| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
| | -----------------------------------------------------------------------------------
| | For the fiscal year ended March 31, 2001                                           

| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
| | ---------------------------------------------------------------------------------------
| | For the transition period from _________ to _________                                  

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

|38 North Central Ave., Staunton, VA      |  | 24401     
|---------------------------------------- |  | ----------
|(Address of principal executive offices) |  | (Zip Code)

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.    /   /

The Issuer had $22,946,457 in gross income for the year ended March 31, 2001

As of May 31, 2001, there were issued and outstanding 2,322,232 shares of the Issuer's Common Stock. The aggregate market value of the voting stock held by non-affiliates of the Issuer, computed by reference
to the average of the closing bid and asked price of such stock as of May 31, 2001, was approximately $20,500,000. (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.)

Part II of Form 10-KSB--Portions of the Annual Report to Stockholders for the fiscal year ended March 31, 2001.

PART III of Form 10-KSB--Proxy Statement for the 2001 Annual Meeting of Stockholders.

Transitional Small Business Disclosure Format:

Yes   /  /        No  /X/

**PART I**

**Item  1. Description of Business**

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**General**

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Community Financial Corporation ("Community" or the "Company") is a Virginia corporation, which owns Community Bank (the "Bank" or "Community 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, Community Bank converted to the stock form of organization through the sale and issuance of
shares of our common stock. References throughout this Form 10-KSB to the Company generally include
the Bank, unless the context otherwise requires.

Our principal asset is the outstanding stock of Community Bank, our wholly owned subsidiary. Our common stock trades on The Nasdaq Stock Market under the symbol "CFFC." In November, 1997 Community Bank
established Community First Mortgage Corporation ("Community First"), a wholly owned mortgage banking subsidiary to originate and sell mortgage loans.

Community and Community 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 our 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, 2001, Community had $270.2 million in assets, deposits of $174.3 million and stockholders' equity of $25.8 million. Community's primary business consists of attracting deposits from the general
public and originating real estate loans and other types of investments through our 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"). Our results of operations are largely dependent upon our net interest income, which is the difference between the interest we
receive on our loan portfolio and our investment securities portfolio, and the interest we pay on our deposit accounts and borrowings.

Our main office is located at 38 North Central Avenue, Staunton, Virginia 24401. Our telephone number is (540) 886-0796.

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**Forward-Looking Statements**

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This document, including information incorporated by reference, contains, and future filings by the
Company on Form 10-QSB and Form 8-K and future oral and written statements by the Company and its
management may contain, forward-looking statements about the Company and its subsidiary which we believe
are within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking
statements include, without limitation, statements with respect to anticipated future operating and financial
performance, growth opportunities, interest rates, cost savings and funding advantages expected or anticipated
to be realized by management.  Words such as "may," "could," "should," "would," "believe," "anticipate,"
"estimate," "expect," "intend," "plan" and similar expressions are intended to identify these forward-looking
statements.  Forward-looking statements by the Company and its management are based on beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions of management and are not guarantees
of future performance.  The Company disclaims any obligation to update or revise any forward-looking
statements based on the occurrence of future events, the receipt of new information, or otherwise.  The important
factors we discuss below and elsewhere in this document, as well as other factors discussed under the caption
"Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual
Report to Stockholders (attached to this document as Exhibit 13) and identified in our filings with the SEC and
those presented elsewhere by our management from time to time, could cause actual results to differ materially
from those indicated by the forward-looking statements made in this document:

The following factors, many of which are subject to change based on various other factors beyond our
control, could cause our financial performance to differ materially from the plans, objectives, expectations,
estimates and intentions expressed in such forward-looking statements:

- the strength of the United States economy in general and the strength of the local economies in which
we conduct our operations;
- the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate
policies of the Federal Reserve Board;
- inflation, interest rate, market and monetary fluctuations;
- the timely development of and acceptance of new products and services of Community Bank and the
perceived overall value of these products and services by users, including the features, pricing and
quality compared to competitors' products and services;
- the willingness of users to substitute competitors' products and services for our products and services;
- the success of Community Bank in gaining regulatory approval of its products and services, when
required;
- the impact of changes in financial services' laws and regulations (including laws concerning taxes,
banking, securities and insurance);
- the impact of technological changes;
- acquisitions;
- changes in consumer spending and saving habits; and
- our success at managing the risks involved in the foregoing.

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**Lending Activities**

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***General.*** We, like most other thrift institutions, concentrate our 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.  We make construction loans secured by commercial real estate and one-to four-family residential properties. Additionally, we make consumer loans in order to increase the diversification and decrease
the interest rate sensitivity of our loan portfolio and to increase interest income. Substantially all of our loans are originated within our market area which includes Shenandoah, Rockingham, Page, Highland, Augusta, Albemarle, Bath, Rockbridge and
Nelson Counties, the city of Richmond and the Hampton Roads area in Virginia.

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 our 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 our experience and on 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 us, however, are not readily saleable in the secondary market due to the fact that we do 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.

Our 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 $225,000 or less may be
approved by the President of the Bank. Loans in excess of $225,000 but less than $750,000 must be approved by a majority of our Loan Committee. All mortgage loans in excess of $750,000 must be approved by the Board of Directors. Consumer loans in excess
of $250,000 on a secured basis and $150,000 on an unsecured basis require the approval of three members 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, 2001, the maximum amount which the Bank could have loaned to one borrower and the borrower's related entities or invested in any one project was
approximately $3.7 million. At March 31, 2001, the Bank had no borrower, or groups of borrowers, with loans outstanding in excess of $3.1 million.

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

|                                     | March 31,             
|------------------------------------ | ----------------------
|                                     | 2001                  
|                                     | Amount                
|                                     | (Dollars in Thousands)
|Real Estate Loans:                   |                       
|Residential                          | $105,794              
|Commercial                           | 46,514                
|Construction                         | 23,507                
|Total real estate                    | 175,815               
|Consumer loans:                      | ******                
|Unsecured personal                   | 1,433                 
|Secured personal                     | 3,302                 
|Automobile                           | 9,714                 
|Home equity                          | 18,096                
|Deposit account                      | 363                   
|Other                                | 153                   
|Total consumer                       | 33,061                
|Commercial business                  | 14,167                
|Total loans                          | 223,043               
|Less:                                |                       
|Undisbursed loans in process         | 6,819                 
|Derferred fees and unearneddiscounts | 188                   
|Allowance for losses                 | 1,478                 
|Total net items                      | 8,485                 
|Total loans receivable, net          | $214,558              
|                                     |                       

The following table shows the composition of our loan portfolio by fixed and adjustable rate at the dates indicated.

|                                     | March 31,             
|------------------------------------ | ----------------------
|                                     | 2001                  
|                                     | Amount                
|                                     | (Dollars in Thousands)
|Fixed-Rate                           |                       
|Real Estate:                         |                       
|Residential                          | $20,252               
|Commercial                           | 14,143                
|Total real estate    loans(1)        | 34,395                
|Consumer                             | 27,092                
|Commercial business                  | 7,026                 
|Total fixed-rate loans               | 68,513                
|Adjustable-Rate loans:               |                       
|Real Estate:                         |                       
|Residential                          | 106,204               
|Commercial                           | 35,216                
|Total real estate     loans(2)       | 141,420               
|Consumer                             | 5,969                 
|Commercial Business                  | 7,141                 
|Total adjustable-rate loans          | 154,530               
|Total loans receivable               | 223,043               
|                                     |                       
|Less:                                |                       
|Undisbursed loans in process         | 6,819                 
|Deferred fees and
unearned discounts | 188                   
|Allowance for losses                 | 1,478                 
|Total net items                      | 8,485                 
|Total loans receivable, net          | $214,558              

(1) Includes residential real estate construction loans of $297,000, $1.0 million, $2.7 million, $818,000, and $1.5 million, and commercial real estate construction loans of $680,000, $1.1 million, $2.6
million, $4.3 million, and $3.7 million at March 31, 2001, 2000, 1999, 1998 and 1997, respectively.

(2) Includes residential real estate construction loans of $20.4 million, $12.2 million, and $7.4 million and commercial real estate construction loans of $2.2 million, $4.6 million, and $1.0 million at March
31, 2001, 2000 and 1999 respectively.

Loan Maturity and Repricing

---

We originate fixed and adjustable rate construction loans both of which generally mature in one year or less. At March 31, 2001, we had total construction loans of $23.5 million, all of which mature in the
fiscal year ending March 31, 2002.

One-to Four-Family Residential Real Estate Lending

---

Our primary lending program is the origination of loans secured by one-to four-family residences, substantially all of which are located in our market area. We evaluate 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 us to make loans in amounts of up to 100% of the appraised value of the underlying real estate, we generally make one-to four-family
residential real estate loans in amounts of 80% or less of the appraised value.  In certain instances, we will lend up to 90% of the appraised value of the underlying real estate and require the borrower to purchase private mortgage insurance in an amount
sufficient to reduce our exposure to 80% or less.

In order to reduce our exposure to changes in interest rates, we originate and sell most of our 30-year fixed-rate one-to four-family residential mortgage loans. For the year ended March 31, 2001, 29.4% of all
one-to four-family residential loans we originated had adjustable interest rates. Although, due to competitive market pressures, we do originate fixed-rate mortgage loans, we currently underwrite and document 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, 2001, $20.3 million (excluding $270,000 of residential construction loans) or 9.1%, of our one-to four-family residential
mortgage loan portfolio consisted of fixed-rate mortgage loans.

Our 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 our primary one-to four-family residential loan is the one year adjustable, we offer a residential loan which adjusts every three or five years generally in accordance with the rates on one or three year U.S. Treasury Bills. Our ARM loans
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 our market area, we make one, three
and five-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, 2001, residential ARM loans totaled
$108.8 million, or 48.8%, of our 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 ARM loans may increase due to the upward adjustment of interest costs to borrowers.

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

We require, 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 our interests.
The cost of this insurance coverage is paid by the borrower. We generally do not require escrows for taxes and insurance.

Commercial Real Estate and Construction Lending

---

We have originated and, in the past have purchased, commercial real estate loans and loan participations. We also make commercial real estate construction loans. Our 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. We have in recent years placed more
emphasis on multi-family housing loans for our commercial real estate loan portfolio. At March 31, 2001, commercial real estate, land and construction loans aggregated $70.0 million or 31.4% of our total loans receivable before net items. Our commercial
real estate and construction loans are secured primarily by properties located in our market area.

Our 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, we charge fees ranging from 1% to 2% on these loans. At March 31, 2001, we had $14.1 million in fixed-rate commercial real estate and construction loans. Commercial real estate loans made by us are fully amortizing
with maturities ranging from five to 30 years.

At March 31, 2001, we had $2.9 million or 1.3% of our total loans receivable before net items invested in commercial construction loans compared to $5.8 million or 2.9% at March 31, 2000. At March 31, 2001, we
had 8 commercial construction loans, the largest one having an outstanding balance of $590,000. All of these loans are presently performing in accordance with their terms. Our 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. Our 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 our underwriting of commercial real estate and construction loans, we may lend, under federal regulations, up to 100% of the security property's appraised value, although the loan to original appraised
value ratio on such properties is generally 80% or less. Our commercial real estate and construction loan underwriting criteria require an examination of debt service coverage ratios, the borrower's creditworthiness and prior credit history and
reputation, and we generally require personal guarantees or endorsements of borrowers. We also carefully consider the location of the security property.

At March 31, 2001, we had 20 commercial real estate loans (or multiple loans to one borrower) in excess of $1.0 million with an aggregate balance of $28.9 million. The largest relationship was to a single
borrower for $3.1 million secured by a combination of multi-family and single family rental property, personal residence, improved
land and residential construction.

The following table presents information as to the Company's commercial real estate and construction lending portfolio as of March 31, 2001 by type of project.

|                                        | Number of loans        | Principal Balance
|--------------------------------------- | ---------------------- | -----------------
|                                        | (Dollars in Thousands)
|Permanent financing:                    |                        |                  
|Multi-family residential buildings      | 44                     | $16,123          
|Hotel and motel                         | 4                      | 4,452            
|Commercial and industrial buildings     | 118                    | 16,367           
|Raw land                                | 67                     | 8,721            
|Church                                  | 3                      | 851              
|                                        | 236                    | 46,514           
|Acquisition and construction financing: |                        |                  
|Commercial and industrial buildings     | 8                      | 2,845            
|                                        |                        |                  
|Total                                   | 244                    | $49,359          
|                                        |                        |                  

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. Our risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the
property's sale 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, we may be required to advance funds beyond the amount originally committed to permit
completion of the project. If the estimate of value proves to be inaccurate, we 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 we usually provide 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, we 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

---

We offer various secured and unsecured consumer loans, including unsecured personal loans, automobile loans, deposit account loans, installment and demand loans, and home equity. At March 31, 2001, we had
$37.0 million or 16.6% of our total loans receivable before net items invested in consumer loans. With the exception of $9.2 million of home equity loans at March 31, 2001, our 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. We originate all of our consumer loans in our market area and intend to continue our consumer lending in this geographic area.

We offer VISA credit card accounts. At March 31, 2001, 1,410 credit card accounts had been issued, with an aggregate outstanding balance of $496,000 and unused credit available of $3.4 million. We presently
charge no annual membership fee and an annual rate of interest of 15.98%.

Consumer loans do not include unused lines of credit on credit card accounts opened by us and lines of credit on home equity loans. The total unused credit available under our home equity
and credit card programs was $7.7 million at March 31, 2001.

The underwriting standards employed by us 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 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 us, and a borrower may be able to assert against such assignee claims and defenses which it has against the seller of the underlying
collateral. We add general provisions to our 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 our consumer loan portfolio has generally been low ($62,000 at March 31, 2001), there can be no assurance that delinquencies will not increase in the future.

Commercial Business Lending

---

We also originate commercial business loans. At March 31, 2001 we had $10.9 million in commercial business loans outstanding, representing 4.9% of our gross loan portfolio. We offer commercial business loans
to service existing customers, to consolidate our banking relationships with these customers, and to further our 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. Our 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, 2001, we had $7.5 million of secured commercial business loans and $3.4 million of unsecured
commercial business loans.

We recognize the generally increased credit risk associated with commercial business lending. Our 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 our credit analysis.

Loan Originations, Purchases and Sales

---

Federal regulations authorize us to make real estate loans anywhere in the United States. However, at March 31, 2001, substantially all of our real estate loans were secured by real estate located in our
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. We did not
purchase any loans in fiscal 2001.

Generally, we originate fixed-rate residential mortgage loans for sale in the secondary market and retain adjustable-rate mortgage loans for our portfolio. Prior to fiscal 1997 we retained the servicing for
mortgage loans sold. During fiscal 1997 we began to sell loans with servicing released to be more competitive in that market.

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

|                                        | Year Ended March 31,
|--------------------------------------- | --------------------
|                                        | 2001                
|                                        | (In Thousands)      
|Origination by Type:                    |                     
|Adjustable Rate:                        |                     
|Real estate - one - to four - family    |                     
|- residential                           | $24,989             
|- commercial                            | --                  
|- consumer                              | 1,407               
|Total adjustable rate                   | 26,396              
|Fixed Rate:                             |                     
|Real estate - one - to four - family    |                     
|- residential                           | 59,763              
|- commercial                            | 3,694               
|Non-real estate - consumer (1)          | 21,294              
|Total fixed rate                        | 84,751              
|Sales and Repayments                    |                     
|Real estate loans                       | 58,675              
|Principal repayments                    | 15,035              
|Total reductions                        | 73,710              
|Increase (decrease) in other items, net | (12,580)            
|Net increase                            | $24,857             
|                                        |                     

(1) Consumer loans include the amounts outstanding on credit card accounts opened by us and outstanding lines of credit on home equity loans. The total credit available was $7.7 million, $8.3 million, and $5.9
million at March 31, 2001, 2000 and 1999, respectively,
which would have increased fixed-rate consumer loans to $36.7 million, $36.2 million, and $28.0 million at such dates, respectively.

Delinquent and Problem Loans

---

When a borrower fails to make a required payment on a loan, we attempt 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 we issue a notice of intent to foreclose on the property and if the delinquency is not cured within 60 days, we may institute foreclosure action. If
foreclosed on, real property is sold at a public sale and may be purchased by us.  Historically, deficiencies have been cured promptly.

The following table sets forth information concerning delinquent mortgage and other loans at March 31, 2001. The amounts presented represent the total remaining principal balances of the related loans, rather
than the actual payment amounts which are overdue.

|                       | Residential RealEstate | Commercial RealEstate | Consumer | Commercial
|---------------------- | ---------------------- | --------------------- | -------- | ----------
|                       | Number                 | Amount                | Number   | Amount    
|                       | (Dollars in Thousands)
|Loans Delinquent for:  |                        |                       |          |           
|30-59 days             | 17                     | $1,166                | 8        | $358      
|60-89 days             | 3                      | 111                   | 1        | 13        
|90 days and over       | 9                      | 437                   | -        | 0         
|Total delinquent loans | 29                     | $1,714                | 9        | $371      



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 our periodic reports with the OTS and in accordance with our classification of assets policy, we regularly review the loans in our portfolio to determine whether any loans
require classification in accordance with applicable regulations.

On the basis of management's review of our assets, at March 31, 2001, we had classified $1,156,000 of our assets as substandard, none as doubtful and $13,000 as loss. All assets that have been classified are
included below in either the table of non-performing assets or under "Other Loans of Concern."

Non-Performing Assets

---

The table below sets forth the amounts and categories of non-performing assets in our 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 we consider to be well secured and in the process of collection. For the years presented, we have 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).

|                                             | March 31,             
|-------------------------------------------- | ----------------------
|                                             | 2001                  
|                                             | (Dollars in Thousands)
|Non-accruing loans:                          |                       
|Commercial and Consumer                      | $531                  
|Real Estate                                  | 437                   
|Accruing loans delinquent more than 90 Days: |                       
|Residential                                  |                       
|Commercial                                   |                       
|Consumer                                     |                       
|Real estate acquired through foreclosure     | 188                   
|Total                                        | $1,156                
|Total as a percentage of total assets        | .43%                  
|Unallocated allowance for loan losses        | $1,460                

Non-performing assets at March 31, 2001 were comprised primarily of residential real estate delinquent 90 days
or more. At March 31, 2001 the largest property in non-performing assets was a multi-family unit with an
approximate value of $111,000. Based on current market values of the properties securing these loans, management anticipates no significant losses in excess of the reserves for losses previously recorded.

Other Loans Of Concern

---

As of March 31, 2001, there were $5.4 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 $5.4 million in other loans of concern is comprised primarily of commercial and  residential real estate loans. Included in the commercial real estate loans of concern is one loan in the amount
of $2.0 million  which is current as to interest and principal payments. We are closely monitoring the status of this loan.

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

---

We provide valuation reserves for anticipated losses on loans and real estate when 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, we also provide reserves based on the dollar amount and type of collateral securing our 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 2001,our net increase in allowance for losses on loans was $259,000 due primarily to an increase in loans. At March 31, 2001, we had an allowance for loan losses
of $1,478,000 which is predominantly a general allowance of $1,460,000.

The following table sets forth an analysis of our allowance for loan losses.

|                                                                                          | Year Ended March 31,  
|----------------------------------------------------------------------------------------- | ----------------------
|                                                                                          | 2001                  
|                                                                                          | (Dollars in Thousands)
|Balance at beginning of period                                                            | $1,218                
|Provision charged to operations                                                           | 320                   
|Charge-offs:                                                                              |                       
|Residential real estate                                                                   | 112                   
|Consumer                                                                                  | 6                     
|Recoveries:                                                                               |                       
|Real Estate                                                                               | 25                    
|Consumer                                                                                  | 32                    
|Net charge-offs                                                                           | 61                    
|Balance at end of period                                                                  | $1,477                
|Ratio of net charge-offs during the
period to average loans outstanding
during the period | .03%                  

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

|                                                 | Residential            | CommercialReal Estate | Construction | Consumer andCommercialBusiness | Total     
|------------------------------------------------ | ---------------------- | --------------------- | ------------ | ------------------------------ | ----------
|                                                 | (Dollars in Thousands)
|March 31,2001                                    |                        |                       |              |                                |           
|Amount of loan loss allowance                    | $     350              | $    409              | $     230    | $    488                       | $   1,477 
|Loan amounts by category                         | 105,257                | 46,514                | 23,507       | 47,909                         | 223,187   
|Percent of loans in each
category to total loans | 47.16%                 | 20.84%                | 10.53%       | 21.47%                         | 100.00%   
|March 31,2000                                    |                        |                       |              |                                |           
|Amount of loan loss allowance                    | $     238              | $     246             | $     136    | $    598                       | $   1,218 
|Loan amounts by category                         | 97,409                 | 42,318                | 20,687       | 40,145                         | 200,559   
|Percent of loans in each
category to total loans | 48.57%                 | 21.10%                | 10.31%       | 20.02%                         | 100.00%   
|March 31, 1999                                   |                        |                       |              |                                |           
|Amount of loan loss allowance                    | $    375               | $    306              | $    123     | $    512                       | $   1,316 
|Loan amounts by category                         | 91,396                 | 38,545                | 13,712       | 33,594                         | 177,247   
|Percent of loans in each
category to total loans | 51.56%                 | 21.75%                | 7.74%        | 18.95%                         | 100.00%   
|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%                         | 100.00%   
|March 31, 1997                                   |                        |                       |              |                                |           
|Amount of loan loss allowance                    | $    385               | $    140              | $    78      | $    436                       | $    1,039
|Loan amounts by category                         | 96,968                 | 37,508                | 5,204        | 12,243                         | 151,923   
|Percent of loans in each
category to total loans | 63.83%                 | 24.69%                | 3.42%        | 8.06%                          | 100.00%   

Subsidiary Activities

---

We established Community First Mortgage Corporation, a mortgage banking subsidiary, in November 1997 and began operations in June 1998. The primary business of Community First is to originate fixed rate
mortgage loans to sell to third party investors to generate fee income and gains on the sale of mortgage loans. The success of a mortgage banking operation such as Community First is generally dependent on increasing the volume of mortgage loans
originated and sold to investors. For the year ended March 31, 2001, our mortgage banking subsidiary originated $59.8
million in fixed rate mortgage loans for resell.

Investment Activities

---

As a member of the FHLB System, Community Bank must maintain minimum levels of investments
that are liquid assets as specified by the OTS. 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, we have maintained our 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, 2001, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings and current borrowings) was 8.4%.

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

|                                              | March 31, 2001        
|--------------------------------------------- | ----------------------
|                                              | Within 1year          
|                                              | Book Value            
|                                              | (Dollars in Thousands)
|Federal agency obligations                    | $     ---             
|State agency obligations and commercial
paper | 925                   
|Total investment securities                   | $   925               
|Weighted average yield                        | 6.08%                 

Included in the above chart are $24.5 million of securities that are callable in 3 years or less.

The following table sets forth the composition of our investment portfolio at the dates indicated.

|                                                                                                                             | March 31,             
|---------------------------------------------------------------------------------------------------------------------------- | ----------------------
|                                                                                                                             | 2001                  
|                                                                                                                             | BookValue             
|                                                                                                                             | (Dollars in Thousands)
|Interest-bearing deposits with banks                                                                                         | $ 2,697               
|Total                                                                                                                        | $2,697                
|Investment securities:                                                                                                       |                       
|Federal agency obligations                                                                                                   | $24,937               
|State agencies and commercial paper                                                                                          | 4,968                 
|FHLMC common and preferred stock                                                                                             | 8,421                 
|Subtotal                                                                                                                     | 38,326                
|FHLB stock                                                                                                                   | 3,150                 
|Total investment securities    and FHLB stock                                                                                | $41,476               
|Average remaining life or
term to repricing, excluding
FHLMC common stock, FHLB
stock and other marketable
equity securities |                       

During fiscal 2001 the market rates paid on investment securities increased.  During fiscal 2001 we invested primarily in federal and state agency securities with maturities of one to five years, some of which
are callable within one to three years from date of purchase.

Sources of Funds

---

General. Deposits have traditionally been the principal source of our funds for use in lending and for other general business purposes. In addition to deposits, we derive 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. We attract both short-term and long-term deposits from the general public by offering a wide assortment of accounts and rates. We have 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 our primary source of deposits in the past. We offer regular passbook accounts,
checking accounts, various money market accounts, fixed-rate long-term certificates with varying maturities, $100,000 or above jumbo certificates of deposit and individual retirement accounts. Certain of our jumbo certificates which have matured revert to
a passbook rate and are reflected in the tables as passbook accounts. We do not solicit brokered deposits due to our ability historically to attract funds from our local markets or borrow from the FHLB at lower rates.

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

|                                         | At March 31,  
|---------------------------------------- | --------------
|                                         | 2001          
|                                         | (In Thousands)
|Passbook and statement accounts          | $14,414       
|NOW and Super NOW accounts               | 26,341        
|Money market accounts                    | 9,009         
|One-to five-year fixed-rate certificates | 92,610        
|Six-month and 91 day certificates        | 31,933        
|Total                                    | $174,307      

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

|                                         | Year Ended March 31,
|---------------------------------------- | --------------------
|                                         | 2001                
|                                         | (In Thousands)      
|Passbook and statement accounts          | $(160)              
|NOW and Super NOW accounts               | (422)               
|Money market accounts                    | (2,248)             
|One-to five-year fixed-rate certificates | (10,919)            
|Six-month and 91 day certificates        | 29,488              
|Total increase                           | $15,739             

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.

|                                     | Year Ended March 31,  
|------------------------------------ | ----------------------
|                                     | 2001                  
|                                     | AverageBalance        
|                                     | (Dollars in Thousands)
|Deposit Category                     |                       
|Non-interest bearing demand deposits | $9,711                
|Interest bearing demand deposits     | 26,717                
|Savings deposits                     | 14,277                
|Time deposits                        | 114,254               
|Total deposits                       | $164,959              

The variety of deposit accounts we offer has allowed us to be competitive in obtaining funds and has allowed us 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 institutions such as thrift institutions into direct investment vehicles such as government and corporate securities). In addition, we have
become much more subject to short-term fluctuations in deposit flows, as customers have become more interest rate conscious. Our ability to attract and maintain deposits, and our cost of funds, has been, and will continue to be, significantly affected by
money market conditions.

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

|                           | Year Ended March 31,  
|-------------------------- | ----------------------
|                           | 2001                  
|                           | (Dollars in Thousands)
|Opening balance            | $158,568              
|Net deposits (withdrawals) | 8,033                 
|Interest credited          | 7,706                 
|Ending balance             | 174,307               
|Net increase               | $15,739               
|Percent increase           | 9.93%                 

During the fiscal years ended March 31, 2001, 2000 and 1999 we emphasized free checking accounts, increased our marketing efforts and remained competitive in regard to the rates offered by competitors. Due to
these efforts we experienced an increase in both non-interest bearing demand and time deposits during fiscal 2001. We may use borrowings as an alternative source of funds. See "- Borrowings."

The following table shows rate information for our certificates of deposit as indicated.

|               | 2.00-3.00%     | 3.01-5.00% | 5.01-6.00% | 6.01-7.00% | Total   
|-------------- | -------------- | ---------- | ---------- | ---------- | --------
|               | (In Thousands)
|March 31, 2001 | ---            | $26,181    | $26,325    | $72,037    | $124,543
|March 31, 2000 | $21            | $37,443    | $49,368    | $19,142    | $105,974
|March 31, 1999 | ---            | $29,790    | $67,199    | $4,192     | $101,181

The following table indicates the amount of the certificates of deposit by time remaining until maturity as of March 31, 2001.

|                                            | Maturity        
|------------------------------------------- | ----------------
|                                            | 3 Months or less
|                                            | (In Thousands)  
|Certificates of deposit less than $100,000  | $33,323         
|Certificates of deposit of $100,000 or more | 10,284          
|Total certificates of deposit               | $43,607         

Borrowings

---

As a member of the FHLB of Atlanta, we are required to own capital stock in the FHLB of Atlanta and are 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. Our 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 us for general corporate purposes. At March 31, 2001, we had $4,422,389 of
securities sold under agreements to repurchase.

We generally utilize borrowings to supplement deposits when they are available at a lower overall cost to us 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.

|                 | Year Ended March 31,  
|---------------- | ----------------------
|                 | 2001                  
|                 | (Dollars in Thousands)
|Maximum Balance: |                       
|FHLB advances    | $63,000               
|FHLB advances    | $20,000               

|                                              | Amount  | Rate | Amount  | Rate | Amount  | Rate
|--------------------------------------------- | ------- | ---- | ------- | ---- | ------- | ----
|Average Balance:                              |         |      |         |      |         |     
|FHLB advances                                 | $48,339 | 6.4% | $32,583 | 5.7% | $14,167 | 5.7%
|Securities sold underagreements to repurchase | $16,695 | 6.6% | $10,000 | 5.7% | ---     | --- 

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

|                                              | At March 31,          
|--------------------------------------------- | ----------------------
|                                              | 2001                  
|                                              | (Dollars in Thousands)
|Securities sold under agreementsto repurchase | $4,422                
|FHLB advances                                 | 63,000                
|Total Borrowings                              | $67,422               
|Weighted average
interest rate of borrowings  | 5.19%                 

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 our market area. We compete for real estate loans principally on the basis of our interest rates and loan fees, the types of loans and the quality of services provided to
borrowers.

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

We consider our primary market for deposits to be Augusta County and for mortgage loans to be Augusta and Rockingham Counties and the Hampton Roads area.  We estimate that our market share of savings deposits
in Augusta County is approximately 10% and our 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.

Regulation

---

General. Community Bank is a federally chartered financial institution, the deposits of which are federally insured. 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,
Community Financial also is subject to federal regulation and oversight.

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, we are required to file periodic reports with the OTS and we
are subject to periodic examinations by the OTS. When an examination is conducted by the OTS, the examiners may require us to provide for higher general or specific loan loss reserves. Our last regular OTS examination was in October, 2000 and the
examiners did not require us 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.  Our OTS assessment for the fiscal year ended March 31,
2001, was $56,829.

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.

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 this system, institutions
classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy, pay
the lowest premium while institutions that are less than adequately capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern pay the
highest premium. Risk classification of all insured institutions will be made by the FDIC for each semi-annual assessment period.

Regulatory Capital Requirements. Federally insured savings associations, such as Community 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 10 of the Notes to Consolidated Financial Statements contained in Part II,
Item 7 of this report for information on our 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.

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 Bank that before and after the proposed distribution meet their capital requirements, may make capital distributions during any calendar year equal to net
income for the current year plus the previous
two years net income, less capital distributions paid over that same 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 Bank may pay dividends in accordance with this general authority.

Liquidity. All savings associations, including Community Bank, are required by the Office of Thrift Supervision to maintain sufficient liquidity to ensure its safe and sound operation.
For a discussion of what we include 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, 2001, 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.

Community Reinvestment Act. Under the Community Reinvestment Act ("CRA"), every FDIC insured institution has a continuing and affirmative obligation consistent with safe and sound banking practices to help
meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution's discretion to develop the
types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with the examination of Community 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 Community 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, Community Bank may be required to devote additional funds for investment and lending in our local community. We were examined for CRA compliance in October, 2000 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 Community Financial and any company which is under common control
with Community 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. Community 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.

Holding Company Regulation. Community Financial is a unitary savings and loan holding company subject to regulatory oversight by the OTS. As such, we are required to register and file reports with the OTS and
are subject to regulation and examination by the OTS. In addition, the OTS has enforcement authority over us and our 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, we generally are not subject to activity restrictions. If we acquire control of another savings association as a separate subsidiary, we or the Company would
become a multiple savings and loan holding company, and our activities and any of our subsidiaries (other than Community 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.

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

Federal and State Taxation

---

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

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

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

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

In August 1996, legislation was enacted that 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 as taxable income 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, 2001, Community Bank's post-1987 excess reserves still to be recaptured amounted to approximately $634,000. This amount will be recaptured into
taxable income ratably over the next three years. 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 Community 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, 2001, Community Bank's Excess for tax purposes totaled approximately $2.3 million.

Community Financial and Community Bank file consolidated federal income tax returns on a fiscal year basis. Savings associations, such as the Community 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.

Our federal income tax returns and our 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 Financial and our consolidated subsidiaries.

Virginia Taxation. We conduct our business in Virginia and consequently are 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 Community Financial. Except as otherwise indicated, the persons named have
served as officers of Community Financial since it became the holding company of Community Bank, and all offices and positions described below are also with Community Bank. There are no arrangements or understandings between the persons named and any
other person pursuant to which such officers were selected.

P. Douglas Richard. Mr. Richard, age 57, is President and Chief Executive Officer of the Company. He was appointed in April, 2000 and was previously a Senior Vice President and
Regional President of the Hampton Roads division. Prior to joining the Company Mr. Richard was Chief Executive Officer of Seaboard Savings Bank in Virginia Beach, Virginia.

R. Jerry Giles. Mr. Giles, age 52, is our Chief Financial Officer. He was appointed 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.

Patsy Clem. Ms. Clem, age 61, is our Controller, a position she has held since July, 1986. Ms. Clem has been employed by us since 1983 in the Accounting Department.

Chris P. Kyriakides. Mr. Kyriakides, age 38, is our Vice President and Regional 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.

Benny N. Werner. Mr. Werner, age 52, is our Senior Vice President of Retail Banking, a position he has held since May 1998. Prior to joining the Company Mr. Werner was employed by Crestar for three years as
President-Warrenton area and employed by Jefferson Savings and Loan, Warrenton, Virginia as Senior Vice President of Retail Banking for seventeen years.

Norman C. Smiley, III. Mr. Smiley, age 39, is our Chief Lending Officer, a position he has held
since November 2000. We have employed Mr. Smiley since April 1996. Prior to joining the Company
Mr. Smiley was a Branch Manager for First Virginia where he was employed for 14 years.

Employees

---

At March 31, 2001, we had a total of 115 employees, including 19 hourly employees. None of our employees are represented by any collective bargaining group. Management considers our employee relations to be good
 .

Item  2.  Description of Property

---

The following table sets forth information at March 31, 2001, with respect to our offices, furniture and equipment.

|Location                                                         | Opened | Owned orLeasedExpiration | Gross SquareFootage | Net BookValue atMarch 31,2001
|---------------------------------------------------------------- | ------ | ------------------------ | ------------------- | -----------------------------
|                                                                
|38 North Central Avenue
Staunton, Virginia                       | 1965   | Owned                    | 17,000              | 2,500,000                    
|                                                                
|Rte 250 West
Waynesboro, Virginia                                | 1989   | Owned                    | 5,300               | 751,000                      
|                                                                
|Route 340 and 608Stuarts Draft, Virginia                         | 1993   | Owned                    | 2,074               | 333,000                      
|                                                                
|5300 Kemps River DriveVirginia Beach, Virginia                   | 1997   | 2002                     | 2,400               | 48,000                       
|                                                                
|621 Nevan RoadVirginia Beach, Virginia                           | 1998   | 2038                     | 13,000              | 938,000                      
|                                                                
|101 Community WayStaunton, Virginia                              | 1999   | 2039                     | 4,500               | 844,000                      
|                                                                
|Community First Mortgage9011 Arboretum ParkwayRichmond, Virginia | 1997   | 2003                     | 1,800               | 93,000                       

Our accounting and record-keeping activities are maintained on an in-house computer system. The net book value of our computer equipment at March 31, 2001 was $625,493.

Item 3.  Legal Proceedings

---

There are no material pending legal proceedings to which we or our subsidiary is a party or to which any of our 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, 2001.

PART II

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

---

The information contained under the caption "Common Stock" on page 36 of the Registrant's Annual Report to Stockholders attached hereto as Exhibit 13 is incorporated herein by reference.

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

---

The information under the caption "Management's Discussion and Analysis of Operations" on pages 5 through 12 of the Registrant's Annual Report to Stockholders attached hereto as Exhibit 13 is incorporated
herein by reference.

Item 7.  Financial Statements

---

The Financial Statements on pages 13 through 34 in the Registrant's Annual Report to
Stockholders attached hereto as Exhibit 13 is incorporated herein by reference.

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

---

There was a Form 8-K filed on June 7, 2001 reporting a change in Accountants from the firm of BDO Seidman, LLP to Yount, Hyde & Barbour, P.C. and such report is
incorporated by reference.

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 our definitive Proxy Statement for the 2001 Annual Meeting of Stockholders, 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 our equity securities, to file with the
SEC initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities. Officers, directors and greater than 10% stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms
they file.

To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required, during the last fiscal year ended March 31, 2001, all
Section 16(a) filing requirements applicable to our officers, directors and greater than 10 percent beneficial owners were complied with except as disclosed in the Proxy Statement for the 2001 Annual
Meeting of Stockholders.

Item 10.  Executive Compensation

---

Information concerning executive compensation is incorporated herein by reference from our
definitive Proxy Statement for the 2001 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 our definitive Proxy Statement for the 2001 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 our definitive Proxy Statement for the 2001Annual Meeting of
Stockholders, a copy of which will be filed not later than 120 days after the close of the fiscal year.

Item 13.  Exhibits and Reports on 8-K

---

(a)	Exhibits:

|RegulationS-B ExhibitNumber | Document                                                                                            | Reference toPrior Filing orExhibit NumberAttachedHereto
|--------------------------- | --------------------------------------------------------------------------------------------------- | -------------------------------------------------------
|2                           | Plan of acquisition, reorganization, arrangement, liquidation, or succession                        | None                                                   
|3(i)                        | Amended and Restated Articles of Incorporation                                                      | *                                                      
|3(ii)                       | Bylaws, as amended and currently in effect                                                          | **                                                     
|4                           | Instruments defining the rights of security holders,
including indentures:
Common Stock Certificate | ***                                                    
|9                           | Voting trust agreement                                                                              | None                                                   
|10                          | Material contracts:                                                                                 |                                                        
|                            | (a)  Community Federal Savings Bank 1987 Stock
       Option and Incentive Plan                     | ****                                                   
|                            | (b)  Employment Agreement with P. Douglas Richard                                                   | **                                                     
|                            | (c)  1996 Incentive Plan                                                                            | *                                                      
|                            | (d)  Supplemental Executive Retirement Plan                                                         | ***                                                    
|11                          | Statement re: computation of per share earnings                                                     | *****                                                  
|13                          | Annual Report to Stockholders                                                                       | 13                                                     
|16                          | Letter on change in certifying accountant                                                           | ******                                                 
|18                          | Letter on change in accounting principles                                                           | None                                                   
|21                          | Subsidiaries of the registrant                                                                      | ***                                                    
|22                          | Published report regarding matters submitted to vote                                                | None                                                   
|23                          | Consent of Experts                                                                                  | 23                                                     
|24                          | Power of Attorney                                                                                   | Not required                                           
|99                          | Additional exhibits                                                                                 | None                                                   

*Filed on July 5, 1996 as exhibits to the Registrant's Definitive Proxy Statement (File No. 000-18265) on Schedule 14A. Such previously filed documents are hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-B.

**Filed on November 14, 2000 as exhibits to the Registrant's Quarterly Report on Form 10-QSB
(File No. 000-18265), for the quarter ended September 30, 2000.  Such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of Regulation S-B.

***Filed on June 29, 1999 as exhibits to the Annual Report on Form 10-KSB for the fiscal year ended March 31, 1999. Such previously filed documents are hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-B.

****Filed on May 19, 1989 as Exhibit 10.1 to the Registrant's Registration Statement No. 33-28817 on Form S-4. Such previously filed document is hereby incorporated herein by reference in accordance with Item
601 of Regulation S-B.

*****See Note 11 of Notes to Consolidated Financial Statements in the Annual Report attached hereto as Exhibit 13.

******Filed on June 6, 2001 as Exhibit 16 to the Registrant's Current Report on Form 8-K (File No. 000-18265).  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, 2001.

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 29, 2001 | By: /s/ P. Douglas Richard
|------------------------- | --------------------------

P. Douglas Richard

(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/ P. Douglas Richard                                                             | By: /s/ James R. Cooke, Jr.                           
|-------------------------------------------------------------------------------------- | ------------------------------------------------------
|                                                                                       |                                                       
|-----------------------------                                                          | ------------------------------                        
|P. Douglas Richard
President and Chief
Executive Officer
(Principal Executive Officer) | James R. Cooke, Jr.
Chairman of the Board
and Director

|Date:       June 29, 2001 | Date:       June 29, 2001
|------------------------- | -------------------------

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

|Date:       June 29, 2001 | Date:       June 29, 2001
|------------------------- | -------------------------

|By: /s/ Dale C. Smith         | By: /s/ Morgan N. Trimyer, Jr. 
|----------------------------- | -------------------------------
|                              |                                
|----------------------------- | ------------------------------ 
|Dale C. Smith
Director        | Morgan N. Trimyer, Jr.
Director

|Date:       June 29, 2001 | Date:       June 29, 2001
|------------------------- | -------------------------

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

|Date:       June 29, 2001 | Date:       June 29, 2001
|------------------------- | -------------------------