceeds are utilized by the Company for
general  corporate  purposes.  At March 31, 1998,  the Company had no securities
sold under agreements to repurchase.

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

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

<TABLE>
<CAPTION>

                                       Year Ended March 31,
                           ---------------------------------------------
                                1998            1997           1996
                           --------------  -------------  --------------
                                          (In Thousands)
<S>                        <C>             <C>            <C>

Maximum Balance:
FHLB                          $32,000          $28,000        $27,000




                           Amount    Rate  Amount   Rate  Amount   Rate
                           ------    ----  ------   ----  ------   ----
Average Balance:
FHLB advances              $25,917    5.7% $26,542   5.6%  $25,347  6.1%


</TABLE>

                                       32

<PAGE>



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

<TABLE>
<CAPTION>

                                              At March 31,
                                       -------------------------
                                        1998     1997     1996
                                       ------   ------    ------
                                        (Dollars in Thousands)
<S>                                   <C>      <C>      <C>

FHLB advances                          $18,000  $26,000  $27,000
                                       -------  -------  -------
     Total borrowings                  $18,000  $26,000  $27,000
                                        =======  =======  =======

Weighted average interest
 rate of FHLB advances                    5.77%    6.85%    5.88%


</TABLE>



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

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

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

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

  The Company  considers its primary market for savings to be Augusta County and
for mortgage  loans to be Augusta and  Rockingham  Counties.  At March 31, 1998,
there was one thrift institution and twelve commercial banks with

                                       33

<PAGE>



offices in the Company's  two-county  primary market area. The Company estimates
that its market share of savings deposits in Augusta County is approximately 10%
and its share of mortgage loans in Augusta and Rockingham  Counties is less than
10%.  The  opening of an office by the Bank in April,  1997 in  Virginia  Beach,
Virginia  expanded the Bank's  market area to the Hampton Roads area of Virginia
in the fiscal year March 31, 1998.


Regulation
----------

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

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

Federal Regulation of Savings Associations. The OTS has extensive authority over
the operations of savings associations. As part of this authority,  Community is
required  to file  periodic  reports  with the OTS and is  subject  to  periodic
examinations by the OTS and the FDIC. When these  examinations  are conducted by
the OTS and the FDIC,  the  examiners  may  require  the  Company to provide for
higher general or specific loan loss reserves.  The last regular OTS examination
of Community was in January,  1998 and the examiners did not require the Company
to provide for higher general or specific loan loss reserves.

  All savings associations are subject to a semi-annual  assessment,  based upon
the savings  association's  total assets, to fund the operations of the OTS. The
Company's OTS assessment for the fiscal year ended March 31, 1998, was $50,815.

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

                                       34

<PAGE>



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

  The Company's general permissible lending limit for  loans-to-one-borrower  is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus of the
Bank (except for loans fully secured by certain readily  marketable  collateral,
in which case this limit is increased to 25% of unimpaired capital and surplus).
At March 31, 1998, the Company's  lending limit under this  restriction was $3.4
million.

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

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

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

                                       35

<PAGE>



assessment period.

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

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

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

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

                                       36

<PAGE>



SAIF  deposits  and  1.3  basis  points  on  BIF  deposits   until  BIF  insured
institutions participate fully in the assessment.

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

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

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

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

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

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

  The OTS is also generally authorized to reclassify an association into a lower
capital category and impose the restrictions applicable to such category

                                       37

<PAGE>



if the institution is engaged in unsafe or unsound practices or is in an
unsafe or unsound condition.

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

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

  Generally,  savings associations,  such as Community that before and after the
proposed  distribution  meet  their  capital  requirements,   may  make  capital
distributions  during  any  calendar  year  equal to the  greater of 100% of net
income  for the  year-to-date  plus 50% of the amount by which the lesser of the
association's   tangible,   core  or  risk-based  capital  exceeds  its  capital
requirement  for such  capital  component,  as measured at the  beginning of the
calendar  year,  or 75% of their net income  for the most  recent  four  quarter
period.  However,  an  association  deemed  to be in need of  more  than  normal
supervision  by the OTS may have its dividend  authority  restricted by the OTS.
Community may pay dividends in accordance with this general authority.

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

  The OTS has  proposed  regulations  that  would  revise  the  current  capital
distribution  restrictions.  Under the proposal a savings association may make a
capital  distribution  without notice to the OTS (unless it is a subsidiary of a
holding  company)  provided  that  it  has a  CAMEL  1 or 2  rating,  is  not of
supervisory  concern and would remain adequately  capitalized (as defined in the
OTS prompt corrective action regulations)  following the proposed  distribution.
Savings  associations  that would remain  adequately  capitalized  following the
proposed  distribution but do not meet the other noted  requirements must notify
the OTS 30 days prior to  declaring  a capital  distribution.  The OTS stated it
will generally regard as permissible that amount of capital  distributions  that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings  association  may not make a capital
distribution without prior approval of the OTS and the

                                       38

<PAGE>



FDIC if it is  undercapitalized  before, or as a result of, such a distribution.
As under the current rule,  the OTS may object to a capital  distribution  if it
would constitute an unsafe or unsound practice.  No assurance may be given as to
whether or in what form the regulations may be adopted.

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

Qualified  Thrift Lender Test.  All savings  associations,  including  Community
Bank,  are  required to meet a qualified  thrift  lender  ("QTL")  test to avoid
certain  restrictions  on  their  operations.   This  test  requires  a  savings
association  to have  at  least  65% of its  portfolio  assets  (as  defined  by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. As an alternative,  the savings  association
may maintain 60% of its assets in those assets specified in Section  7701(a)(19)
of the Internal Revenue Code.  Under either test, such assets primarily  consist
of  residential  housing  related  loans and  investments.  At March  31,  1998,
Community Bank met the test and has always met the test since its effectiveness.

  Any  savings  association  that  fails to meet the QTL test must  convert to a
national bank charter,  unless it requalifies as a QTL and thereafter  remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the BIF.  If such an  association  has not yet  requalified  or  converted  to a
national  bank,  its  new  investments  and  activities  are  limited  to  those
permissible  for both a  savings  association  and a  national  bank,  and it is
limited to national bank branching  rights in its home state.  In addition,  the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. At March 31, 1998, Community Bank met the test and has always met the
test since its effectiveness. See "- Holding Company Regulation."

Community  Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every
FDIC insured institution has a continuing and affirmative  obligation consistent
with safe and sound  banking  practices  to help  meet the  credit  needs of its
entire community, including low and moderate income neighborhoods.  The CRA does
not  establish   specific   lending   requirements  or  programs  for  financial
institutions nor does it limit an institution's discretion to

                                       39

<PAGE>



develop the types of products and  services  that it believes are best suited to
its particular community,  consistent with the CRA. The CRA requires the OTS, in
connection with the examination of the Bank, to assess the institution's  record
of meeting  the  credit  needs of its  community  and to take such  record  into
account  in its  evaluation  of  certain  applications,  such as a merger or the
establishment of a branch, by the Bank. An unsatisfactory  rating may be used as
the basis for the denial of an application by the OTS.

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

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

  Certain transactions with directors,  officers or controlling persons are also
subject to conflict of interest  regulations enforced by the OTS. These conflict
of interest  regulations and other statutes also impose restrictions on loans to
such persons and their related interests. Among other things, such loans must be
made on terms substantially the same as for loans to unaffiliated individuals.

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

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

  If the Bank fails the QTL test, the Company must obtain the approval

                                       40

<PAGE>



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

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

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

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

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

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

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

  The percentage of specially computed taxable income that was used to compute a
savings association's bad debt reserve deduction under the percentage of taxable
income method (the "percentage bad debt

                                       41

<PAGE>



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

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

  In August  1996,  legislation  was enacted that  repealed the  above-described
reserve method of accounting (including the percentage of taxable income method)
used by many thrift institutions to calculate their bad debt reserve for federal
income tax  purposes.  Thrift  institutions  with $500 million or less in assets
may, however,  continue to use the experience method. As a result, the Bank must
recapture  that  portion of the reserve  that exceeds the amount that could have
been taken under the  experience  method for post- 1987 tax years.  At March 31,
1998, the Bank's post-1987 excess reserves amounted to approximately $1,267,000.
The recapture will occur over a six-year period, commencing with the fiscal year
ending  March 31, 1999,  provided  the  institution  meets  certain  residential
lending  requirements.  The  legislation  also requires  thrift  institutions to
account  for bad debts for  federal  income  tax  purposes  on the same basis as
commercial banks for tax years beginning after December 31, 1995.

  In  addition  to the  regular  income  tax,  corporations,  including  savings
associations  such as the Bank,  generally  are  subject  to a minimum  tax.  An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative minimum taxable income.

  To the  extent  earnings  appropriated  to a  savings  association's  bad debt
reserves for  "qualifying  real property  loans" and deducted for federal income
tax purposes  exceed the allowable  amount of such reserves  computed  under the
experience method and to the extent of the association's  supplemental  reserves
for  losses on loans  ("Excess"),  such  Excess  may not,  without  adverse  tax
consequences,   be  utilized  for  the  payment  of  cash   dividends  or  other
distributions   to  a  shareholder   (including   distributions  on  redemption,
dissolution or  liquidation) or for any other purpose (except to absorb bad debt
losses).  As of March 31,  1998,  the  Bank's  Excess for tax  purposes  totaled
approximately $2.9 million.


                                       42

<PAGE>



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

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

  Virginia   Taxation.   Community   conducts   its  business  in  Virginia  and
consequently is subject to the Virginia  corporate  income tax. The Commonwealth
of Virginia  imposes a corporate income tax on a basis similar to federal income
tax at a rate of 6% on Virginia taxable income.



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

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

  Thomas W. Winfree.  Mr. Winfree,  age 53, is the Company's President and Chief
Executive Officer. He was elected in October 1995. Prior to joining the Company,
Mr. Winfree was President and Chief Executive  Officer of Jefferson  Savings and
Loan in Warrenton, Virginia.

  R. Jerry Giles. Mr. Giles,  age 49, is the Company's Chief Financial  Officer.
He was elected in April  1994.  Prior to joining the  Company,  Mr.  Giles was a
Certified Public Accountant in public accounting and the Chief Financial Officer
with a savings bank for eleven years.

  Shirley V. Lovegrove.  Ms. Lovegrove, age 59, is the Company's Vice President,
Operations and Savings,  a position she has held since 1985.  Ms.  Lovegrove has
been  employed by the Company since 1974 and was  previously  an Assistant  Vice
President of the Company.

  Angel Negron,  Jr. Mr.  Negron,  age 51, is the Company's  Vice  President and
Chief Lending Officer, a position he has held since February, 1996.

                                       43

<PAGE>



Prior to his employment by the Company, Mr. Negron was a commercial loan officer
with a commercial bank for 21 years.

  Paul K.  Martin.  Mr.  Martin,  age 34, is the  Company's  Vice  President  of
Administration,  a position he has held since March 31, 1997,  and was Assistant
Vice-President  and Branch  Manager of the Company and of the Bank from  October
1991 to March, 1996.

  Sarah A. Ralston.  Ms. Ralston,  age 64, has been the Company's  Secretary and
Treasurer for the past 17 years. Ms. Ralston has been employed by the Company in
various capacities since 1956.

  Patsy Clem. Ms. Clem, age 58, is the Company's Controller,  a position she has
held since July,  1986.  Ms. Clem has been employed by the Company since 1983 in
the Accounting Department.

  P. Douglas Richard.  Mr. Richard,  age 53, is the Company's Vice President and
Regional President, a position he has held since January, 1997. Prior to joining
the Company Mr. Richard was Chief Executive  Officer of Seaboard Savings Bank in
Virginia Beach, Virginia.

  Chris P. Kyriakides.  Mr. Kyriakides,  age 35, is the Company's Vice President
and Regional  Executive  Vice  President,  a position he has held since January,
1997. Prior to joining the Company Mr.  Kyriakides was Chief Operations  Officer
of Seaboard Savings Bank in Virginia Beach, Virginia.

Employees
---------

  At March 31, 1998,  the Company had a total of 57 employees,  including  eight
hourly  employees.  None  of the  Company's  employees  are  represented  by any
collective  bargaining group.  Management considers its employee relations to be
good.

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

  The following table sets forth  information at March 31, 1998, with respect to
the Company's offices, furniture and equipment.


                                       Owned
                                         or         Gross       Net Book
                                       Leased       Square      Value at
        Location           Opened    Expiration     Footage  March 31, 1998
----------------------------------------------------------------------------

38 North Central Avenue    1956        Owned         17,000      $2,196,000
Staunton, Virginia

Rte. 250 West              1989        Owned          5,300         986,000
Waynesboro, Virginia

Routes 340 and 608         1993        Owned          2,074         372,000

                                       44

<PAGE>



Stuart's Draft, Virginia

5300 Kemps River Drive     1997        2002           2,400          88,000
Virginia Beach, Virginia

Community First Mortgage
9011 Arboretum Parkway
Richmond, Virginia         1997        1998           1,800          10,000

  The Company's  accounting and  record-keeping  activities are maintained on an
on-line  basis with an  independent  service  bureau.  The net book value of the
Company's computer equipment at March 31, 1998 was $169,347.

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

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


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

  No  matter  was  submitted  to  a  vote  of  security  holders,   through  the
solicitation of proxies or otherwise, during the quarter ended March 31, 1998.

                                 PART II

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

  As of May 29,  1998,  there  were  approximately  585  holders  of  record  of
Community Common Stock.  Community's  stock is quoted on the Nasdaq Stock Market
under the symbol "CFFC."

  The  following  tables  present the  Corporation's  high and low,  bid and ask
prices as reported by the Nasdaq Stock  Market  during the last two fiscal years
and the  dividends  declared by the  Corporation  for the stated  periods.  This
information  reflects  interdealer prices,  without retail mark-up,  markdown or
commissions and may not represent actual transactions.
<TABLE>
<CAPTION>

                        Bid               Ask
                 ----------------    ----------------
     1998         High      Low       High      Low      Dividends Declared
--------------   ------   ------    ------    ------    -----------------
<S>             <C>       <C>       <C>       <C>             <C>

1st Quarter      $10.75   $10.75    $11.75    $11.63          $.070
2nd Quarter       10.75    10.75     11.75     11.50           .070
3rd Quarter       13.75    10.75     14.25     11.69           .070
4th Quarter       15.25    14.50     16.50     15.50           .070

                                       45

<PAGE>





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

1st Quarter      $ 9.56    $ 9.50    $10.50    $10.50            $.065
2nd Quarter       10.25      9.50     11.25     10.50             .065
3rd Quarter       10.25     10.25     11.25     11.25             .065
4th Quarter       11.25     10.25     11.75     11.13             .070
</TABLE>

  Dividend  payment  decisions  are made  with  consideration  of a  variety  of
factors,  including earnings,  financial  condition,  market  considerations and
regulatory  restrictions.  The ability of the  Corporation  to pay  dividends is
limited by  restrictions  imposed by the  Virginia  Stock  Corporation  Act, and
indirectly, by the OTS. In general,  dividends paid by Virginia corporations may
be paid only if, after giving  effect to the  distribution  the  corporation  is
still able to pay its debts as they become due in the usual  course of business,
or the  corporation's  total  assets are greater than or equal to the sum of its
total  liabilities plus the amount that would be needed (if the corporation were
to be dissolved  at the time of the  distribution)  to satisfy the  preferential
rights,  upon the dissolution,  of stockholders  whose  preferential  rights are
superior to those receiving the distribution.  Restrictions on dividend payments
from the Bank to the Corporation (the Corporation's  primary source of funds for
the payment of dividends  to its  stockholders)  are  described in Note 8 of the
Notes to Consolidated  Financial Statements contained in Part II, Item 7 of this
report.

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

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


                                       46
<PAGE>

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

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

                            Forward Looking Statement

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

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

                           Asset/Liability Management

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

         Presented in the following  table, as of March 31, 1998 and 1997, is an
analysis  of the Bank's  interest  rate risk as  measured  by changes in NPV for
instantaneous  and sustained  parallel  shifts in the yield curve,  in 100 basis
point  increments,  up and down 300 basis  points and  compared to Board  policy
limits  and in  accordance  with  OTS  regulations,  based  on  the  assumptions
described below.  The Board limits have been  established with  consideration of
the dollar impact of various rate changes and the  Corporation's  strong capital
position.  As  illustrated  in the table,  NPV is more sensitive to rising rates
than declining rates. This occurs principally because, as rates rise, the market
value of  fixed-rate  loans  decline due to both the rate  increase  and slowing
prepayments.  When  rates  decline,  the  Corpora-tion  does  not  experience  a
significant  rise in market value for these loans  because  borrowers  prepay at
relatively high rates.  The value of the  Corporation's  deposits and borrowings
change in approximately the same proportion in rising or falling rate scenarios.


                                       47
<PAGE>


COMMUNITY FINANCIAL CORPORATION
--------------------------------------------------------------------------------


                                     March 31, 1998           March 31, 1997
                                  --------------------      ------------------
   Change in
  Interest Rate     Board Limit    $ Change    % Change     $ Change  % Change
  (Basis Points)     % Change       in NPV      in NPV       in NPV    in Npv
  --------------     --------       ------      ------       ------    ------
                             (Dollars in Thousands)
     +300              -25%        $-1,296       -4%        $-4,294      -15%
     +200              -15            -251       -1          -2,301       -8
     +100              -10             217        1            -833       -3
      -0-               --             --        --              --       --
     -100              -10            -506       -2             198       +1
     -200              -15            -825       -3              74        0
     -300              -25            -773       -3             280       +1



         Management  continually works to maintain a neutral position  regarding
interest  rate  risk.  In  the  current  interest  rate  environment,  Community
customers are interested in obtaining  long term credit  products and short term
savings  products.  Management  has  taken  action  to  counter  this  trend.  A
significant  effort has been made to reduce the duration and average life of the
Corporation's interest earnings assets. As of March 31, 1998,  approximately 75%
of the  Corporation's  gross loan  portfolio  consisted  of loans which  reprice
during the life of the loan. The Corporation emphasizes adjustable rate mortgage
loans and has increased its portfolio of short term consumer loans.  Longer term
fixed-rate  mortgage loans,  20 to 30 years,  are generally sol in the secondary
market. The Corporaiton is currently originating  fixed-rate loans for immediate
sale only.

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

         As  with  any  method  of  measuring   interest   rate  risk,   certain
short-comings 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 asssets,  such as ARM loans,  have features which
restrict  changes in interest  rates on a short-term  basis and over the life of
the asset.  Further, in the event of a change in interest rates,  expected rates
of prepayments on loans and early  withdrawals  from  certificates  could likely
deviate significantly from those assumed in calculating the table.


                                       48
<PAGE>


COMMUNITY FINANCIAL CORPORATION
--------------------------------------------------------------------------------


Average Balances, Interest Rates and Yields

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

<TABLE>
<CAPTION>

                                                                         Year Ended March 31,
                                    ----------------------------------------------------------------------------------------------
                                                1998                             1997                             1996
                                    ----------------------------    -----------------------------    -----------------------------
                                    Average               Yield/    Average                Yield/    Average                Yield/
                                    Balance   Interest     Cost     Balance    Interest     Cost     Balance    Interest     Cost
                                    -------   --------     ----     -------    --------     ----     -------    --------     ----
                                                                             (Dollars in Thousands)
Interest-Earning Assets
-----------------------
<S>                                <C>        <C>          <C>      <C>        <C>          <C>      <C>        <C>          <C>  
Loans ..........................   $158,057   $ 13,344     8.44%    $144,409   $ 12,189     8.44%    $138,127   $ 11,816     8.55%
Investment securities
and other investments ..........     11,665        605     5.18       10,700        589     5.51        9,254        571     6.17
                                   --------   --------               -------   --------               -------   --------
Total interest-earning
assets .........................    169,722     13,949     8.22      155,109     12,778     8.24      147,381     12,387     8.41
                                   --------   --------               -------   --------               -------    -------

Interest-Bearing Liabilities
----------------------------
Deposits .......................    126,689      5,845     4.61      111,307      5,055     4.54      105,093      4,977     4.74
FHLB advances and
other borrowings ...............     25,572      1,471     5.75       26,321      1,481     5.63       25,349      1,538     6.07
                                    -------    -------               -------   --------               -------     ------
Total interest-
bearing liabilities ............    152,261      7,316     4.80      137,628      6,536     4.75      130,442      6,515     4.99
                                    -------    -------               -------   --------               -------     ------
Net interest income/
interest rate spread ...........              $  6,633     3.42                $  6,242     3.49                $  5,872     3.42
                                               =======                         ========                         ========
Net interest-earning
assets/net yield on
interest-earning assets ........              $ 17,461     3.80                $ 17,481     3.57                $ 16,939     3.47
                                               =======                         ========                         ========
Percentage of interest
earning assets to interest-
bearing liabilities ............                         111.47%                          112.70%                          112.99%
</TABLE>


                                       49
<PAGE>


COMMUNITY FINANCIAL CORPORATION
--------------------------------------------------------------------------------


Interest rate spread

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

                                                           March 31,
                                                  ---------------------------
                                                   1998       1997      1996
                                                   ----       ----      ----
Yield On
--------
Loans ..........................................   8.29%      8.15%     8.32%
Investment securities and other investments ....   4.49%      6.08%     5.60%
   Total interest-earning assets ...............   8.04%      8.03%     8.14%

Cost Of
-------
Deposits .......................................   4.60%      4.54%     4.62%
FHLB of Atlanta advances and other borrowings ..   5.77%      6.85%     5.88%
   Total interest-bearing liabilities ..........   4.74%      4.96%     4.87%

Interest rate spread ...........................   3.30%      3.07%     3.27%


Rate/Volume Analysis

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

<TABLE>
<CAPTION>

                                                              Year Ended March 31,
                                        ---------------------------------------------------------------
                                                  1998 v. 1997                     1997 v. 1996
                                        ------------------------------   ------------------------------
                                              Increase                         Increase
                                             (Decrease)                       (Decrease)
                                              Due to           Total            Due to          Total
                                        -----------------     Increase    ----------------    Increase
                                         Volume      Rate    (Decrease)    Volume     Rate    (Decrease)
                                        -------     -----    ----------   -------     ----    ----------
                                                                 (Dollars in Thousands)
Interest-Earning Assets
<S>                                     <C>         <C>      <C>         <C>       <C>        <C>    
Loans ...............................   $ 1,155         --    $ 1,155     $   532   $  (159)   $   373
Investment securities
and other investments ...............        55        (39)        16          83       (65)        18
                                        -------    -------    -------     -------   -------    -------
   Total interest-earnings assets ...   $ 1,210        (39)   $ 1,171     $   615   $  (224)       391
                                        =======    =======    -------     =======   =======    -------

Interest-Bearing Liabilities
Deposits ............................   $   701    $    89    $   790     $   298   $  (220)   $    78
FHLB advances and other borrowings ..       (41)        31        (10)         59      (116)       (57)
                                        -------    -------    -------     -------   -------    -------
   Total interest-bearing liabilities   $   660    $   120        780     $   357   $  (336)        21
                                        =======    =======    -------     =======   =======    -------
Net interest income .................                         $   391                          $   370
                                                              =======                          =======
</TABLE>

                                       50
<PAGE>


COMMUNITY FINANCIAL CORPORATION
--------------------------------------------------------------------------------


                                 Asset Quality

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

         At March 31, 1998, the Corporation's total  non-performing  assets were
$938,000 or .51% of total assets compared to $676,000 or .40% at March 31, 1997.
Non-performing  assets at March 31, 1998 were  comprised of three single  family
residential  properties,  a combination  single family house and farm which were
more than  ninety-days  past due, real estate  acquired  through  foreclosure of
three single  family  dwellings,  two rental  properties  of three and two units
respectively,  and a five  acre  lot.  Based on  current  market  values  of the
collateral securing these loans, management anticipates no significant losses in
excess of the reserves for losses previously recorded.  Due to an uncertain real
estate  market and the  economy in general no  assurances  can be given that the
Corporation's level of non-performing assets may not increase in the future.

         The  Corporation  maintains  an allowance  for loan losses  provide for
estimated  potential  losses in its loan  portfolio.  Management  determines the
level  of  reserves  based on loan  performance,  the  value of the  collateral,
economic and market conditions, and previous experience.  Management reviews the
adequacy of the  allowance  at least  quarterly,  utilizing  its  internal  loan
classifications  systems.  During  fiscal 1998,  the  Corporation  increased its
allowance for losses on loans $78,000 to  $1,117,000,  due to the  Corporation's
increased loan volume,  especially in commercial real estate,  construction  and
consumer loans. See "Asset/Liability  Management."  Management believes that the
loan loss reserve is adequate.  The Corporation  has had net  charge-offs to its
loan loss reserve of $421,000,  $142,000, and $70,000, for the years ended March
31,  1998,  1997 and 1996,  respectively.  The  increase in net  charge-offs  is
related primarily to one commercial loan.  Although  management believes it uses
the best information available, future adjustments to reserves may be necessary.
See "Results of Operations - Comparison of Years Ended March 31, 1998 and 1997 -
Provision for Loan Losses."

                              Financial Condition

         The  Corporation's  total  assets  increased  $16.2  million  to $183.9
million  at March  31,  1998  primarily  as a result of loans  receivable  which
increased  $13.6  million.  The  increase in loans  receivable  was funded by an
increase  in  deposits  of  $21.6  million.  The  increase  in  deposits  can be
attributed to both an increase in time deposits of $17.8 million and an increase
in checking accounts of $5.4 million.  Management  believes the increase in time
deposits is primarily  attributable to a special time deposit  promotion and the
increase in checking assounts is related to an increased  marketing effort.  The
increase  in loans  receivable  was due to the  origination  of  commercial  and
construction real estate and more competitive pricing on consumer loans.

         The  Corporaiton's  principal use of funds is to originate  loans.  The
principal source of funds for loan  disbursements is loan principal  repayments,
net growth in deposits  and  borrowings.  In fiscal 1998 net loans  increased by
$13.6 million.  While  borrowing for fiscal 1998 decreased by $8.0 million,  the
increase in the loan  portfolio was funded through  increased  deposits of $21.6
million.

         Stockholders'  equity  increased $2.2 million to $25.5 million at March
31,  1998  compared  to March 31,  1997.  The  increase  was the result of  $1.8
million of net income in fiscal 1998 and net unrealized gains of $1.0 million on
available  for  sale   securities,   partially   offset  by  dividends  paid  to
stockholders of $715,000.

                             Results of Operations

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

<PAGE>

Comparsion of Year Ended March 31, 1998 and 1997

         General. Net income for the year ended March 31, 1998 was $1,805,483 or
$.70 per share compared to $1,734,734 or $.68 per share for the year ended March
31, 1997.  Net income  increased  due  primarily to the increase in net interest
income of $390,926 during the year ended March 31, 1998.

         Interest Income. Total interest income increased to $13,949,307 for the
year ended March 31, 1998 as  compared to  $12,777,987  for the year ended March
31, 1997. The increase in total interest income can be attributed to an increase
in the dollar  volume of interest  earning  assets,  primarily  $13.6 million in
dollar volume of interest  earning  assets,  primarily $13.6 million in mortgage
and  consumer  loans,  which was offset by a decrease  in the yield on  interest
earning  assets.  Average  yields  on  total  interest-earning  assets  remained
relatively constant at 8.22% in fiscal 1998.


                                       51
<PAGE>

COMMUNITY FINANCIAL CORPORATION
--------------------------------------------------------------------------------

         Interest  Expense.  Total interest expense  increased to $7,316,025 for
the year ended  March 31,  1998,  from  $6,535,631  for the year ended March 31,
1997.  While the cost of funds increased from 4.75% for the year ended March 31,
1997 to 4.80% for fiscal 1998, the increase in interest  expense is attributable
primarily to an increase in the average  balance of deposits  during fiscal year
1998. The increase in deposit balances was due to increases in both certificates
of deposit and checking accounts for the current fiscal year.

         Provision for Loan Losses. The provision  increased to $498,764 for the
fiscal year ended March 31, 1998,  from $180,561 for the fiscal year ended March
31, 1997. The  Corporation  monitors its loan loss reserve on a quarterly  basis
and makes  allocations as necessary.  Management  believes that the level of its
loan loss reserve is adequate.  As of March 31, 1998,  the total  allowance  for
loan losses  amounted to $1,117,131  of which  $1,080,000  was not  specifically
allocated to identified  problem  loans.  At March 31, 1998,  the  Corporation's
total  allowance as a  percentage  of total loans  receivable  was .68% and as a
percentage of total non-performing loans was 119%. See "Asset Quality."

         Noninterest Income.  Noninterest income increased to $766,590 in fiscal
1998 as compared to $518,742 for the year ended March 31, 1997, primarily due to
an increase  in the number of checking  accounts  and the related  charges.  The
Corporation  increased  marketing in regard to its checking account products and
increased its checking account base by  approximately  1,400 accounts during the
year ended March 31, 1998.

         Noninterest Expense.  Total noninterest expense increased to $4,016,955
during the year ended  March 31, 1998 from  $3,805,739  for the year ended March
31, 1997 due primarily to the opening of a branch in Virginia Beach, Virginia in
April of 1997 and the organization of a mortgage banking  subsidiary in November
of 1997.  The  increase  in  noninterest  expense  in the  fiscal  year 1998 was
significant,  particularly in view of a special one-time  assessment by the FDIC
of $671,000 in fiscal 1997.

   The  Corporation  is  conducting  a formal  review of its  systems and system
providers,  due to concerns regarding  possible  consequences that the year 2000
may pose to  computer  and other  operating  systems  utilized  in its  business
activities.  While a preliminary  review has resulted in the  identification  of
certain issues which require  resolution,  management  believes that appropriate
plans are in place to resolve these issues in a timely manner.  Management  does
not  believe  the  resolution  of these  issues  will  significantly  impair the
Corporation's  ability to provide necessary  services to our customers,  nor are
the costs  involved in this  program  expected to have a material  impact on the
Corporations earnings or financial condition.

         Taxes.  Total taxes increased to $1,078,670 during the year ended March
31, 1998 from $1,040,064 during fiscal 1997. The effective tax rate for the year
ended March 31, 1998 was 37.4% as compared to 37.5% for the year ended March 31,
1997.  The  increase in taxes is  attributable  to an increase in income  before
income taxes.

Comparison of Years Ended March 31, 1997 and 1996

         General. Net income for the year ended March 31, 1997 was $1,734,735 or
$.68 per share  compared to  $2,011,538 or $.80 per share for the year March 31,
1996. Net income decreased due to a special  one-time  assessment by the FDIC of
$671,000 which had a tax affected effect of approximately  $416,000.  Net income
for the year ended March 31, 1997, excluding the special assessment,  would have
been approximately $2,150,000 or $.85 per share.

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

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

         Provision for Loan Losses. The provision  decreased to $180,561 for the
fiscal year ended March 31, 1997 from  $307,361  for the fiscal year ended March
31, 1996. The  Corporation  monitors its loan loss reserve on a quarterly  basis
and makes  allocations as necessary.  Management  believes that the level of its
loan loss reserve is adequate.  As of March 31, 1997,  the total  allowance  for
loan losses  amounted  to  $1,039,013  of which  $783,700  was not  specifically
allocated to
                                       52

<PAGE>

COMMUNITY FINANCIAL CORPORATION
--------------------------------------------------------------------------------

identified  problem loans. At March 31, 1997, the Corporation's  total allowance
as a percentage of total loans  receivable was .69% and as a percentage of total
non-performing loans was 154%. See "Asset Quality."

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

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

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

                         Liquidity and Capital Resources

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

         Liquidity  represents  the  ability  of the  Corporation  to  meet  its
on-going funding requirements for contractual  obligations,  the credit needs of
customers,  withdrawal of customers'  deposits and operating  expenses.  Savings
associations  are  required to maintain  minimum  levels of liquid  assets.  OTS
regulations  currently  require the Bank to maintain an average daily balance of
liquid  assets equal to at least 4% of the sum of its average  daily  balance of
net withdrawable deposit accounts and borrowings payable in one year or less. At
March 31, 1998, the Bank's liquid asset ratio was 7.7%.

         The Corporation's  dominant source of funds during the year ended March
31, 1998 was from deposits which increased by $21.6 million, due primarily to an
increase in time deposits of $17.8 million and a $3.7 million increase in demand
deposits.  FHLB  advances  decreased  from  March  31,  1997  by  $8.0  million.
Management  believes this shift in deposit categories is attributable  primarily
to a time  deposit  promotion  during  the fiscal  year which  offered a rate of
interest greater than the prevailing  market and the increase in demand deposits
was due to increased marketing of the Corporation's free checking account.

         The  Corporation's  cash  increased  $2.4  million from $4.9 million at
March 31,  1997 to $7.3  million at March 31,  1998.  The  increase  in cash was
related to the  increase  in  deposits  and a  decrease  in  securities  held to
maturity of $2.0 million.

         At March 31,  1998,  the  Corporation  had  commitments  to purchase or
originate $8.3 million of loans.  Certificates of deposit scheduled to mature in
one  year or less at  March  31,  1998,  totaled  $70.9  million.  Based  on its
historical  experience,  management  believes that a significant portion of such
deposits will remain with the Corporation. Management further believes that loan
repayments and other sources of funds will be adequate to meet the Corporation's
foreseeable short- and long-term liquidity needs.

         At  March  31,  1998,  the  Bank  was  in  compliance  with  all of its
regulatory capital requirements.

                     Impact of Inflation and Changing Prices

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

<PAGE>

                            Accounting Pronouncements

         For a discussion of certain  accounting  pronouncements  implemented by
the  Corporation  during  fiscal  1998  and  new  pronouncements  which  will be
implemented in the future,  see Summary of Accounting  Policies to Consoli-dated
Financial Statements.
                                       53


<PAGE>


[BDO SEIDMAN LETTERHEAD]



Report of Independent Certified Public Accountants


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


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

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

         In our opinion, the consolidated financial statements referred to above
present fairly, in all material  respects,  the financial  position of Community
Financial Corporation and subsidiary at March 31, 1998 and 1997, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period ended March 31, 1998 in conformity  with  generally  accepted  accounting
principles.



Richmond, Virginia
April 24, 1998


                                           /s/  BDO Seidman, LLP
                                           ----------------------------


                                       54
<PAGE>


COMMUNITY FINANCIAL CORPORATION
--------------------------------------------------------------------------------


Consolidated Balance Sheets

March 31,                                                  1998         1997
---------                                                  ----         ----
Assets
Cash (including interest bearing deposits of
    approximately $2,866,000 and $1,015,000) .....   $  7,266,145   $  4,922,213
Securities (Note 1)
    Held to maturity .............................      3,184,241      5,197,437
    Available for sale ...........................      3,905,055      2,243,220
Investment in Federal Home Loan Bank stock,
    at cost (Note 6) .............................      1,600,000      1,400,000
Loans receivable, net (Note 2) ...................    162,471,219    148,905,485
Real estate owned, net ...........................        303,365        173,245
Property and equipment, net (Note 3) .............      3,634,223      3,542,108
Accrued interest receivable ......................      1,031,789        989,438
Prepaid expenses and other assets ................        498,137        334,036
--------------------------------------------------------------------------------
                                                     $183,894,174   $167,707,182
--------------------------------------------------------------------------------


Liabilities and Stockholders' Equity

Liabilities
Deposits (Note 4) ................................   $138,164,173   $116,594,885
Advances from Federal Home Loan Bank (Note 6) ....     18,000,000     26,000,000
Advance payments by borrowers
    for taxes and insurance ......................        175,053        135,561
Other liabilities (Notes 7 and 9) ................      2,040,188      1,639,740
--------------------------------------------------------------------------------
Total liabilities ................................    158,379,414    144,370,186
--------------------------------------------------------------------------------

Commitments and Contingencies (Notes 9, 10 and 11)
--------------------------------------------------------------------------------

Stockholders' Equity (Notes 8 and 10)
Preferred stock, $.01 par value, authorized
    3,000,000 shares, none outstanding ...........             --             --
Common stock, $.01 par value, 10,000,000
    authorized shares, 2,559,446 and 1,275,348
    shares outstanding ...........................         25,594         12,753
Additional paid-in capital .......................      4,773,634      4,716,677
Retained earnings ................................     18,344,373     17,266,745
Net unrealized gain on securities
    available for sale (Note 1) ..................      2,371,159      1,340,821
--------------------------------------------------------------------------------
Total stockholders' equity .......................     25,514,760     23,336,996
--------------------------------------------------------------------------------
                                                     $183,894,174   $167,707,182
--------------------------------------------------------------------------------


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

                                       55

<PAGE>


COMMUNITY FINANCIAL CORPORATION
--------------------------------------------------------------------------------


Consolidated Statements of Income

Year Ended March 31,                        1998          1997           1996
--------------------                        ----          ----           ----

Interest income
  Loans ...........................    $13,344,490    $12,188,714    $11,816,368
  Investment securities ...........        410,909        471,864        447,619
  Other investments ...............        193,908        117,409        123,735
--------------------------------------------------------------------------------
Total interest income .............     13,949,307     12,777,987     12,387,722
--------------------------------------------------------------------------------

Interest expense
  Deposits (Note 4) ...............      5,844,535      5,054,884      4,977,188
  Borrowed money ..................      1,471,490      1,480,747      1,538,046
--------------------------------------------------------------------------------
Total interest expense ............      7,316,025      6,535,631      6,515,234
--------------------------------------------------------------------------------
Net interest income ...............      6,633,282      6,242,356      5,872,488
Provision for loan losses
 (Note 2) .........................        498,764        180,561        307,361
--------------------------------------------------------------------------------
Net interest income after
  provision for loan losses .......      6,134,518      6,061,795      5,565,127
--------------------------------------------------------------------------------

Noninterest income
  Service charges, fees and
    commissions ...................        757,462        509,748        430,945
  Other ...........................          9,128          8,994         24,761
--------------------------------------------------------------------------------
Total noninterest income ..........        766,590        518,742        455,706
--------------------------------------------------------------------------------

Noninterest expense
  Compensation and employee
     benefits (Notes 9 and 10) ....      1,956,187      1,333,550      1,183,016
  Occupancy .......................        481,063        399,290        372,560
  Data processing (Note 11) .......        407,925        349,150        308,814
  BIF/SAIF premium disparity
    assessment (Note 8) ...........             --        670,765             --
  Insurance .......................         74,222        189,143        242,076
  Other ...........................      1,097,558        863,841        702,458
--------------------------------------------------------------------------------
Total noninterest expense .........      4,016,955      3,805,739      2,808,924
--------------------------------------------------------------------------------

Income before income taxes ........      2,884,153      2,774,798      3,211,909
--------------------------------------------------------------------------------
Income taxes (Note 7)
  Current .........................      1,013,576        971,179      1,139,733
  Deferred ........................         65,094         68,885         60,638
--------------------------------------------------------------------------------
Total income taxes ................      1,078,670      1,040,064      1,200,371
--------------------------------------------------------------------------------
Net income ........................    $ 1,805,483    $ 1,734,734    $ 2,011,538
--------------------------------------------------------------------------------
Earnings per share (Note 10)
  Basic ...........................    $       .71    $       .68    $       .80
  Diluted .........................    $       .70    $       .68    $       .80
--------------------------------------------------------------------------------


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

                                       56
<PAGE>


Item 7.  Financial Statements
------------------------------

COMMUNITY FINANCIAL CORPORATION
--------------------------------------------------------------------------------


Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>

                                                                                  Net Unrealized
                                                                                     Gain on
                                                     Additional                     Securities         Total
                                          Common       Paid-in       Retained        Available      Stockholders'
                                           Stock       Capital       Earnings        For Sale         Equity
                                           -----       -------       --------        --------         ------
<S>                                  <C>          <C>            <C>             <C>            <C>         
Balance, March 31, 1995 .........     $   12,419   $  4,540,632   $ 14,723,799    $    275,584   $ 19,552,434
Net income ......................             --             --      2,011,538               _      2,011,538
Cash dividends, $.21 per share ..             --             --       (529,100)              _       (529,100)
Exercise of stock options
    (Note 10) ...................            278        111,002             --              --        111,280
Net unrealized gain on
    securities available for sale
    (Note 1) ....................             --             --             --         753,828        753,828
-------------------------------------------------------------------------------------------------------------
Balance, March 31, 1996 .........         12,697      4,651,634     16,206,237       1,029,412     21,899,980
Net income ......................             --             --      1,734,734              --      1,734,734
Cash dividends, $.26 per share ..             --             --       (674,226)             --       (674,226)
Exercise of stock options
    (Note 10) ...................             56         65,043             --              --         65,099
Net unrealized gain on
    securities available for sale
    (Note 1) ....................             --             --             --         311,409        311,409
-------------------------------------------------------------------------------------------------------------
Balance, March 31, 1997 .........         12,753      4,716,677     17,266,745       1,340,821     23,336,996
Net income ......................             --             --      1,805,483              --      1,805,483
Two-for-one stock split .........         12,797             --        (12,797)             --             --
Cash dividends, $.28 per share ..             --             --       (715,058)             --       (715,058)
Exercise of stock options
    (Note 10) ...................             44         56,957             --              --         57,001
Net unrealized gain on
    securities available for sale
    (Note 1) ....................             --             --             --       1,030,338      1,030,338
-------------------------------------------------------------------------------------------------------------
Balance, March 31, 1998 .........     $   25,594   $  4,773,634   $ 18,344,373    $  2,371,159   $ 25,514,760
-------------------------------------------------------------------------------------------------------------
</TABLE>

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



Consolidated Statements of Cash Flows

Year Ended March 31,                       1998          1997           1996
--------------------                       ----          ----           ----
Operating activities
Net income ........................   $ 1,805,483   $  1,734,734    $ 2,011,538
Adjustments to reconcile net
 income to net cash provided
 by operating activities
  Provision for loan losses .......       498,764        180,561        307,361
  Provision for real estate losses             --             --         25,000
  Depreciation ....................       234,007        216,462        212,750
  Amortization of premium and
   accretion of discount on
   securities, net ................          (586)        (3,683)          (351)
  Decrease in net deferred loan
   origination fees ...............      (115,671)       (33,289)      (110,561)


                                       57
<PAGE>


COMMUNITY FINANCIAL CORPORATION
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

Year Ended March 31,                                   1998            1997           1996
--------------------                                   ----            ----           ----
<S>                                                <C>             <C>             <C>        
  Loans originated for resale ................     (4,805,000)     (1,587,470)     (1,422,000)
  Proceeds from loan sales ...................      3,816,000       1,568,470       1,299,000
  Increase (decrease) in deferred
   income taxes ..............................        (24,394)         66,316          62,327
  Loss (gain) on sale of real estate .........         (9,755)          4,274              --
  (Increase) decrease in other assets ........       (206,452)         69,579        (298,374)
  Increase (decrease) in other liabilities ...        464,334         317,805         (13,929)
----------------------------------------------------------------------------------------------
Net cash provided by operating activities ....      1,656,730       2,533,759       2,072,761
----------------------------------------------------------------------------------------------
Investing activities
  Proceeds from maturities of held to maturity
    securities ...............................      3,742,267       2,071,892       2,979,871
  Purchase of held to maturity securities ....     (2,359,982)     (1,375,234)     (4,791,147)
  Net increase in loans ......................    (13,232,234)     (7,494,061)     (7,068,723)
  Purchases of property and equipment ........       (326,123)        (66,527)        (72,735)
  Proceeds from sale of real estate owned ....        152,043         145,002              --
  Redemption of FHLB stock ...................             --         150,000              --
  Purchase of FHLB stock .....................       (200,000)       (200,000)       (100,000)
----------------------------------------------------------------------------------------------
Net cash absorbed by investing activities ....    (12,224,029)     (6,768,928)     (9,052,734)
----------------------------------------------------------------------------------------------
Financing activities
  Net increase in certificates of
    deposit ..................................     17,787,000       4,998,000       4,665,694
  Net increase (decrease) in savings and
    checking deposits ........................      3,782,288       2,095,424        (177,799)
  Proceeds from issuance of common stock .....         57,001          65,099         111,280
  Dividends paid .............................       (715,058)       (674,226)       (529,100)
  Proceeds from advances .....................     76,000,000      33,000,000      78,000,000
  Repayments of advances .....................    (84,000,000)    (34,000,000)    (76,000,000)
----------------------------------------------------------------------------------------------
Net cash provided by financing activities ....     12,911,231       5,484,297       6,070,075
----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash
equivalents ..................................      2,343,932       1,249,128        (909,898)
Cash and cash equivalents - beginning
 of year .....................................      4,922,213       3,673,085       4,582,983
----------------------------------------------------------------------------------------------
Cash and cash equivalents - end of year ......   $  7,266,145    $  4,922,213    $  3,673,085
----------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash
  Flow Information
----------------------------------------------------------------------------------------------
Cash payments of interest expense ............   $  7,340,052    $  6,553,835    $  6,482,210
----------------------------------------------------------------------------------------------
Cash payments of income taxes ................   $  1,207,076    $    852,296    $  1,151,092
----------------------------------------------------------------------------------------------
Supplemental Schedule of Non-Cash
  Investing and Financing Activities
----------------------------------------------------------------------------------------------
Transfers from loans to real estate
  acquired through foreclosure ...............   $    331,237    $    131,718    $    298,334
----------------------------------------------------------------------------------------------
</TABLE>


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

                                       58
<PAGE>


COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------


                           Principles of Consolidation

         The accompanying consolidated financial statements include the accounts
of Community  Financial  Cor-poration (the  "Corporation")  and its wholly-owned
subsidiary,   Community   Bank  (the  "Bank")  and  Community   First   Mortgage
Corporation,  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.

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

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

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

                                   Estimates

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

                                   Securities

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

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

         Investments  in debt and equity  securities  classified  as trading are
stated  at  market  value.  Unrealized  holding  gains and  losses  for  trading
securities are included in the statement of income. Gains and losses on the sale
of securities are determined using the specific identification method.

                                Loans Receivable

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

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

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


                                       59
<PAGE>


COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------


but uncollected interest income is reversed. Thereafter,  interest is recognized
only as cash is received until the loan is reinstated to accrual status.

         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.

         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 and Participation in Loans

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

         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.

                                       60
<PAGE>


COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------


                                  Income Taxes

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

         For tax years  beginning  prior to January 1, 1996,  savings banks that
met certain  definitional tests and other conditions  prescribed by the Internal
Revenue Code were allowed, within limitations,  to deduct from taxable income an
allowance for bad debts using the "percentage of taxable income" method.

         Section  1616 of the Small  Business  Job  Protection  Act of 1996 (the
"Act")  repealed the  percentage of taxable  income method of computing bad debt
reserves,  and required the recapture into taxable income of "excess  reserves",
on a ratable  basis  over the next six years.  Excess  reserves  are  defined in
general,  as the excess of the  balance of the tax bad debt  reserve  (using the
percentage  of  taxable  income  method)  as of the  close  of the last tax year
beginning before January 1, 1996 over the balance of the reserve as of the close
of the last tax year  beginning  before  January 1, 1988.  The  recapture of the
reserves is deferred if the Corporation meets the "residential loan requirement"
exception, during either or both of the first two years beginning after December
31, 1995. The residential loan requirement is met, in general,  if the principal
amount of residential loans made by the Corporation  during the year is not less
than the Corporation's "base amount".  The base amount is defined as the average
of the principal  amounts of  residential  loans made during the six most recent
tax years beginning before January 1, 1996.

         As a result of the Act, the  Corporation  must  recapture  into taxable
income  approximately  $1,267,000  ratably over six years.  The residential loan
requirement  exception  was met for the  taxable  years ended March 31, 1997 and
1998, therefore the income will be includable over the six-year period beginning
with the year ending March 31, 1999.

                          New Accounting Pronouncements

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"),  which  establishes  standards for reporting and display of comprehensive
income,  its  components  and  accumulated  balances.  Compre-hensive  income is
defined to include all changes in equity except those resulting from investments
by owners  and  distributions  to  owners.  Among  other  disclosures,  SFAS 130
requires  that all  items  that are  required  to be  recognized  under  current
accounting  standards as  components  of  comprehensive  income be reported in a
financial  statement  that is  displayed  with  the  same  prominence  as  other
financial statements. SFAS 130 is effective for financial statements for periods
beginning  after  December 15, 1997 and  requires  comparative  information  for
earlier years to be restated. Management does not expect the application of this
pronouncement  to have a  material  effect on the  financial  statements  of the
Corporation.

                               Earnings Per Share

         Basic  earnings  per share  include  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 weighted average number of shares of common stock  outstanding
for the years ended March 31, 1998, 1997 and 1996 were 2,553,216;  2,544,170 and
2,516,136,  respectively,  for basic earnings per share and 2,583,631; 2,557,549
and 2,517,178, respectively, for diluted earnings per share.

                             Statement of Cash Flows

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

                                     Other

         Certain   reclassifications   have  been  made  in  the  prior   years'
consolidated financial statements to conform to the March 31, 1998 presentation.


                                       61
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


1. Securities

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

March 31, 1998
--------------------------------------------------------------------------------

                                                Gross        Gross     Estimated
                                Amortized   Unrealized    Unrealized     Market
                                  Cost          Gains       Losses       Value
                                  ----          -----       ------       -----
Held to Maturity
  United States government
      and agency obligations   $1,860,574   $    6,069        $ 749   $1,865,894
  Corporate obligations ....    1,298,644       30,471           --    1,329,115
  Other ....................       25,023          736           --       25,759
--------------------------------------------------------------------------------
                                3,184,241       37,276          749    3,220,768
Available for Sale
  Federal Home Loan Mortgage
      Corporation stock ....       80,605    3,824,450           --    3,905,055
--------------------------------------------------------------------------------
                               $3,264,846   $3,861,726        $ 749   $7,125,823
--------------------------------------------------------------------------------

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

                                                Gross        Gross     Estimated
                                Amortized   Unrealized    Unrealized     Market
                                  Cost          Gains       Losses       Value
                                  ----          -----       ------       -----
Held to Maturity
  United States government
      and agency obligations   $4,876,286   $   14,235     $ 34,287   $4,856,234
  Corporate obligations ....      296,128           --          628      295,500
  Other ....................       25,023          460           --       25,483
--------------------------------------------------------------------------------
                                5,197,437       14,695       34,915    5,177,217
Available for Sale
  Federal Home Loan Mortgage
      Corporation stock ....       80,605    2,162,615           --    2,243,220
--------------------------------------------------------------------------------
                               $5,278,042   $2,177,310     $ 34,915   $7,420,437
--------------------------------------------------------------------------------


The amortized  cost and estimated  market value of securities at March 31, 1998,
by contractual maturity, are shown below:

March 31, 1998
--------------------------------------------------------------------------------
                                                                       Estimated
                                                    Amortized            Market
                                                       Cost               Value
                                                    ----------        ----------
Held to Maturity
 Due in one year or less ...................        $  500,000        $  499,062
 Due in one through five years .............         2,385,597         2,422,456
 Other .....................................           298,644           299,250
--------------------------------------------------------------------------------
                                                     3,184,241         3,220,768
--------------------------------------------------------------------------------

Available for Sale
 Federal Home Loan Mortgage
  Corporation stock ........................            80,605         3,905,055
--------------------------------------------------------------------------------
                                                    $3,264,846        $7,125,823
--------------------------------------------------------------------------------


                                       62
<PAGE>


COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------


2. Loans Receivable

Loans receivable are summarized as follows:


March 31,                                      1998                      1997
---------                                      ----                      ----
Real estate loans
  First mortgage conventional
      One to four family ............   $  94,939,920             $  96,968,331
      Multi-family ..................      18,586,403                18,787,851
      Commercial ....................      21,032,004                18,720,436
      Construction ..................      10,070,882                 5,204,235
--------------------------------------------------------------------------------
Total real estate loans .............     144,629,209               139,680,853

Less
  Loans in process ..................       3,002,655                 1,619,476
  Deferred loan fees, net ...........         303,099                   372,460
  Allowance for loan losses .........         654,457                   602,910
--------------------------------------------------------------------------------
Net real estate loans ...............     140,668,998               137,086,007

Consumer loans
  Unsecured personal ................       5,050,816                 4,417,470
  Automobile ........................       3,433,609                 1,645,893
  Home equity .......................       7,085,474                 1,630,347
  Deposit account ...................         301,656                   338,976
  Other .............................       6,337,562                 4,210,428
--------------------------------------------------------------------------------
Total consumer loans ................      22,209,117                12,243,114

Less
  Deferred loan fees (origination
   costs), net ......................         (55,778)                  (12,467)
  Allowance for loan losses .........         462,674                   436,103
--------------------------------------------------------------------------------
Net consumer loans ..................      21,802,221                11,819,478
--------------------------------------------------------------------------------
                                        $ 162,471,219             $ 148,905,485
--------------------------------------------------------------------------------



--------------------------------------------------------------------------------

Loans serviced for others amounted to approximately $8,792,000, $10,513,000, and
$11,264,000 at March 31, 1998, 1997 and 1996,  respectively.  The loans were not
included in the accompanying consolidated statements of financial condition.

The weighted average interest rate on loans receivable was  approximately  8.29%
and 8.15% at March 31, 1998 and 1997, respectively.

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

Year Ended March 31,                      1998           1997           1996
--------------------                      ----           ----           ----
Balance at beginning of year ......   $ 1,039,013    $ 1,000,278    $   762,621
Provision charged to expense ......       498,764        180,561        307,361
Losses charged to the allowance,
  net of recoveries ...............      (420,646)      (141,826)       (69,704)
--------------------------------------------------------------------------------
Balance at end of year ............   $ 1,117,131    $ 1,039,013    $ 1,000,278
--------------------------------------------------------------------------------

Of the total allowance for loan losses at March 31, 1998 and 1997, approximately
$1,080,131  and  $783,700,   respectively,  is  not  specifically  allocated  to
identified problem loans.

                                       63
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


2. Loans Receivable (continued)

The following  information  relates to the  Corporation's  impaired  loans which
includes  troubled  debt  restructurings  that meet the  definition  of impaired
loans; there were no loans considered impaired at March 31, 1998.


As of and for the year ended March 31,                                    1997
--------------------------------------                                    ----
Impaired loans with a specific allowance .......................        $416,882
Impaired loans with no specific allowance ......................              --
--------------------------------------------------------------------------------
Total impaired loans ...........................................        $416,882
--------------------------------------------------------------------------------
Total allowance related to impaired loans ......................        $195,270
Average balance of impaired loans for the year .................        $420,956
Interest income on impaired loans for the year
  recorded on a cash basis .....................................        $  4,004
--------------------------------------------------------------------------------

3. Property and Equipment

Property and equipment are summarized as follows:

March 31,                                              1998             1997
---------                                              ----             ----
Buildings ..................................        $3,275,898        $3,201,387
Land and improvements ......................           876,276           876,276
Furniture and equipment ....................           977,220           757,018
--------------------------------------------------------------------------------
                                                     5,129,394         4,834,681

Less accumulated depreciation ..............         1,495,171         1,292,573
--------------------------------------------------------------------------------
                                                    $3,634,223        $3,542,108
--------------------------------------------------------------------------------

4. Deposits

March 31,                                          1998                 1997
---------                                          ----                 ----
Demand deposits
  Savings accounts ...................         $ 12,442,584         $ 12,577,540
  NOW accounts .......................           21,003,469           15,576,036
  Money market deposit
    accounts .........................            8,425,120            9,935,309
--------------------------------------------------------------------------------
Total demand deposits ................           41,871,173           38,088,885

Time deposits ........................           96,293,000           78,506,000
--------------------------------------------------------------------------------
                                               $138,164,173         $116,594,885
--------------------------------------------------------------------------------

The aggregate  amount of time deposit  accounts with a minimum  denomination  of
$100,000 was  approximately  $10,255,517  and  $6,594,000  at March 31, 1998 and
1997, respectively.

                                       64
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COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------


4. Deposits  (continued)

Time deposits mature as follows:

March 31,                                           1998                 1997
---------                                           ----                 ----
Within one year ......................          $70,867,000          $58,772,000
One to two years .....................           17,968,000           10,715,000
More than two years ..................            7,458,000            9,019,000
--------------------------------------------------------------------------------
                                                $96,293,000          $78,506,000
--------------------------------------------------------------------------------

Interest expense on deposits is summarized as follows:

Year Ended March 31,                           1998          1997        1996
--------------------                           ----          ----        ----
Time deposits ...........................   $4,773,241   $4,045,717   $3,999,200
Money market deposit and NOW accounts ...      701,547      649,194      624,182
Savings .................................      369,747      359,973      353,806
--------------------------------------------------------------------------------
                                            $5,844,535   $5,054,884   $4,977,188
--------------------------------------------------------------------------------

5. Fair Value of Financial Instruments

The estimated  fair values of the  Corporation's  financial  instruments  are as
follows:
<TABLE>
<CAPTION>

March 31,                                      1998                         1997
---------                          --------------------------    ---------------------------
                                      Carrying       Fair           Carrying        Fair
                                       Amount        Value           Amount         Value
                                       ------        -----           ------         -----
Financial assets
<S>                                <C>            <C>            <C>            <C>         
 Cash and short-term investments   $  7,266,145   $  7,266,000   $  4,922,213   $  4,922,000
 Securities ....................      7,089,296      7,126,000      7,440,657      7,420,000
 Loans, net of allowance for
  loan losses ..................    162,471,219    162,682,000    148,905,485    148,509,000
Financial liabilities
 Deposits ......................    138,164,173    138,369,000    116,594,885    116,795,000
 Advances from Federal Home
  Loan Bank ....................     18,000,000     18,000,000     26,000,000     26,000,000


                                      Notional        Fair          Notional        Fair
                                       Amount         Value          Amount         Value
                                       ------         -----          ------         -----
Unrecognized financial instruments
 Commitments to extend credit .... $ 11,825,000   $ 11,825,000   $ 11,179,000   $ 11,179,000
</TABLE>


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

Cash and short-term investments

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

                                       65
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


5. Fair Value of Financial Instruments (continued)

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.

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.

Commitments to extend credit

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

6.  Advances From Federal Home Loan Bank

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


Due in year ending March 31,
-----------------------------------
1999                    $ 3,000,000
2000                             --
2001                             --
2002                     15,000,000
                        -----------
                        $18,000,000

The weighted  average interest rate on advances was 5.77% and 6.85% at March 31,
1998 and 1997, 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.

                                       66
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COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------


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,                1998              1997             1996
--------------------                ----              ----             ----
Maximum amount outstanding
 during the year...............  $32,000,000       $28,000,000      $27,000,000
--------------------------------------------------------------------------------
Average amount outstanding
 during the year...............  $25,916,667       $26,541,667      $25,346,995
--------------------------------------------------------------------------------
Average interest rate during
 the year......................         5.68%             5.58%            6.07%
--------------------------------------------------------------------------------


7. Income Taxes

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

March 31,                                            1998                1997
---------                                            ----                ----
Deferred tax assets
  Deferred loan fees ...................        $        --         $     6,522
  Other ................................              5,426               7,364
--------------------------------------------------------------------------------
                                                      5,426              13,886
--------------------------------------------------------------------------------

Deferred tax liabilities
  Depreciable assets ...................           (149,419)           (143,335)
  FHLMC stock ..........................         (1,453,291)           (821,794)
  FHLB stock ...........................            (90,852)            (90,852)
  Allowance for losses .................            (56,901)             (6,351)
  Other ................................             (4,477)            (93,965)
--------------------------------------------------------------------------------
                                                 (1,754,940)         (1,156,297)
--------------------------------------------------------------------------------
Net deferred tax liability .............        $(1,749,514)        $(1,142,411)
--------------------------------------------------------------------------------


8. Stockholders' Equity and Regulatory Capital Requirements

Savings  institutions  must maintain specific capital standards that are no less
stringent  than the capital  standards  applicable  to national  banks.  The OTS
regulations  currently  have three  capital  standards  including (i) a tangible
capital  requirement,  (ii) a core capital  requirement,  and (iii) a risk-based
capital requirement. The tangible capital standard requires savings institutions
to maintain tangible capital of not less than 1.5% of adjusted total assets. The
core capital standard requires a savings institution to maintain core capital of
not less than 4.0% at March 31, 1998 and 3% at March 31, 1997 of adjusted  total
assets. The risk-based capital standard requires  risk-based capital of not less
than 8.0% of risk-weighted assets.

                                       67
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


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

The following table presents the Bank's  regulatory  capital levels at March 31,
1998 and 1997, relative to the OTS requirements applicable at that date:

                         Amount    Percent       Actual     Actual     Excess
March 31, 1998          Required   Required      Amount     Percent    Amount
--------------          --------   --------      ------     -------    ------
Tangible Capital .... $ 2,742,000    1.50%    $21,632,000    11.83%  $18,890,000
Core Capital ........   7,313,000    4.00      21,632,000    11.83    14,319,000
Risk-based Capital ..  10,380,000    8.00      24,468,000    16.67    14,088,000


                         Amount    Percent       Actual     Actual     Excess
March 31, 1998          Required   Required      Amount     Percent    Amount
--------------          --------   --------      ------     -------    ------
Tangible Capital .... $ 2,498,000    1.50%    $19,779,000    11.88%  $17,281,000
Core Capital ........   4,996,000    3.00      19,779,000    11.88    14,783,000
Risk-based Capital ..   8,908,000    8.00      20,562,000    18.46    11,654,000


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


Capital  distributions by OTS-regulated  savings 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 up to 100% of its net income to date plus
the amount  that would  reduce by  one-half  its  surplus  capital  ratio at the
beginning  of the  calendar  year.  Any  distributions  in excess of that amount
require  prior  OTS  notice,  with  the  opportunity  for OTS to  object  to the
distribution.  A Tier 1 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. The
Bank did not pay any  dividends to the  Corporation  during the year ended March
31, 1998.

Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act");
during the year ended March 31, 1997,  the FDIC imposed a special  assessment on
SAIF members to capitalize the SAIF at the designated  reserve level of 1.25% as
of September 30, 1996. Based on the Corporation's deposits as of March 31, 1995,
the date for measuring  the amount of the special  assessment,  the  Corporation
paid a special  assessment of  approximately  $671,000.  Excluding  this special
assessment,  net of tax effect,  net income and  earnings per share for the year
ended  March  31,  1997  would  have  been  approximately  $2,151,000  and $.85,
respectively.  The FDIC has lowered the premium for deposit  insurance from that
prior to the special assessment to a level necessary to maintain the SAIF at its
required reserve level.

On February 23, 1998, the Board of Directors declared 100% stock dividend in the
form of a  two-for-one  stock split to be  distributed  March 25,  1998,  to all
shareholders of record as of March 11, 1998. All applicable  share and per share
data have been adjusted for the stock dividend.

                                       68
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COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------


9. Employee Benefit Plans

Pension Plan

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

Year Ended March 31,                         1998           1997           1996
-------------------                          ----           ----           ----
Net periodic pension cost

Service cost - benefits
 earned during the period ............     $ 46,902      $ 30,176      $ 27,872
Interest cost on projected
 benefit obligations .................       39,573        34,077        38,884
Actual return on plan assets .........      (38,146)      (37,684)      (29,905)
Net amortization and deferral ........       (7,275)       (6,695)      (15,502)
--------------------------------------------------------------------------------
                                            $41,054      $ 19,874        $21,349
--------------------------------------------------------------------------------
Accumulated benefit obligation

Vested benefits ......................     $520,012      $441,077       $393,678
Non-vested benefits ..................        9,945         5,743         27,792
--------------------------------------------------------------------------------
                                           $529,957      $446,820       $421,470
--------------------------------------------------------------------------------

Year Ended March 31,                                      1998           1997
--------------------                                      ----           ----
Accrued pension cost

Projected benefit obligation ......................... $ 665,004      $ 537,272
Fair value of plan assets, primarily
  IPG insurance contracts ............................   568,250        546,708
--------------------------------------------------------------------------------
Assets in excess (deficit) of projected
  benefit obligation .................................   (96,754)         9,436
Unrecognized prior service cost ......................    15,504         18,604
Unrecognized net (gain) loss .........................    18,875        (47,270)
Unrecognized net asset ...............................   (49,597)       (57,864)
--------------------------------------------------------------------------------
                                                       $(111,972)      $(77,094)


                                       69
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


9. Employee Benefit Plans (continued)

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

Year Ended March 31,                                            1998       1997
--------------------                                            ----       ----
Weighted average discount rate..............................      6.8%      7.0%
--------------------------------------------------------------------------------
Expected long-term rate of return on
  plan assets ..............................................      7.5%     7.5%
--------------------------------------------------------------------------------
Increase in future compensation levels .....................      5.0%     5.0%
--------------------------------------------------------------------------------


The  measurement  date used to value the plan assets was December 31, 1997,  and
1996.

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 as follows:

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

    1996 ................    $38,325          $1,749                    $40,074
    1997 ................     43,513              --                     43,513
    1998 ................     49,967              --                     49,967

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

                                       70
<PAGE>


COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------


10. Stock Option Plan

The Corporation has a noncompensatory stock option plan (the "Plan") designed to
provide long-term incentives to employees.

The following table summarizes options outstanding:

Year Ending March 31,            1998              1997              1996
---------------------     -----------------   ----------------   ---------------

                                 Weighted-          Weighted-          Weighted-
                                  average            average            average
                                 exercise           exercise           exercise
                          Shares    price     Shares   price     Shares   price
                          ------    -----     ------   -----     ------   -----
Options outstanding at
  beginning of year ..   127,300   $ 9.57     72,000   $ 8.02     99,260  $ 2.83
Options granted ......    47,000    13.58     67,000    10.69     56,200    9.24
Options exercised ....    (8,750)    6.52    (11,300)   10.00    (55,640)   4.00
Options forfeited ....      (100)   10.00       (400)    5.76    (27,820)   2.00
--------------------------------------------------------------------------------
Options outstanding at
  end of year ........   165,450   $10.80    127,300   $ 9.57     72,000  $ 8.02
--------------------------------------------------------------------------------

         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:                       1998              1997              1996
-----------                       ----              ----              ----
  As reported.............     $1,805,483        $1,734,734        $2,011,538
  Pro forma...............      1,696,279         1,611,900         1,914,873

Net income per share:        Basic  Diluted    Basic  Diluted    Basic  Diluted
---------------------        -----  -------    -----  -------    -----  -------
  As reported.............   $0.71    $0.70     $.68     $.68     $.80     $.80
  Pro forma...............    0.66     0.65      .63      .63      .76      .76


The fair value of each option  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,  1998: a risk free  interest  rate of 5.24%,
dividend  yield of 2.00%,  expected  weighted  average  term of 10 years,  and a
volitality of 20.00%.


                                       71
<PAGE>


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


The following table summarizes  information about stock options  outstanding and
excercisable at March 31, 1998:

                                                           Options Outstanding
                                                         -----------------------
                                                         Weighted      Weighted
                                                          Average       Average
                                                         Remaining     Excercise
                                              Number of  Contractual      Price
                                                Shares   Life (Years)  Per Share
                                                ------   ------------  ---------
$ 6.50 - 9.50 .............................     38,000      8.32         $ 8.24
$10.00 - 15.00 ............................    127,450      8.86          10.94
--------------------------------------------------------------------------------
                                               165,450      8.74         $10.80
--------------------------------------------------------------------------------


11. Commitments and Contingencies

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require   payment  of  a  fee.  The   Corporation   evaluates  each   customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed  necessary  by the  Corporation  upon  extension  of credit,  is based on
management's  credit evaluation of the counterparty.  Collateral held varies but
may include single family  residences,  other residential  property,  commercial
property  and  land.  At  March  31,  1998,  the   Corporation  had  outstanding
commitments to originate  loans with variable  interest  rates of  approximately
$6,590,000 and loans with fixed rates of approximately  $1,720,000. In addition,
unused lines of credit amounted to approximately $5,235,000 at March 31, 1998.

Leases

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

       Year Ending
        March 31                        Amount
        --------                        ------
         1999                        $  31,200
         2000                           33,600
         2001                           36,000
         2002                           38,400
                                      --------
                                      $139,200
                                      --------

Total  lease  expense  was $31,200 and $0 for the years ended March 31, 1998 and
1997, respectively,  and total data processing expense was $408,000 and $349,000
for the years ended March 31, 1998 and 1997, respectively.

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


                                       72
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COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------


12. Selected Quarterly Financial Data (Unaudited)

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

Year Ended March 31, 1998
-------------------------
                                                First   Second   Third    Fourth
                                              Quarter  Quarter  Quarter  Quarter
                                              -------  -------  -------  -------
Total interest income ......................   $3,363   $3,510   $3,538   $3,538
Total interest expense .....................    1,729    1,874    1,884    1,829
--------------------------------------------------------------------------------
Net interest income ........................    1,634    1,636    1,654    1,709
Provision for loan losses ..................       25      368       25       81
--------------------------------------------------------------------------------
Net interest income after provision
  for loan losses ..........................    1,609    1,268    1,629    1,628
Other income ...............................      169      174      207      217
Other expenses .............................      986      919      984    1,128
--------------------------------------------------------------------------------
Income before income taxes .................      792      523      852      717
Income taxes ...............................      297      195      313      274
--------------------------------------------------------------------------------
Net income .................................   $  495   $  328   $  539   $  443
--------------------------------------------------------------------------------
Earnings per share
  Basic ....................................   $  .20   $  .13   $  .21   $  .17
  Diluted ..................................   $  .20   $  .13   $  .21   $  .16
--------------------------------------------------------------------------------

Year Ended March 31, 1997
-------------------------
                                                First   Second   Third    Fourth
                                              Quarter  Quarter  Quarter  Quarter
                                              -------  -------  -------  -------
Total interest income ......................   $3,144   $3,151   $3,232   $3,251
Total interest expense .....................    1,633    1,600    1,653    1,650
--------------------------------------------------------------------------------
Net interest income ........................    1,511    1,551    1,579    1,601
Provision for loan losses ..................       33       70       53       25
--------------------------------------------------------------------------------
Net interest income after provision
  for loan losses ..........................    1,478    1,481    1,526    1,576
Other income ...............................      118      130      136      135
Other expenses .............................      716    1,462      734      893
--------------------------------------------------------------------------------
Income before income taxes .................      880      149      928      818
Income taxes ...............................      330       54      349      307
--------------------------------------------------------------------------------
Net income .................................   $  550   $   95   $  579   $  511
--------------------------------------------------------------------------------
Basic and diluted earnings
 per share .................................   $  .21   $  .04   $  .23   $  .20
--------------------------------------------------------------------------------


                                       73
<PAGE>


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

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

Condensed Statements of Financial Condition

March 31,                                               1998              1997
---------                                               ----              ----
Assets
Investment in the Bank, at equity ............      $21,745,532      $19,905,521
Cash .........................................        1,357,422        2,071,134
Prepaid expenses and other assets ............           40,647           19,520
--------------------------------------------------------------------------------
                                                    $23,143,601      $21,996,175
--------------------------------------------------------------------------------

Liabilities and Stockholders' Equity

Liabilities ..................................      $        --      $        --
--------------------------------------------------------------------------------
Stockholders' Equity
  Common stock ...............................           25,594           12,753
  Additional paid-in capital .................        4,773,634        4,716,677
  Retained earnings ..........................       18,344,373       17,266,745
--------------------------------------------------------------------------------
Total stockholders' equity ...................       23,143,601       21,996,175
--------------------------------------------------------------------------------
                                                    $23,143,601      $21,996,175
--------------------------------------------------------------------------------


Condensed Statements of Income

Year Ended March 31,                       1998           1997           1996
--------------------                       ----           ----           ----
Income
  Interest income .................    $       --     $    4,900     $   34,224
--------------------------------------------------------------------------------
Total income ......................            --          4,900         34,224
--------------------------------------------------------------------------------
Noninterest expenses ..............       (55,652)       (83,187)       (62,755)
--------------------------------------------------------------------------------
Income (loss) before equity in
 undistributed net income of
 the Bank .........................       (55,652)       (78,287)       (28,531)
Equity in undistributed net
 income of the Bank ...............     1,840,010      1,783,140      2,028,221
--------------------------------------------------------------------------------
Income before income taxes ........     1,784,358      1,704,853      1,999,690
Income taxes ......................       (21,125)       (29,881)       (11,848)
--------------------------------------------------------------------------------
Net income ........................    $1,805,483     $1,734,734     $2,011,538
--------------------------------------------------------------------------------


                                       74
<PAGE>


COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
--------------------------------------------------------------------------------

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

Condensed Statements of Cash Flows

Year Ended March 31                       1998          1997            1996
-------------------                       ----          ----            ----
Operating activities
  Net income ......................   $ 1,805,483    $ 1,734,734    $ 2,011,538
  Adjustments
    Equity in income of the Bank ..    (1,840,010)    (1,783,140)    (2,028,221)
    (Increase) decrease in prepaid
     and other assets .............       (21,128)       (10,224)        12,189
    Increase (decrease) in other
     liabilities ..................            --        (16,823)           654
--------------------------------------------------------------------------------
Net cash absorbed by operating
 activities .......................       (55,655)       (75,453)        (3,840)
--------------------------------------------------------------------------------
Investing activities
  Proceeds from maturities of
   investment securities ..........            --        249,931        996,776
--------------------------------------------------------------------------------
Net cash provided by investing
 activities .......................            --        249,931        996,776
--------------------------------------------------------------------------------
Financing activities
  Cash dividends paid on common
   stock ..........................      (715,058)      (674,226)      (529,100)
  Stock options exercised .........        57,001         65,099        111,280
--------------------------------------------------------------------------------
Net cash absorbed by financing
  activities ......................      (658,057)      (609,127)      (417,820)
--------------------------------------------------------------------------------
Increase (decrease) in cash .......      (713,712)      (434,649)       575,116

Cash, beginning of year ...........     2,071,134      2,505,783      1,930,667
--------------------------------------------------------------------------------
Cash, end of year .................   $ 1,357,422    $ 2,071,134    $ 2,505,783
--------------------------------------------------------------------------------


                                       75
<PAGE>


                                 PART III

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

  Information  concerning  directors of the Registrant is incorporated herein by
reference  from the  Company's  definitive  Proxy  Statement for the 1998 Annual
Meeting of  Stockholders,  a copy of which will be filed not later than 120 days
after the close of the fiscal year.

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

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

  To the  Company's  knowledge,  based  solely on a review of the copies of such
reports  furnished  to the  Company and  written  representations  that no other
reports were  required,  during the last fiscal year ended March 31,  1998,  all
Section 16(a) filing  requirements  applicable  to its  officers,  directors and
greater than 10 percent beneficial owners were complied with.

Item 10.  Executive Compensation
--------------------------------
  Information  concerning  executive  compensation  is  incorporated  herein  by
reference  from the  Company's  definitive  Proxy  Statement for the 1998 Annual
Meeting of  Stockholders,  a copy of which will be filed not later than 120 days
after the close of the fiscal year.


Item 11.  Security Ownership of Certain Beneficial Owners and
          Management
-------------------------------------------------------------
  Information  concerning  security  ownership of certain  beneficial owners and
management is  incorporated  herein by reference  from the Company's  definitive
Proxy  Statement for the 1998 Annual  Meeting of  Stockholders,  a copy of which
will be filed not later than 120 days after the close of the fiscal year.

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------
  Information  concerning certain relationships and transactions is incorporated
herein by reference from the Company's  definitive  Proxy Statement for the 1998
Annual Meeting of Stockholders, a copy of which will be filed not later than 120
days after the close of the fiscal year.

                                       76

<PAGE>



                                 PART IV

Item 13.  Exhibits and Reports on 8-K
-------------------------------------
    (a) Exhibits:



                                              Reference to
                                              Prior Filing, Item
                                               or Exhibit
Regulation                                       Number
S-K Exhibit                                     Attached
  Number                     Document            Hereto
--------------------------------------------------------------

    2    Plan of acquisition, reorganization,
         arrangement, liquid, or succession        None
    3    Articles of Incorporation and Bylaws        *
    4    Instruments defining the rights of
         security holders, including indentures:
         Common Stock Certificate                    *
    9    Voting trust agreement                    None
   10    Material contracts:
         Stock Option and Incentive Plan             *
         Employment Agreement                        *
         Employee Stock Ownership Plan              **
   11    Statement re computation of per
          share earnings                           Item 7
   13    Annual Report to Security Holders         None
   16    Letter on change in certifying
          accountant                               None
   18    Letter on change in accounting
          principles                               None
   19    Previously unfiled documents              None
   21    Subsidiaries of Registrant                 21
   22    Published report regarding matters
          submitted to vote of security
          holders                                  None
   23    Consent of Experts and Counsel             23
   24    Power of Attorney                     Not required
   27    Financial Data Schedule                    27
   99    Additional exhibits                       None

--------------------

*    Filed  on  May  19,  1989  as  exhibits  to the  Registrant's  Registration
     Statement No. 33-28817 on Form S-4. All of such previously  filed documents
     are hereby  incorporated herein by reference in accordance with Item 601 of
     Regulation S-B.


                                       77

<PAGE>



**   Filed on June 28, 1993,  as Exhibit 10 to the Annual  Report on Form 10-KSB
     for the fiscal year ended March 31, 1993. Such previously filed document is
     hereby  incorporated  herein by  reference in  accordance  with Item 601 of
     Regulation S-B.


  (b) Reports on Form 8-K:

  No reports on Form 8-K have been filed  during the  three-month  period  ended
March 31, 1998.

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

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


                                       78

<PAGE>



                                   SIGNATURES

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

                                  COMMUNITY FINANCIAL CORPORATION


Date: June 26, 1998               By:/s/ Thomas W. Winfree
                                     ------------------------------
                                     Thomas W. Winfree
                                     (Duly Authorized Representative)


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


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

Date: June 26, 1998               Date: June 26, 1998



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

Date: June 26, 1998               Date: June 26, 1998



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

Date: June 26, 1998               Date: June 26, 1998

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

Date: June 26, 1998               Date: June 26, 1998